China, the continent's biggest trade partner, has freed its currency

Not a single soul from the US to Europe quite appears to know what to make of China’s sudden move to allow market forces more sways in determining the exchange rate of its closely-managed currency, as stock market took a hammering and investors sought refuge anywhere they could. 

For Africa, the fallout may be cause for longer-term concern, adding to tailwinds to build intra-African trade.

China, the world’s second-largest economy, is a big driver of global growth, and the markets showed it: Asian currencies tumbled while those in Europe rose, American and European stocks fells, while yields on “safer” US government debt slid on fears of inflation and the cloudy outlook.

The uncertainty has led to frenzied speculation as traders and investors take all sorts of positions, with more nuanced analysis expected only in coming weeks when much of the dust kicked up by China’s lowering of the value of its currency will have settled.

But for Africa, which last year traded an estimated $222 billion worth with China (three times more than with the US), the abrupt currency move by the People’s Bank of China (PBOC), the country’s central bank, may have more far-reaching ramifications.

Beijing says its move was solely focused on strengthening its economy by weakening domestic consumption and local demand for foreign products and commodities, but even it will probably marvel at the extent of the panic it has caused in the markets.

Some analysts have highlighted the slowing Chinese economy, as property and financial services slowed and the stock market remained tense on suspicions that the economy will take a hit that was worse than expected. Some brought up evidence that China’s slowing energy demand suggested growth a few percentage points behind its official target of 7% growth this year.

The IMF welcomed the devaluation, and while it said the decision would not affect its December decision on China’s push to have the yuan become part of the lender’s special currency basket, it was notable that state news agencies highlighted that the currency reforms, which also touch on its capital account and forex reserves, were part of its ambition to become a bigger player in global finance.

Beijing is now reporting its forex reserves monthly as opposed to on a quarterly basis, and while still the largest in the world, they have in recent months fallen to a two-year low, suggesting increased capital outflows as imports rose. That is all about to change, it seems.

The immediate consequence for Africa is that wary investors will reduce their appetite for emerging markets, reducing the cash and opportunities available for investment in regional economies. Nervous investors tend to flee to havens, and the less-volatile government debt in developed economies is expected to have more takers seeking to reduce exposure.

Another near-term outcome is that China may essentially be exporting deflation, drying up money supply channels for developing countries, and thus making it more costly for them to borrow.

The yuan’s depreciation will also give a considerable boost to Chinese exporters as their products become cheaper and more competitive globally. But despite the hundreds of billions in economic engagement between Africa and China, the balance of trade has been firmly in the Asian country’s favour.

This means more Chinese goods will soon be making their way into African markets, with the attendant risk of dumping. This would further weaken internal regional ability to produce the same goods locally or compete.

A lot of Africa’s trade has been in exporting raw industrial materials and commodities to China. But these are already taking a hammering, with financial data company Bloomberg reporting that its commodities index Wednesday fell to its lowest level since 2002.

Beijing’s move could reduce demand for African imports as it looks to build its own capacity, and commodity-dependent countries like South Africa, which is its biggest trading partner in Africa, Zambia, Liberia and Sierra Leone will have much cause for concern, as prices and key markets shrink.

Oil exporters such as Nigeria, Angola and Algeria might welcome the news in the hope of some economic respite if crude prices maintain their rally, but the gain would have to be more to counter the reduced demand by China for energy.

It could however be tougher news for African oil importers, who are the majority and have already seen crude price gains pared by weakened and wildly-swinging domestic currencies.

A devalued yuan also makes it more expensive for Chinese tourists to travel the world. Tourism-dependent African countries that have been aggressively courting them, such as Kenya, South Africa  and Mauritius can expect to feel the pinch. The latter is already counting its losses as new visa rules continue to chip away at its billion-dollar industry.