Monday, August 26, 2013

China goodies: The hidden risks in turning to the East

China goodies: The hidden risks in turning to the East

Updated Monday, August 26th 2013 at 23:27 GMT +3
President Uhuru meets Chinese delegation on his visit to the country. The head of State bagged many goodies for the country.

President Uhuru Kenyatta may have bagged some goodies from China, but the billion-dollar question still lingers. Were the deals secured from the Asian giant really worth their perceived value?

His mission to grab a piece of the resource-hungry dragon, observers say, will simply make him one of hundreds of heads of State that have visited China hoping to cash in on the world’s most populous country and its booming economy that everyone wants a piece of.
But efforts made, including courting by the powerful US, Germany, Britain, France and hundreds of emerging economies including Nigeria, and Egypt, to woo China have been not always gone as hoped.
Horticulture exports
What China has done is keeping everyone guessing while yielding little. The country’s biggest weapon is its more than a billion population (1.344 billion in 2011). This is the huge market each nation is eyeing.
If Kenya accessed even five per cent of this market for its tea, coffee or horticulture — or even just attracted more tourists — it would not be struggling with its ever-waning balance of payments. Kenya has one of the widest current account deficits, with exports unable to support a rapidly growing import bill.
China’s population is very big. The US does big business with China. Kenya is strategically thinking like US and entering into markets with a high consuming population,” said Kariithi Murimi, a fellow at the Institute of Certified Public Accountants of Kenya. “ China is helping in infrastructure as is Japan. It is a win-win situation.”
“Turning to the East is strategic, the same way USA went to China before other countries and reaped dividends … General Motors was making profits in China even as it was declaring bankruptcy in USA. Even Europe turned East,” said Dr XN Iraki, a lecturer at the University of Nairobi School of Business.
Iraki said Kenya started turning East long before the Kibaki Administration. “We stopped buying cars from Europe and USA and went Japanese long before China came to the scene.”
“While it’s true we buy a lot from the West – from machinery to software and ideas – China is catching up by manufacturing these items more cheaply,” he added. “So selling to the West and buying East makes economic sense.” But many think China is still calling the shots since it is yet to fully open up its market to outsiders.
Kenya is heavily dependent on Europe and US markets for its horticulture exports as well as tourism numbers. Although Kenya’s tea is mainly exported to Asian markets, the Middle East as well as countries such as Egypt, Kenya still need dollars to trade with the rest of the world.

Unfortunately, the traditional allies that President Kenyatta is overlooking offer the country these much-needed dollars as opposed to China and other Asian tigers.

Huge brands
Iraki said the strategy of turning to the East is only sustainable if Kenya starts selling to the East too. “If we sold more oil and other products to the East, our trade would be more balanced.”
He also noted that what Uhuru is doing is continuing a process of “easternisation” that started with the rise of Japan and Korea. “Seen how Koreans are selling cars and electronics in Kenya, including setting up churches? Though they forgot to rename KIA, which is a hard sell in Ukambani. We need each other and the more trading partners the better.
“The East seems to understand us better and treat us as equals. They are also less interested in our internal affairs and cultural influences. We buy Toyotas but you will not hear of a Kenyan called Watanabe Kamau. We buy Samsung but have no clue what Koreans believe in. Politics and propaganda aside, turning East is logical. Further, we are getting into the Indian century ... after China.”
Big sectors
Kenya seems to have made a deliberate policy shift towards the East, especially in infrastructure and energy sectors. China has been funding several large projects, including the Nairobi-Thika highway.
“President Kenyatta is conducting his own pivot to Asia, which is to all intents and purposes a rebalancing in favour of China,” Aly Khan Satchu, an independent investment analyst, said.
“It is an impossible call to reconfigure our exports to face East, and this remains a dichotomy at the heart of the ‘look East’ policy.” However, Satchu said, to grow trade, the country needs to take advantage of its transit position [we are the route to the sea for a number of countries], and doing so requires leapfrogging our infrastructure.
“[ China’s President] Xi Jingpin can make that happen with his signature. That financial capacity is what our President is seeking,” Satchu added.
“Naturally, China has seen an opening and you will recall it was the first country to congratulate the newly elected President. In diplomacy circles, the timing of that note spoke volumes. I sense the President appreciates the Chinese and Russians are steadfast allies [ask Bashar], and hence I think looking East rebalances the West.”
Kwame Owino, the chief executive officer at the Institute of Economic Affairs agrees that diversifying Kenya’s market connections is key to growth.

