For African countries that have bet heavily on China as their economic saviour, the sudden devaluation of the Chinese currency is a painful reminder of the risks of over-dependence on the Asian giant.
The devaluation of the yuan, coupled with a broader slowdown of the Chinese economy, is likely to weaken demand for the commodities that have spearheaded Africa's booming trade with Beijing. It could also help Chinese manufacturers to compete even more ruthlessly against African producers as Beijing's exports become cheaper.
China, hungry for minerals and oil, has rapidly gained dominance in African markets over the past decade. Its trade with Africa last year was more than $220-billion (U.S.), three times greater than U.S. trade with Africa. It's the biggest trading partner of most African nations. But while this has helped spur African growth, it also leaves the region vulnerable to a slowdown or a devaluation.
Africa's second-biggest economy, South Africa, felt the bite of the Chinese devaluation almost immediately last week. South Africa's currency, the rand, fell to a 14-year low, and its stock market suffered heavy losses. It was a further blow to South Africa's battered economy, plagued by electricity shortages, labour unrest, mining-sector decline and a manufacturing sector that has fallen into recession. Union leaders are threatening to launch crippling strikes in the gold and coal industries, while mining companies are planning to lay off as many as 11,000 employees because of rising costs and weakening commodity prices.
In addition to the damage wreaked on the rand last week, South African central bank governor Lesetja Kganyago warned that the Chinese devaluation will hurt South Africa's exports. Analysts also warned of potential losses in the South African steel industry, which will find it more difficult to compete against cheaper Chinese steel exports in the future. The steel industry is already seeking a 10-per-cent tariff increase to protect itself against cheap imports, particularly from China.
President Jacob Zuma has assiduously courted Beijing in recent years, seeing China as crucial to his economic strategy. He and his top ministers have led two major trade missions to Beijing since 2010, while the ruling African National Congress has forged close links to China's Communist Party. The ANC routinely praises Beijing's economic policies – and even some of its political policies – as a model for South Africa.
China has become South Africa's biggest trading partner, with $24-billion in annual trade. Most of the trade consists of South African raw materials and Chinese manufactured goods. This trade, however, could be threatened by the recent slowdown in China's growth, and by the shifting nature of its economy, which is becoming less reliant on imported raw materials.
China had been fuelling a tourism boom in South Africa, with a dramatic rise in Chinese tourists visiting the country in the past several years. Yet this, too, has proven fragile. A controversial new reform of visa rules by Mr. Zuma's government has led to a 38-per-cent drop in Chinese visitors to South Africa this year.
Despite the latest currency problems, China's influence on African economies has generally been positive. Its companies are building railways, roads, airports, mines and oil facilities across the continent. But cheap Chinese exports have devastated industries such as South Africa's textiles sector. And as commodities weaken, Chinese investors have become increasingly skeptical about Africa.
Cees Bruggemans, an economist in Johannesburg, expects the South African currency to follow the downward path of the Chinese yuan over the next year. He predicts that the rand will depreciate to about 14 to the U.S. dollar by late next year, compared to about 12.8 today.
"Companies worldwide deriving sales and earnings from their China trade may find themselves marked down," he said in an analysis last week.
"The same treatment is likely to continue for commodities, especially those heavily dependent on Chinese demand and already experiencing supply gluts. Thus the slide in most commodity prices, including copper, iron ore, coal and oil, may not be over. This in turn has implications for commodity producers and emerging market currencies."