NS4301 Summer Term 2015 China Devaluation: Implications for Africa Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Overview China’s August 2015 devaluation For Africa fallout may be cause for longer term concern Adding to move to increase intra-African trade Devaluation has created uncertainty Price of gold rose weeks after it appeared unattractive For Africa 2014 saw $222 $billion in trade with China (three times the U.S.) Devaluation may have more far-reaching ramifications Impact will depend on motivation for devaluation Simple correction to real exchange rate? Sign of Chinese economy weakening? Move towards more flexible exchange rate?

China Currency Appreciation

China Current Account

Impacts on Africa I Immediate consequence for Africa Manner in which investors reduce demand for emerging economy debt Nervous investors tend to flee frontier markets, reducing cash and opportunities for investment there China may be exporting deflation, drying up money supply channels for developing countries – making it harder to borrow Devaluation will give a considerable boost to Chinese exporters – products cheaper and more competitive Will reduce the ability of African countries to produce the same goods or compete

Impacts on Africa II Much of Africa’s trade with China is exporting raw industrial materials and commodities These already taking a hammering – Bloomberg commodities index now at lowest level since 2002 Those priced in dollars will be more expensive in China Devalued yuan also makes it more expensive for Chinese tourists – Adverse effects on Kenya, South Africa nad Mauritius Africa’s booming trade with China has offered the region an alternative however now the best alternative would be to develop intra-African trade and reduce external risk.

Impacts on Africa III Patrick McGroarty and Martina Stevis, Yuan Move Rattles Africa, Wall Street Journal, August 18, 2015 Yuan deflation sending many African currencies down In South Africa Rand hit a 14 year low of 12.94 to the dollar. Currencies in other African countries with close ties to China, like Angola and Zambia are also down sharply China’s demand for Angolan oil, Zambian copper and South African gold has fueled a steep increase in trade but leaving economies exposed to China policy shifts

Africa Trade with China

Impacts on Africa IV Angola is battling foreign exchange shortage as falling oil prices and slack demand from China slash revenue from crude exports that generate nearly all F/X and pubic revenues Zambian copper mines laying off workers or closing because local power shortages made it to costly to keep production up as long as prices at six-year lows South Africa finance ministry forecasting economic growth of only

Impacts on Africa V Some countries benefitting – weaker yuan cuts cost of Chinese goods and services they import. East African countries – Ethiopia, Kenya and Mozambique have run big b/p deficits importing Chinese made equipment – now cheaper Kenya’s diversified economy may gain the most from weaker yuan China is second biggest source of imports of Kenya and buyers of heavy Chinese machinery say considering paying for purchases in yuan rather than dollars. As China’s ties with Africa have strengthened some African officials have joined China’s campaign to promote the yuan as an alternative to the dollar.