Currency move will affect Africa exports

Continent needs to increase its own demand for raw materials it now exports by boosting local industry

In mid-August, the People's Bank of China allowed the Chinese currency to drop 3.5 percent against the US dollar. There has been much talk about the implications of this move, with some analysts saying that this is so far the strongest sign of a persistent economic slowdown of China's economy.

China's exports, which sustained the country's economic growth in the decade leading to the global financial crisis in 2008, have been falling. In July, exports dropped 8.3 percent, hence the theory that China is resorting to devaluation of its currency in an attempt to restore export figures to their former levels and hence stabilize economic growth.

Some analysts, on the other hand, say that the PBOC is " keen to show the yuan is a truly free-floating currency, in order to win inclusion in the reserve currencies basket used by the International Monetary Fund " The yuan has not been traded freely and there are strict controls over the flow of money in and out of the country.

Whatever the reason for the depreciation, the effect shall be felt through the prices of Chinese products across different economies around the world. This will lead to lower rates of inflation in countries that import a significant amount of Chinese finished goods. Moreover, the competitiveness of Chinese exports against those of its trade rivals will increase, maybe forcing those economies to also devalue their currencies. Analysts fear that continued devaluation of the yuan could increase trade tensions and even spark currency wars.

In Africa, imports from China form a large proportion of total imports. The depreciation of the yuan, which translates to cheaper goods from China, has both merits and demerits. The decrease in prices of Chinese goods will lead to lower inflation rates since they form a big part of Africa's imports and overall consumption. This is good because unlike in some European countries and in the United States, where inflation and interest rates have been close to or at zero, Africa's aggregate demand has been high. The steadily increasing trade between China and Africa was estimated at approximately $220 billion in 2014, which is three times the value of trade between Africa and the US. China is also the second-largest oil importer from sub-Saharan Africa, second only to Europe.

However, cheaper goods from China are likely to hurt local industries, especially the manufacturing industry. Consumer preference for cheaper goods will see demand for locally manufactured goods decline. It could also have an effect on trade between African countries. The effect is likely to be small because African trade consists more of raw materials and agricultural products than finished goods.

Africa's exports to China are less significant compared to the corresponding imports and consist mainly of raw materials such as minerals and agricultural produce. The depreciation of the yuan is not likely to directly affect these exports. However, the slowdown of China's economy, and especially the manufacturing sector, would probably have a direct impact on Africa's exports to China. The economic slowdown would translate into decreased demand for Africa's exports and further lead to a fall in the prices of exports, especially raw materials. Already, this can be felt in the declining international prices of crude oil and commodities such as iron ore.

With inflation in many Western economies low, further declines would lead to periods of deflation in advanced economies. The effect of this would be a slump in consumption and investment, as consumers and businesses delayed spending due to expectations of a further fall in prices. The impact of decreasing demand in these advanced economies would probably feed through to individuals' wages and firms' profitability, leading to slow growth rates in those economies and possibly also for the world. The effect of this would be a continued decline in the international prices of many commodities that Africa exports as their demand fell. Ultimately, Africa too would find it harder to sustain or increase economic growth.

The tourism industry is set to suffer as the lower yuan would mean that Chinese nationals may choose to go on vacation at home rather than embark on now expensive African safaris. New Chinese investors will also find that they have to pay more to invest in Africa.

Africa should wake up to the challenge that it faces, that is, to increase its own demand for the numerous raw materials it exports by seeking to boost local industries and thereby solve the problem of possible declines in the demand for its exports.

The author is a lecturer at the Business School in Strathmore University. The views do not necessarily reflect those of China Daily.