The Black Dragon: A Nigerian Perspective Of The Chinese Economy
In response to China’s declining economy and its resultant effects, the People’s Bank of China cut its benchmark lending rate to 4.6% (the fifth cut since November, 2014), reduced its one-year benchmark deposit rate to 2%, devalued the Yuan twice in two (2) days to 1.6% and cut Bank’s reserve requirement ratio by 0.5%.
In addition, the Government is placing pressure on State-Owned Banks to lend money to Companies for Investment purposes and it has stepped up initiatives to spend money on huge infrastructural developments. All of these are to achieve the objectives of making the way China sets its exchange rates more market-oriented, improve trade from a 3.8% export drop in July, make Chinese goods cheaper and more appealing overseas, aid China in meeting its 7% target growth rate, (the lowest in 6 years) and improving consumer confidence in the stock market which declined by 8.5% on the Shangai Composite Index in July.
Most of these initiatives are tailored towards creating a favourable environment for Chinese local industries. In the face of a declined and declining economy, further Government initiatives may include reduced tax or tax rebate, reduced export duties, reduced Government spending, reduced interest rates (on-going), devaluation of the currency (on-going), change in government policies and increased cost of importation.
Despite the obvious increase in efforts by the Chinese Government to improve the ease of doing business index, the capital flight from China and by extension, the rest of the world, increases daily and is currently at $5trillion. This, it can be said is the paramount effect of the decline in the Chinese economy and volatility in the stock market. Other possible effects include excess supply of and lower prices of goods, high costs of production and borrowing, lower purchasing power of consumers, lower wages for workers and a general reduction in development indices (GDP per capita, literacy rates, life expectancy, measures of poverty, disease indicators and demographic indicators including unemployment).
Nigeria – China Relations
Nigeria as the giant of Africa, the 4th largest African trading partner and the 2nd largest Chinese export destination after South Africa as at 2010, is positioned by default, to be affected by the fall of the great China. Areas of impact include:
• Increased cost of doing business with China: The devaluation of the Yuan translates directly into increased costs associated with bilateral trade. This implies that exchanging goods worth 1 Nigerian Naira with goods worth 0.032 Chinese Yuan may not be of the same value as in previous times. In essence, the effective purchasing power of Nigeria is reduced by this devaluation.
• Potential capital inflows from the global economy in terms of an increase in the inflow of expatriate businesses (start-ups, SMEs and Franchises) seeking safer and more diversified business environments and/or an increased investment in the Nigerian stock market.
• Increased import duties from China: The aim may be to discourage imports into China. This implies that the cost of exports to China may increase and the monetary value of these exports to Nigeria may decrease accordingly.
• Reduced financial aid from China: Nigeria-China relations have been characterized by rapid and aggressive economic, cultural, scientific and educational co-operation, increasing FDIs, aids/grants, etc. Within Nigeria, the states that have benefited for this investments and aids include Lagos, Cross River, Bauchi, Ogun State and Yobe. The slump in the Chinese economy may therefore translate to a drop in Chinese involvement in the development of Nigeria. Current areas of investment include education, infrastructure, commerce, health, technology, etc.
• Increase in Chinese goods imported and/or smuggled into countries: Due to an increase in the supply of Chinese goods, a reduction in price and in a bid encourage local producers, the Chinese Government may postulate laws favouring exports. This implies that since there are existing channels for the sales of Chinese goods in Nigeria, the tendency that these goods will be imported or smuggled into Nigeria, especially because of the low costs of these goods, is high.
• Increased threats to local manufacturers in terms of eroding margins and competing cheap products: The entry of Chinese businesses and Chinese cheap goods into the Nigerian market could discourage local production and producers due to cost reductions by these companies, such with which Nigerian businesses may not be equipped to compete with. In the long run, eroding margins and competing cheap products could lead to a drop in the growth of the Nigerian economy.
To hedge against these risks and take advantage of the benefits arising from this partnership, Nigeria must:
• Position itself as a favourable investment economy in terms of legislation and regulations that encourage growth of and investment in businesses. The present volatility in the economy caused by pending ministerial appointments have caused a reduction in consumer confidence and investments and can further prevent investment in the economy. Issues such as this must be immediately addressed, to encourage the inflows of China capital into Nigeria. This inflow will increase fund availability to businesses, especially the SMEs, and as such give room for growth and expansion of these businesses and growth and expansion in the economy.
• Implement laws that protect local SMEs. As many studies have found out, these SMEs drive growth in an economy.
• Increase the quality of its inspection at borders to discourage smugglers and smuggling of Chinese goods in the country. Relevant bodies must be held accountable for an increase in smuggled Chinese goods. It therefore follows that accurate records must be kept for imported Chinese goods.
• Also, businesses must position themselves for these inflows by improving their business processes and improving their transparency in business dealings.
In conclusion, China is playing a major role in the development of the Nigerian economy and as such, the relationship between these countries must be preserved, however, Nigeria must take precautionary steps to protect its economy.
Acknowledgements: Pedestal Africa Limited, Bloomberg, Reuters and IMF