Financial markets in South Africa held firm yesterday in spite of the significant exposure of some Top40 companies in the JSE to China’s economic meltdown.
The JSE All Share Index rose more than 1% to stay just above the 75 000 index points mark yesterday while the rand remained almost unchanged at R18.61 against the US dollar.
The share price of China’s largest property developer, Evergrande Group, plunged more than 80% as the company delayed crucial restructuring meetings with creditors and revealed first-half losses of $4.5 billion (R85bn), with liabilities of $328bn.
The world’s second-largest economy is currently experiencing stalled economic activity, with foreign investment and the property crisis worsening and leaving developers Evergrande and Country Garden facing severe financial difficulties.
Analysts warned yesterday that the financial troubles of Evergrande Group, as well as the broader economic challenges in China, can potentially have implications for South African financial markets and local companies with exposure to the Chinese markets.
China is a major consumer of commodities, and South Africa is a significant exporter of resources like minerals, metals, and agricultural products to China.
China is South Africa’s largest trading partner, with 12% of exports and 23% of imports.
TreasuryONE head of market risk management Wichard Cilliers said a slowdown in the Chinese economy or a decrease in its demand for these commodities could lead to lower prices and reduced export revenues for South African companies, which could hurt their profitability.
Cilliers said companies also might need to re-evaluate their supply chain dependencies, currency hedging, and financial resilience in the face of potential disruptions in the Chinese market.
He said a weakening Chinese economy could impact global financial markets and currency exchange rates. South Africa’s currency, the rand, is often sensitive to global economic trends.
“If the Chinese economic crisis leads to global market volatility, it could put pressure on the rand because of risk aversion. On top of this, any significant shocks in global markets, especially in emerging markets, can lead to volatility on the JSE, affecting local investments and investor confidence,” Cilliers said.
“South African companies with business interests in China or those that rely on Chinese financing may face challenges. If China’s financial sector experiences instability, it could become more difficult.”
However, Cilliers said the impact of these developments would depend on various factors, including the extent of the economic crisis in China, the measures taken by the Chinese government to address it, and the global economic context.
China’s government has been trying to reassure jittery home buyers after Evergrande missed a payment on its multibillion-dollar debt, reviving fears about the impact on the struggling Chinese economy.
Anchor Capital fund manager Peter Little said metal prices had held up relatively well considering the economic malaise, probably on the expectation that the Chinese government would be under pressure to stimulate economic growth and the playbook they usually follow in that scenario is to stimulate real estate activity.
Little said if this did not happen or if the real estate industry slowed further, there was likely more downside to the metal prices, which would weigh on South African export values and, by extension, economic activity.
“So the mining sector is clearly the one most impacted by China. The other obvious ones are Naspers/Tencent, where the biggest underlying investment is Chinese e-commerce company Tencent,” Little said.
“Chinese stocks have been fairly out of favour for the last few years as regulatory clampdowns have weighed on sentiment and created uncertainty, so valuations for these Chinese internet companies already reflect a decent amount of pessimism.”