The world’s financial markets took a boost this week when China announced a $586bn programme of investment in infrastructure and social welfare amounting to 7 percent of GDP in each of the next two years.

The new investment was expected to concentrate on low-income housing, water, electricity and transport, including a big increase in railways.

The keen welcome by global markets eager for good news was a tribute to China’s emerging economic muscle. But the timing of the announcement, originally planned to follow a Beijing summit of China’s economic policymakers later this month, pointed to the flipside of China’s new strength.

As the
Financial Times reported, ‘Anecdotal evidence from a range of different companies in China suggests that the economy slowed sharply in October and some economists had downgraded next year’s growth estimate to 5-6 per cent in the absence of strong fiscal action. Economists say the government wanted to deliver a strong signal about its spending plans before the official October data were released’.

China’s more regulated banking system has preserved it from the direct impact of the ‘credit crunch’. But its export dependence has exposed it to the impact of the depression the crunch has triggered.

A wave of factory closures in the Pearl River Delta has led local officials to pre-empt possible industrial unrest by setting up emergency funds to pay sacked workers their unpaid wages, and to monitor local factories to identify firms in danger before they collapse.

As well as offsetting the immediate impact of the depression, the spending and investment boost could mark a shift to boosting domestic living standards and consumption to reduce China’s exposure to global turbulence.

But this will not mark a turn to isolation. According to US Treasury figures as of February this year Asian countries between them held more than half of all US public debt. Japan is the major purchaser with $1,197bn but China is in second place with $922bn, and total dollar reserves of $2trillion - more than two thirds of its annual production.

‘The US government decision to bail out the mortgage giants
Fannie Mae and Freddie Mac in September came - according to
rumour - after a phone call in which the Chinese president,
Hu Jintao, threatened President George Bush that if they were
not rescued, China would stop buying US Treasury bills. The
US government denies the story. The Chinese point to the
facts: Fannie and Freddie were saved and the Chinese loans,
$595.9bn, were guaranteed. The story is emblematic of the
current changes in the geopolitics of capital.’ [Martine Bulard ‘Financial realities after the Dollar’ Le Monde Diplomatique November 2008.">
Yet the stimulus package represents more than just a response to the global financial crisis. Coined as ‘The New Deal for China’, it represents a sobering analysis of China’s export led growth strategy. It is believed that this could be the defining moment in Beijing’s economic model that reduces dependence on exports in favour of a heathier path.

Indeed, the speculation that China is the only country that can weather the financial crisis with its US$1 trillion plus foreign reserves means that advancing the prospects of harmonious development domestically remains the top priority for President Hu Jintao’s administration. This is particularly so given the need to defuse social protests. So the financial package could be the start of a more disciplined fiscal policy in Beijing aimed at strengthening domestic social safety nets.

What does this mean for Africa?

The stimulus package is geared towards injecting capital into the domestic economy, particularly within the services sector. But some are hoping that it will also anchor China’s demand for Africa’s commodities. Of course, the volatile oil market also has energy pundits thinking that this could be a boost for the price of the black gold. The fact that the stimulus package is intended to strengthen domestic demand and fuel greater infrastructure development , could well mean that China’s African interests are not at risk and instead offer . greater opportunities.

The recent visit by the Chairman of the Standing Committee of China’s National People’s Congress, Mr. Wu Banggao, could be seen in this light.
Invited by five African countries, Mr. Wu reaffirmed relations with the five countries that invited him (Algeria, Ethiopia, Gabon, Madagascar and Seychelles) and concluded further deals with them. In Algeria the Hong Kong listed company Great Wall Motors has entered into , a deal to ship 700 luxury vehicles to the North African country. With domestic demand taking a dip, this contract could help ease some of the negative effects for the car maker.

In other developments Mr. Wu discussed boosting cooperation with , Madagascar signed an economic and technical pact with Gabon that will see further large-scale projects in mineral production, power production and a gymnasium construction, and proposed a three point plan for co-operation with . Ethiopia.

The real thrust of Mr. Wu’s visit was the official ground-breaaking ceremony for the African Union conference centre in Addis Ababa, Ethiopia. Pledged at the 2006 FOCAC Summit, the Conference Centre is seen as a first step towards strengthening dialogue and cooperation between China and the AU.

But all eyes will now be on this weekend’s Global Crisis G20. With China, India, Brazil, and South Africa in attendance, there has been a quiet storm brewing in Africa around the Continent’s exclusion This could be an important opportunity for China to step up to the plate and place Africa’s concerns on the table. It will be interesting to see in the wake of the crisis meeting and China’s stimulus package, whether this has ben the occasion of a maturing of its relations with African countries.

Many are predicting that China’s engagement with Africa has not been affected by the global financial crisis, and indeed that it could stimulate further interests in Africa’s infrastructure development and still remain a significant growth factor.

But perhaps we should also be asking whether we will see further large-scale loan packages like the mineral backed DRC loan. From the African side expectations that an Obama Presidency will renew confidence in Africa’s exports to the American market will depend how the new Obama administration and Beijing calibrate their economic interdependence.

For the moment with demand slowing down in the US, it may interesting to explore whether Africa will become the export destination of second choice for Chinese companies who are experiencing negative returns as a result of domestic slowdown, as in the case of Great Wall Motors. But, for how long - and what about the purchasing power parity of Africa’s consumers, outside of the small elites?.

∗ Stephen Marks is a research associate and Sanusha Naidu is research director of Fahamu’s China in Africa programme.