Why Kenya now needs a strategy to engage with China

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2015 was a water-shed year for Kenya-China Relations after Premier Li Keqiang’s visit in May 2014. China overtook Japan and Germany as our biggest bilateral lender, extending loans, grants, credit lines, and technical assistance in a number of key sectors like Infrastructure development, ICT, energy, and foreign affairs. This is expanding in breadth and scope. The flagship Vision 2030 projects like the first phase of the US$4 billion Standard Gauge Railway, 85 per cent funded by China ExIm Bank, roads, airports, energy, security and backbone IT infrastructure are funded, and being built by Chinese firms. The pattern was repeated across Africa, as China-Africa trade soared to an all-time high of US$ 222 billion, heavily imbalanced in favour of China.

Over the same period, China overtook India to become Kenya’s largest source of imports, growing by 37.1 per cent to KSh. 273.8 billion from KSh. 203.3 billion in a similar period in 2014. China led by a commanding a 29.9 per cent of the imports against India’s, which dropped to KSh. 208.3 billion between January and October, from Ksh. 218.9 billion for the same period in 2014. India accounted for 22.7 per cent share of the total import bill of Ksh. 916 billion over the 10-month period.

A huge component of the growth in value of imports from China is mainly due to rising demand for construction equipment into the ongoing Sh327 billion, 485-kilometre Standard Gauge Railway project between Mombasa and Nairobi.

The renminbi (RMB) joins an exclusive club previously only reserved for the T4 currencies issued by the top 4 global economies, namely the US dollar, the euro, British pound and Japanese yen, and takes effect from October 1, 2016, having met the 2 conditions set by the IMF that the currency must be issued by a major exporter and must be freely tradable. Though the IMF uses the reserve basket to denominate its emergency loans, not to create an internationally traded asset, the RMB’s new higher status boosts China’s economic leverage, ramping up it’s lending to countries like Kenya, expanding cross-border and international trade settled in RMB, and increasing the People’s Bank of China’s (PBOC) Emergency credit facilities for loanees.

Given the current structure of our economy and trade imbalance with China, we have an opportunity to not only rebalance but also out-manoeuvre our African competitors and peers, commodity-dependent South Africa and Nigeria.

With the falling global commodities super-cycle implying that commodity-derived revenues are falling, and indicative demand in the globe’s biggest consumer of commodities, China, is plateauing from the aggressive manufacturing and export-oriented dragon that grew at annualized GDP rates of 7-10 per cent, to a more inward-looking, domestic consumption-driven and service-oriented market growing at more modest rates of 5-7 per cent, it matters much to Kenya and the region to recalibrate our trade and investment policies to max out the benefits to be had from these developments.

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