“It is only that Kenya is jumping on board late, at a time when China’s growth has begun to plateau,” he said.
Owino added that the country needs to increase its portfolio of products by strengthening manufacturing, tapping more into regional integration and diversifying from peasant agriculture to more specialised manufacturing and professional services. “Most of our tea goes to Egypt and Pakistan, while coffee goes to Germany and most of our agri-products to East Africa with Uganda being our biggest buyer,” Murimi said.

Dollar demand
“Kenya needs a friend to fund infrastructure so as to lower the cost of doing business, hence the reason we are going to China.
The West talks down to the borrower, making one feel like a true beggar, as opposed to Asia that treats borrowers as equals.”
Analysts say if Kenya is to shift trade relations to countries like China, we will still need dollars to buy products from the West, including oil and raw materials.
Prof Michael Chege, an advisor at the ministry of Devolution and Planning, says the excitement on our trade with the rest of the world should be structured and beneficial.
“We in Kenya are getting excited — whether for or against ‘looking East’ — and are forgetting that the policy that will serve Kenya best is to expand trade and investment relations both East and West and also in Africa,” he said.
“We are therefore making the mistake of assuming that trade, aid and investments from the East are done at the expense of the West, whereas we can, and are, growing our economic ties with both — except that our ties with the East are growing faster.”
As far as Kenyan exports by region are concerned, Africa, especially the East African Community and Comesa, are Kenya’s largest trading partners at Sh250 billion last year, having overtaken Europe which stands at Sh108 billion.
“That is where most of our exports go. But we can and should export more to Europe, as well as China (where we exported Sh5 billion in 2012),” Chege added.
Currently, China does not feature among the top 10 export markets. Neighbouring Uganda remains Kenya’s biggest export market. In the first five months of this year, Kenya’s exports to Uganda stood at Sh23.4 billion. Other major export markets are Tanzania, Egypt, UK, Pakistan, Netherlands, USA, Germany, Rwanda, United Arab Emirates and France.

However, Chege emphasised, whatever trade agreements Kenya signs should be above board.
“If we can sign the right trade agreements and increase our exports range and volume, we will grow.” And our largest source of imports by region is now Asia, having replaced the European Union. But by country, the number one source of our imports is now India.

A decade ago, Kenya sourced most of its imports from the West, but tables have since turned. India, China and UAE control a sizeable market.
For instance, Kenya’s imports from India stood at Sh86.9 billion for the first five months of this year, while UAE took the second spot at Sh74.5 billion. China came in third at Sh54.2 billion.

Balance of trade
This compares poorly with the UK at Sh21.9 billion and US at Sh24.945 billion, which is nearly half of what is going to the East.

However, Britain still holds the largest segment of stock in foreign investment in Kenya. Asian investors are catching up a well as Brazil, Russia, India, China and South Africa.
“But we could still use more foreign investment from the EU. We need them all to create these jobs that we desperately need,” said Chege.

Looking East has not affected tourism, the second largest source of foreign exchange after tea. Kenya’s largest source of tourists (793,000 in 2012) is still Europe, with Germany and UK at the top, and the US. Asia is at the bottom at 137,000 tourists, with China contributing only 60,000 visitors.
“Perhaps more will come now. We need more from the East and West to achieve the Vision 2030 target of three million tourists by 2018. We only had 1.4 million in 2012,” Chege added.

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