China In Africa: Implications For Australia

International | Apr 23 2021

China is spending US$40bn a year in Africa. Longer term consequences can include Australia's exports of iron ore

-China has been working hard on strengthening ties with African nations, resource-rich or otherwise
-China’s dispatch of PPE and vaccines to friendly nations in Africa has been a smart exercise in diplomacy
-All eyes on Guinea's Simandou deposit when it comes to Australia's position of global iron ore exporter

By Ed Kennedy

Recently The Economist held a webinar ‘Africa-China Relations: new frontiers of co-operation?’.

One does not have to be a financier or policy wonk to recognise the substantial implications for the African region and the People’s Republic of China in deepening ties between the two. But the impact of an ever-increasing closeness certainly isn’t confined to Africa and China. Australia’s economic future could have a huge stake in it too. 

As China continues its rapid economic growth and builds the influence that comes with such clout, it can find in Africa not only an opportunity to enhance trade ties, but also diversify its import sources. In an era in which Australian-Chinese relations are at the lowest they’ve been in decades, Australia now needs to prepare for years ahead where Beijing may find in Africa an opportunity to shore up strength at home while diminishing existing trade ties with Australia.

The core takeaways from The Economist webinar considered alongside broader trends in Australian-Chinese relations illustrate the time is ripe for a substantial recalculation. For a re-think among Australian political and business circles regarding the future of its trade ties with the world’s most populous nation. In particular, as it concerns iron ore. 

The Economist Snapshot

Overseen by Pratibha Thaker, Editorial Director, Middle East & Africa and Sanya Suri, Country Analyst, The Economist’s webinar showed the deft skill in which China has built strong ties with African nations via a variety of economic avenues.

As Ms Thaker detailed, China is Africa’s single largest bilateral trading partner, and two-way trade pre-pandemic in 2019 accounted for around US$208bn. It’s been the largest single export market for 16 African states, and been the largest source of imports for 33 African states. The covid-19 pandemic has of course upended all normality in global trade – and this includes China’s relations in Africa – but such stats illustrate the length and depth of China’s foundations in the region.

The complexity of China’s African relations from one nation to another means any notion of a ‘grand strategy’ – beyond the commonality shared by many African states having signed up to China’s signature Belt and Road Initiative (BRI) – is of course elusive. 

But consistent themes can indeed be identified. As Ms Thaker noted, Chinese investment in Africa has hit around US$40bn a year since 2011. Resource-rich nations like Zambia, Democratic Republic of Congo and Angola have all been favourites of Beijing.

China’s dispatch of PPE and vaccines to friendly nations in the region has also been a smart exercise in diplomacy interwoven with a recognition of hard economic truths; for China to maintain and build on its economic ties in African nations, it requires the latter to have a healthy workforce. Accordingly, helping end the pandemic in the region is a key aim for Beijing.

Building the Road Ahead

Although any relation between nations is always multi-layered, for African states the core incentive to build closer ties with China has come down to infrastructure. Per a 2019 Brookings report and according to the African Development Bank, between US$130bn to US$170bn a year would be required to help close the regional infrastructure gap. Yet the gap between these figures and the rate of spending has also been substantial, with investment sometimes not even getting over the US$100bn mark. Closer ties with China has helped African nations bridge this gap.

In and of itself, infrastructure investment in Africa by China doesn’t pose a challenge for the Australian economy. As indeed – save for situations where Chinese business may hold exclusive rights to the use of such infrastructure to the exclusion of others – Australia and other nations can ultimately stand to benefit from investment that leads to the improvement of amenities, wherever it’s sourced from.

But where Australia’s economy does stand to suffer is the alternative market Africa could build in the years ahead in the mining sector – and see it directly compete with Australia as a supplier to China

The Iron Ore Factor

Iron ore is a key element in the Australian-Chinese relationship. Australia provides around 60% of China’s supply. Given the immense demand China has for iron ore – the key ingredient in steel production – it’s recognised even if the Australian-Chinese relationship has soured elsewhere in recent months following the outbreak of the covid-19 pandemic, by and large this trade flow should continue as normal. At least in the short term.

Because although Australia is presently the key supplier of iron ore to the nation, it’s not the only one. Brazil is the second largest iron ore supplier in the world, and a key source for China. Yet ultimately, it’s not within Latin America’s largest nation that the greatest potential threat to Australia’s ongoing export to its biggest customer is held. Instead, it’s held to be in the tiny West African nation of Guinea. A state with a population of around just 13 million, but within its borders the belief there’s the world’s largest untapped reserves of iron ore.

As well as the Simandou project – predicted to have a 100Mt production capacity – Guinea also holds Kalia and Zogota. These are expected to be much smaller than Simandou, but still significant. All are expected to be operational by around the middle of the decade. Chinese investment has also been essential to the reactivation of the Tonkolili mine in Sierra Leone.

