China’s sudden yuan devaluation last month shook things up across the globe, sending stocks seesawing and stoking fears of even slower economic growth in the Asian nation.
Some countries, however, stand to feel the effects of China’s currency moves more acutely than others—namely Africa, where China is the top trading partner for most of the continent’s countries.
Trade between China and Africa as a whole totaled more than $220 billion in 2014, according to figures from the World Bank and the U.S. government, which is roughly three times the amount of Africa’s trade with the U.S.
With a weaker yuan, Chinese goods will be cheaper in Africa and African exports will be more expensive in China as they are often priced in U.S. dollars—likely meaning lower demand for African goods.
If a dip in demand persisted, Africa would be trading and earning less, and according to BBC, “If that cycle continues over a much longer period of time, African states could see their economies shrink, government coffers running dry and eventually countries taking on more debt.”
Fortunately, for now that worst-case isn’t the case yet as Africa can still count on the European Union and the U.S. for trade.
If China’s devaluation does serve to speed its economic growth, as analysts surmise the move was intended to do, demand for Africa’s commodities could pick back up.
It’s investments in Africa that will likely experience a direct impact.
Established investors may feel little impact of China’s currency fluctuations, but those deals that are still in work could end up on hold if Africa has less money to spend.
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Apparel brands in particular have been looking to Africa of late as the continent works to position itself as a new option for low-cost sourcing. Interest in the region has seen an uptick since big companies, like apparel firm PVH and fast fashion retailer H&M, ventured into countries there to source.
“On FDI [foreign direct investment], there will be short term impact, as projects are based on long-term plans, and Africa investment projects are more and more diversified,” a source familiar with the matter told Sourcing Journal.
Another effect China’s currency moves could have, the source explained, is that “Imports of finished products in Africa for African consumption might increase, based on attractive Chinese prices.” However, though some have said this would put African manufacturers at a disadvantage, the source said, “Imports of Chinese fabrics will help African factories to increase their exports to the U.S., taking advantage of the Third Country Fabric Provision.”
The Third Country Fabric Provision, part of the newly renewed African Growth and Opportunity Act (AGOA), stipulates that as long as a garment is cut and sewn in Africa, fabric can be imported from anywhere in the world and the goods can be shipped to the U.S. duty free.
It may be early yet to tell exactly how China’s yuan devaluation will impact Africa and its export sectors, but if the move proves to fuel growth in China, African nations will benefit.