To be specific, we are going to talk about trade between Africa and China.

In 2023, China’s total trade with Africa soared to $282 billion, far surpassing the United States’ total trade with Africa, which stood at $68 billion in the same year- a mere quarter of China’s trade volume. 

For over a decade, China has maintained its position as Africa’s largest trading partner. The rapid growth can be attributed to China’s increasing demand for natural resources from Africa and Africa’s reliance on Chinese goods. 

Therefore, when thinking about cross border payment in Africa, it is only natural that Howard and I investigate Africa-China trade. 

Setting aside the complex power dynamics between US-China in developing countries— also representing the question of justice and fairness—  a topic which I won’t delve into detail now,  fundamentally, there is a glaring trade deficit between Africa and China.  

The trade deficit surged by 36%, from $47 billion in 2022 to $64 billion in 2023. 

South China Morning Post

The deficit itself approximately equates to the total trade between US and Africa.. 

Compared to 2022, Chinese exports increased by approximately 8% to $173 billion while imports decreased by about 7% to $109 billion.  

What happened when there is a trade deficit? 

Below is a post that Howard shared with me, in which a Chinese merchant in Nigeria describes his pain points on a Zhihu, the Chinese-equivalent of Reddit. 

As a business owner in Nigeria, one can technically apply for a bank account, and transact internationally, using a formal channel through SWIFT.

Yet the problem arises when the country is experiencing a deficit. 

Even if the bank does offer forex, there is often disparity between the exchange rates set by the Central Bank of Nigeria and those set by the parallel market. 

Moreover, there may be a heightened scrutiny on foreigners, even for  small transactions due to concerns related to money laundering and terrorism financing. 

As the result, the Chinese merchant operating in Nigeria has to exchange currency either by: 

a. ) Physically queuing outside an exchange for a long time 

b. ) Seeking out other merchants who happen to need to sell their foreign currencies

Then manually depositing them into their RMB or USD accounts.  

One time, my supplier in China waited 6 months before he received money.

A Chinese Merchant in Nigeria

So what is the mid-term implications? 

Reversing decade-long trade deficit takes time.  

The continent indeed depends on foreign commodities. Without improving Africa’s infrastructure, logistics, and building its value-added manufacturing capabilities, the trade deficit is likely to persist. 

As the shortage of foreign currencies continues, more local currencies circulate in the market without a buyer and the local currencies depreciate as a result against major currencies such as the USD and RMB. 

As the foreign currency appreciates, import cost rises. Trade deficit continues and cost of living possibly increases. 

With the looming inflationary pressure, the government impose capital controls and limit the amount of imports, which leads to a possible economic slowdown. 

To stimulate the economy, the government further fuels exports in the country. Yet, regardless of the volume of production, the depreciated currency represents a smaller value of the export. 

The never ending story of trade deficit in Africa. : (

Wrapping up

Of course, all of the above can be overly simplified connection between the cause and effect of a trade deficit. 

What I want to argue is that, fundamentally though, beyond government interventions, someone should be building something to help alleviate NOT trade deficit, but problems experienced by the small and medium sized businesses in Africa. 

By 2050, 1 in every 4 people will be African. The young and vibrant continent needs its FinTech infrastructure, not only to accelerate but to meet the bare minimum of the capital flow needed for its foundational day-to-day growth.  

A problem worth solving perhaps?

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Some other topics that I plan to dive into include:

+ Usage of digital currency in Africa 

+ Climate change in Africa 

+ Power struggle between US and China in Africa 

+ Competitor landscape across FInTech sub-sectors 

Comment or PM me if there is any topic that you are interested in reading too. 

Peace!

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Sources:

+ Office of the US Trade Representative

+ Jevans Nyabiage, China-Africa trade hit US$282 billion in 2023, South China Morning Post

+ Transacting in Africa, How Money Flows into China, Zhihu.com