Asia shrugged off the all-fall-down in Western markets and has quickly resumed its growth trajectory, with China even doubling car sales compared with this time last year.
In the meantime China has become South Africa’s leading trade partner, but the country has a huge deficit with the emerging superpower in both trade and investment.
Trade between Africa and China has more than doubled in the past two years, rising to $107-billion in 2008. In the next three years the Chinese have predicted that this figure will surpass $250-billion.
After Angola, South Africa is the second-largest exporter to China, representing 16% of African imports to China. South Africa represents the largest export market for China in Africa, representing 17% of Chinese exports to Africa.
The problem, however, is that while South Africa sells iron, manganese and chromium ores to China, it buys cellphones, computers and printers – products that are high on the value chain, products that create more jobs than digging minerals from the ground. Its trade deficit with China is serious – it exports only 50% of what it imports.
China is a resource-ravenous country. It has 1.3-billion people undergoing an industrial revolution without the natural resources of the United States or the colonies that the United Kingdom was able to tap into during its expansion phase.
Some accuse China of neo-colonialism and of raping Africa of its resources and then dumping its manufactured goods on the growing African market. But whose fault is that? Is China, which is open and transparent in the way it transacts, really to blame, or should the way Africa interacts with China be questioned?
Standard Bank economist Jeremy Stevens said the perception of China as a neo-colonialist power is unfair and that China represents a unique opportunity for Africa to move into a higher-growth path.
”We need to use the good relations, revenue from our commodities and our potential market to grow Africa, to develop our industrial capacity, diversify our exports and develop our infrastructure. That is our job, not China’s,” said Stevens.
A close look at foreign direct investment with China is a big wake-up call. If one excludes the Standard Bank-ICBC deal, there is more foreign direct investment into China from South African companies than there are deals coming to South Africa from China. South Africans are going to China and making money, yet China is not complaining that we are exploiting them – in fact, it’s quite the opposite. A foreign posting to South Africa is considered one of the top 15 jobs in the Chinese foreign ministry.
The government has recognised the importance of developing a relationship with China that is mutually beneficial. Minister of Economic Development Ebrahim Patel said at a talk at the Gordon Institute of Business Science that South Africa does not want to replicate the relationship it used to have with Europe and North America, in which it supplied raw materials and imported finished goods. ”A balanced relationship requires that South Africa can strengthen its manufacturing footprint as we pursue a broad-based industrialisation strategy to create jobs and promote economic development.”
The question is how to achieve a more balanced relationship.
Stevens said focusing on the Chinese market is not the only strategy. The Chinese view Africa as a huge potential market in the next 50 to 100 years. ”We need to understand that it is about our market and then we can leverage this to benefit us.” One of the main issues addressed by the Forum on China-Africa Cooperation is to improve market access for African exports, including South African goods to China. But we need to be looking at ways that we can leverage off Chinese expertise in manufacturing. What we need is for China to bring its businesses here and to help us develop our own industries.
”China sees Africa as a very important long-term market where they can build their own brands and develop skills and expertise,” said Stevens, who says this is a model China itself followed. China attracted foreign investment, which created jobs and up-skilled its people. This is what drove China’s meteoric growth rates.
Ultimately, China learned from the foreign companies. But now China is ready for the next phase. Those foreign companies created their own brands for the developed world using Made in China labels. China now wants to develop its own brands and global companies and it sees Africa as the ideal market to do so. If Africa plays its cards straight, we could see Made in Africa goods thriving under Chinese brands.
One just needs to look at the type of investments we are seeing from India – Tata, Mahindra, Ranbaxy, Dr Reddy and Cipla. Indian power-generating and coal-trading company Sandro Power Supply plans to list on the JSE.
China’s investments into South Africa have been focused on infrastructure.
The South African government has already identified areas where Chinese expertise can help grow the local economy. Patel said local companies need to build on innovation and technology to provide value-add global products. While the Forum on China-Africa Cooperation focuses on technology transfer, Patel said South Africa has a significant technological base that can be used for joint ventures. ”Chinese investments in the local real economy can be promoted through such joint ventures, with the twin commitments to cooperation in science and technology and to building up financing capacity, including special loans for small and medium-size businesses. This will provide a basis for the strengthening of locally owned enterprises,” said Patel.
Another area the South African government has targeted is beneficiation. Rather than just selling our raw materials, we could sell value-added products such as catalytic converters rather than just platinum. At a recent Forum on China-Africa Cooperation meeting, Minister of Trade and Industry Rob Davies said that South Africa had to work on policies that enabled it to beneficiate some of its trade. Currently, iron ore makes up 20% of the country’s exports to China. Government would like to see half of that processed in South Africa.
But the challenge will be dealing with the rest of Africa. Beneficiation increases the costs of exports. If South Africa starts to out-price itself, China will simply get its minerals from another country.
This, Stevens said, is Africa’s Achilles heel. South Africa does not have any multilateral agreements or guidelines to ensure that the entire region benefits from Chinese trade. ”We need to work as a bloc in setting broad parameters, so that a country trading with Africa can’t use competition among [African countries] to get a better deal for itself.”
Already the Bric countries — Brazil, Russia, India and China — appear to have broken up the continent so that they do not compete in the same markets driving prices up. China’s oil demand is met by Angola, where it buys about $20-billion of oil each year, yet China imports only $500-million of oil from Africa’s other major oil exporter, Nigeria. It is India that has the oil relationship with Nigeria, which is now India’s second-largest source of energy.
Unfortunately, Africa does not appear to have a similar strategy or coordination. African countries are outbidding one another for short-term gains without focusing on the long-term benefits.
Africa needs to create agreements similar to oil cartel Opec, which has successively protected the interests of oil-producing countries by not allowing destructive price competition to destroy its industries. Africa needs to create trading blocks in the East, South and West so that regions can work together to create long-term, sustainable business and trade relations with China.
n excellent example of this is the recent decision by China to remove tariffs on imports from poorer African nations. South Africa lobbied to have all African countries included. This was not agreed to by China, although the list of tariff-exempt products from Africa was increased to 440.
However, the Southern African Development Community can still take advantage of the offering to poorer countries as it has one of the poorest countries in the world, Lesotho, in its trading bloc. By creating a regional strategy, South Africa and other SADC members could manufacture products that they on-sell to Lesotho, which in turn could export them to China, benefiting from the zero-tariff arrangement. This is how economic regions throughout the world operate, by leveraging their strengths to benefit the region as a whole.
A beneficiation programme could work in a similar way. Ultimately, however, a beneficiation strategy needs to include other resource-producing countries so that Africa shares in long-term wealth creation rather than destroying the wealth of our natural resources for short-term gain. As Stevens said, Africa needs to start asking what China will want in 50 years’ time and start to develop industries around this. With China as a strategic partner, Made in Africa could become a powerful brand.
