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R94bn bilateral deals crown state visit

HE President Xi Jinping proposes a toast during the state banquet held at the Sefako Makgatho Presidential guesthouse in Pretoria. President Xi Jinping is on a state visit to South Africa. 02/12/2015, Kopano Tlape, GCIS

HE President Xi Jinping proposes a toast during the state banquet held at the Sefako Makgatho Presidential guesthouse in Pretoria. President Xi Jinping is on a state visit to South Africa. 02/12/2015, Kopano Tlape, GCIS

Published Dec 4, 2015


#Focac: Johannesburg - The signing of 26 agreements worth R94 billion by the Chinese and South African governments on Wednesday presents an opportunity for the skewed trade relations and perceptions between the two countries to be addressed.

The trade balance favoured China as more than 90 percent of South Africa’s top 10 exports to China were in raw materials, while all of the country’s top 10 imports from China were manufactured products. China is South Africa’s biggest trading partner and accounted for 10 percent of world trade.

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There were more than 120 medium- and large-sized Chinese companies running their businesses in South Africa and most of the Chinese companies regarded South Africa as a gateway to expand business.

China has established itself as a giant in world affairs, following 30 years of economic reform and opening up to the world.


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After numerous bilateral agreements were signed between the two countries this week, the question remains whether they were mutually beneficial.

China has been blamed for the collapse of the South African textile industry, which affected thousands of jobs. There is resentment within the local steel industry, which called for tariff protection, after complaining that cheap Chinese imports had brought the industry to its knees.

However, it must be said that affordable Chinese products, ranging from clothing to electronic goods, have been a relief for millions of South Africans living in poverty.

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This week, there was little expectation that President Xi Jinping’s visit would signal a turn in the country’s economic fortunes. Abdul Davids, Kagiso Asset Management’s head of research, noted that the visit came as the Chinese economy was transitioning from an infrastructure-led, heavy commodity-intensive economy to a more consumer and services orientated economy. The transition was not expected to be smooth, and would be quite disruptive to the global economy, especially with regard to resources.

“Chinese consumption growth of commodities has been the single biggest driver of commodity prices over the last ten years, and as China’s economy slows we have seen the devastating impact on commodity demand and prices. Conflicting data points to a gradual to rapid slow-down in the Chinese economy that is further exacerbating the transition pain,” Davids said.

The decline of the platinum, coal and iron ore prices this year saw South African producers restructure operations in a bid to save costs, which affected thousands of jobs. Because the Chinese economy was expected to grow at 7 percent this year – which was below expectations – the impact on commodity producers, like South Africa, was bad news.

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Dropped off

Martyn Davies, the managing director of emerging markets and Africa at Deloitte Frontier Advisory, said this week that China-South Africa trade had dropped off significantly over the past year, due to both reduced commodity prices, as well as a depreciated rand that served to make Chinese imports more expensive.

“South Africa’s commodity exports to China have reduced significantly in recent times,” Davies said. “But there are great opportunities to increase exports to China from our strong automotive sector and agribusiness sectors, to name just two.”

He expected a moderate recovery in resource demand in the medium term, citing that there was a cyclical and structural challenge in the domestic economy.

“The China-driven super cycle, which peaked in late-2012, has tapered off dramatically. At the time it masked our structural flaws. Now we have to contend with both structural and cyclical challenges.

“The problems in the resources have been exacerbated by other challenges. For example, why is South Africa not growing as an economy? We are a diversified economy, but our economy has flatlined. To grow we need agile reform through pragmatic policy and the implementation thereof. Economically enabling infrastructure spend would be ideal right now,” Davies added.

Annabel Bishop, an economist at Investec, said there were indications that commodity prices could bottom next year, but they were not expected to rise substantially, with only a mild ascent during 2017 to levels not substantially higher than current levels. The commodity price super cycle is over.

“The platinum price decline this year has, along with the decline in prices of coal and iron ore, provided producers in South Africa (with) reasons for mine rationalisation and job cuts. Platinum prices have slumped 50 percent since setting a record high in 2011,” Bishop said. “A further dip in prices before then is possible, early in the new year. Indeed the new normal will likely be commodity prices at these lower levels, as China has moved away from a focus on heavy industrial processing and manufacturing to services.”

The sectoral rebalancing in China is expected to persist until at least 2025 and yield ultimately more economic stability for the world’s current second-largest economy. “For South Africa’s resource sector this is just one more headwind, as the industry is battling higher costs, policy uncertainty, labour rigidities, slack demand and some over investment. Chinese businesses were investing in South African mining business, however, two deals have collapsed, following regulatory delays,” Bishop said.


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