China's economic rebalancing act, and the new normal of lower commodity prices, provides opportunities for deeper relations between the country and its African and Latin American partners, according to a new report released by The Economist Intelligence Unit (EIU).
According to the report, China continues to be a key trade partner throughout both regions, a direct investor and a source of bilateral finance. But, the relationship is not without its problems. Both regions run a large trade deficit with China, which imports mostly commodities from Africa and Latin America, and exports higher-value-added consumer goods to both regions.
"China is Africa’s single biggest trade partner following years of stellar growth since the early 2000s,” says Pratibha Thaker, Editorial Director, Middle East & Africa at the EIU. “This is reflected by China’s insatiable appetite for Africa’s energy products and raw materials, as well as its ability to place a wide range of goods on the African continent. It is clear that China's corporate position in African markets is changing.”
Thaker notes there is a renewed focus on industrialisation that could see China’s SEZs (Special Economic Zones) policy gain fresh momentum. The Chinese government announced in 2006 that it would support the establishment of "economic and trade co-operation zones" (ETCZ) abroad as part of its "Going Global" policy.
“There were intentions to create around 50 SEZs across Africa but the reality has fallen way short of expectations. Currently, Egypt, Ethiopia, Mauritius, Nigeria, Zambia and Algeria have Chinese led SEZs. Renewed progress could be on the horizon in these and other SEZs as well as trade facilitating infrastructure,” adds Thaker.
Extractive sector investments
In Africa, China’s renewed focus on Africa (shared by President Xi Jinping at the Forum on China-Africa Co-operation at the end of 2015) includes encouraging local industrialisation, fostering agricultural modernisation, building essential infrastructure, and enhancing China’s trade and investment facilitation.
Chinese firms are positioning themselves to snap up extractive sector investments at lower prices with a view to securing longer-term strategic supplies.
China will tap into Africa's fast-growing consumer markets, establish production bases closer to its end clients, exploit free-trade deals and set up production bases to feed value chains and consumer markets back in China.
Fiona Mackie, Regional Manager for Latin America and the Caribbean at the EIU said: "Adjustment to weaker Chinese demand and lower commodity prices hasn't been easy for Africa or Latin America, but a shift in emphasis away from natural resources and towards higher-value-added sectors should ultimately benefit both regions, and help raise incomes. But these improvements aren't a given; they'll require tricky reforms to tax systems, labour markets and regulatory systems to help boost competitiveness."
In Latin America, new engagements focus on investment and technical co-operation in an increasingly diverse number of sectors that have the potential to boost the region's long-term productivity.
The expected convergence of Chinese incomes with Latin American per head incomes will help the region make competitiveness gains that rebalance trade relationships.
But for Latin America to take advantage of these opportunities, reforms to reduce business costs are needed.