Save for some astounding discovery in Africa or truly remarkable turn of events in the Australian-Chinese relationship, the Great Southern Land is well-placed to remain the top supplier of iron ore to China, at least for the next few years.

Yet in the short term Beijing’s current displeasure with Canberra –  interwoven with the widespread perception greater action on carbon emissions is an overdue step by Australia’s federal government –  means the local iron ore industry is right to look to the years ahead with some degree of unease. This given the current circumstances in the trade stoush, and the role West African nations could soon play as a competitor.

Australian-Chinese Trade and Investment

There’s no doubt Australia is more vulnerable to a rapid downturn in trading relations with China, than the reverse. But what is in doubt is whether the current low point of Australian-Chinese relations is a temporary blip, or instead the end of an era. If it’s the former, it appears clear it will be many years until Beijing turns a cordial hand towards Australia once more. If it’s the latter, Australia must begin a new chapter that pursues economic diversification to cushion the blow of any further salvos from Beijing in the trade dispute that’s seen the imposition of punitive tariffs on Australian wine, barley, and other goods dispatched to China. 

Already there’s some sign this is occurring, with India increasingly viewed not only as a key regional strategic partner for Australia – alongside Japan and the U.S. – but also a trading partner. Following recent Chinese tariffs, India notably took additional barley from Australia. Although this is welcome, given Australian-Indian trade is around just 10% of Australia-Chinese trade, the economic relationship has a long way to go. 

However painful tariffs may be, the potential for Beijing to swiftly reverse them remains. More concerning for Australia’s economic growth, the 61% drop in Chinese investment during 2020. While the pandemic undoubtedly accounts for part of this decline, Australia's Foreign Investment Review Board (FIRB) is set to become a lightning rod for criticism going forward given recent reforms to it that beefed up restrictions.

To those seeking to drive more investment from China (and other nations) in Australia, the FIRB is too strong. For those desiring Australia increase protection of key infrastructure and tighten restrictions surrounding what foreigners can own in sensitive areas of the economy, the FIRB is too weak. In this dynamic, any reform done in any fashion guarantees more criticism.  

Whatever the merits of either view, the differing perspectives – and thus the volatility of the debate – surrounding the FIRB will only increase in future. So although Australia perhaps has some wiggle room in redefining its relationship with China, it will also find itself with fewer options than it once had due to elevated concerns surrounding Australian national security. 

Domestic Challenges to Define African-Chinese Relations

For those tempted to draw a straight line fearfully between China’s growing engagement with African nations and a decline of the Australian economy, it’s important to consider the picture in whole. In particular, Beijing has more than enough on its plate with numerous territorial disputes in the Asian region it’s involved in heating up, as well as profound domestic challenges. China’s gender imbalance issue alone – the byproduct of the ‘one child’ policy it maintained for many years – would take generations to address. Chinese health authorities recognise the scale of the problem, having previously called it the “most serious and prolonged” of its kind in the world.

In this dynamic, the notion Beijing would recklessly throttle iron ore trade with Australia and thus jeopardize its domestic steel production appears unfathomable at present. This said, a few years ago a large and rapid fallout of Australian-Chinese relations would have seemed quite unlikely. Ultimately, the greatest determinator in the long term of Beijing’s fate and fortunes with Africa – and how it may factor that in when it comes to relations with Australia – is set to be determined by those who live in the region.

While in the next few years – with many nations still reckoning with covid-19 as China seeks to move beyond it – Beijing is well-placed to make some gains, further along it’s expected its relations across Africa will be tested by the latter’s own demographic developments. As of 2020 almost 60% of Africa’s population is under 25. With estimates by 2050 the region could hold 2.5 billion people –  almost 25% of a global population set to be near-10 billion – the growing critics of Chinese influence in Africa could have both more voices in support of them, and greater heft domestically to pursue more diversified economic growth. 

With high youth unemployment already a region-wide issue in Africa before covid-19 hit, many among the next generation of leaders will have first-hand experience with a long period of unemployment, and a new skepticism towards a globalised economy. There’s already signs of this demographic swelling now. 

As Sanya Suri noted in The Economist's webinar, the pandemic has led to a decline in household incomes for many Africans, and China’s economic presence in the region looms as an easy target for criticism. Yes, this sentiment may diminish once recovery begins. This said, for evidence once a protectionist-bent is in place it can persist for years, one need only look at the ongoing strength of Donald Trump’s political movement, or the ultimate outcome of the Brexit era in the UK.

The Bottom Line

Just as century after century has seen sailors come undone when seeking to sail around the Cape of Good Hope, Australia shall has to navigate its future relations with China dealing with strong headwinds from Africa. Ones that shall undoubtedly make the nation’s voyage through the 2020s harder, and potentially even deal a significant blow should Guinea mines (or another nation) turn the global iron ore market on its head. For Canberra and Co now there’s a strong case to chart a new course, before conditions worsen and external factors make it that much harder to steer the ship effectively. 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms