China’s trade with Africa is only 5 percent of its global trade total, according to 2011 figures from Global Trade Atlas. But its impact on the continent is profound. Equally so, China’s current woes will weigh heavily on Africa.

Over the past months, the world’s focus has been drawn to the possible implications of a slowing and changing Chinese economy and the impact on developed and developing nations. The implications for the African continent must also be considered. The past decade has seen a growing interaction between African economies and China from a trade perspective, as well as in terms of investments and the construction of infrastructure.

“Developing nations around the world are dealing with a lower growth economic environment; Africa is certainly not immune.”

The impact of lower commodity prices as a result of the Chinese economic slowdown is already being felt as it highlights the twin deficits many countries run. Over the last year we have seen many African currencies weaken in a similar fashion to what are generally deemed to be “commodity” currencies. Secondly, lower tax revenues from mining, oil and other commodities have constrained government budgets.

Higher domestic interest rates in many African countries are a result of imported inflation due to the weaker currencies, as well as increased government borrowing needs. So far, many developing nations around the world are dealing with a lower growth economic environment; the continent is certainly not immune. However, in spite of the constrained environment, Africa still needs significant investments in infrastructure and foreign direct investment (FDI) to continue on its growth path.

On the infrastructure front, we have seen Chinese engineering contractors pursuing contracts around the world as their domestic economy and investment into infrastructure there slows. Almost a third of the value of China’s foreign engineering contracts in 2014 (according to statistics from the China Global Investment Tracker) was on the African continent.

Chinese support

The eastern African region has benefited significantly and has received a third of all Chinese project spend on the continent over the last decade. Having launched the Asian Infrastructure Investment Bank and the Silk Road Infrastructure Fund with $40 billion (R550.9bn), we do not see the Chinese government reducing its support for engineering firms’ project expansion outside the country. Support is, however, not unconditional and funding for the Accra Ring Road in Ghana was recently turned down by the Export-Import Bank of China.

On the FDI front, there is less cause for concern. Although FDI from China into Africa is growing, it only amounted to 4.8 percent of the total FDI into Africa in 2014 (according to Ernst & Young or EY’s Attractiveness Survey Africa 2015). This, according to sources including the China Global Investment Tracker, amounted to 6.1 percent of China’s FDI, which is in line with Africa’s portion of global gross domestic product. FDI into Africa remained constant in 2014, despite a 16 percent decline in global FDI from 2013, according to UN Conference on Trade and Development’s World Investment Report 2015. This year is expected to be a record year for FDI into Africa (projected to hit $55bn) and should exceed development assistance for the first time.

The type of FDI into Africa has also moved away from extractive or primary industries. In 2014, 43 percent of the greenfield investments were in the services sector, with 33 percent in manufacturing and only 24 percent in primary sectors, says the UN report. This shows a move away from primary sectors, where the existing investment makes up 31 percent of the total. So, while we expect slightly lower growth across the continent in the near term, the longer-term outlook remains robust. FDI and other long-term investments into the economies of Africa, as well as continued growth in its infrastructure are continuing apace.

In line with global risk aversion we have seen some portfolio investors reduce their exposure to the continent, while others appear to be waiting for further currency weakness before investing. However, the weakness this has caused in equity markets appears to be overdone in the longer term.

Paul Clark is an Africa specialist at Ashburton Investments. The views expressed here do not necessarily reflect those of Independent Media.