How the US-China trade war is likely to affect SA

China is expected to continue to invest in and give aid to South Africa because of SA’s resource-rich base and its gateway-to-Africa role. Picture: Kopano Tlape, GCIS

China is expected to continue to invest in and give aid to South Africa because of SA’s resource-rich base and its gateway-to-Africa role. Picture: Kopano Tlape, GCIS

If an all-out trade war was to develop, China would likely reinforce its trade and investment ties with its Brics partners and would more urgently expand its investment base in South Africa.

The simmering US-China trade war has again made headlines, with President Donald Trump’s surprise turnaround this weekend after discussions with Chinese President Xi Jinping at the G20.

Trump announced that US technology companies would be allowed to supply Huawei, and agreed not to add additional tariffs for the “time being”.

The trade war is one component of an altogether broader confrontation in the relationship between the two largest economies in the world, which has been deteriorating more quickly over the past 10 years and has taken on greater intensity since Trump took office.

The relationship is transforming from an essentially mutually beneficial one to an increasingly confrontational engagement. The US seems to view China’s rapid growth and progress as a threat, primarily because of its size, trading power and rapid – and often contentious – adoption of global intellectual property. China has been actively extending its influence in emerging market and developing economies (EMDEs) through infrastructural development and cooperative aid.

The rising tensions have been over the imposition of higher trade tariffs across a widening base of traded goods by the US on China and a response from China, though more muted.

Three different outcomes (probabilities) have been proposed, based on a model developed by Dezan Shira & Associates, a multi-disciplinary consulting and business intelligence firm in Asia:

  • A worst-case scenario of all-out war – unlikely
  • A middle-ground scenario of a truce – likely
  • A scenario where a trade deal is done – possible.

South African ties with China

The relationship between China and South Africa extends across diplomatic, trade and investment ties. While the diplomatic relationship has been in place for the past 21 years, in 2010 the Chinese government upgraded South Africa to the diplomatic status of ‘Strategic comprehensive partner’, signalling its intention to take a more active role in its relationship with South Africa.

SA has been China’s largest trading partner in Africa for eight consecutive years, accounting for a quarter to a third of China-Africa overall trade. South Africa aims to promote investment-led trade.

The Brics grouping of major emerging national economies (Brazil, Russia, India, China and South Africa) is about liberalising trade among this bloc and pushing for a more representative global order in diplomacy and trade. At the Brics Summit in July 2018, President Xi pledged $14.7 billion in investments in South Africa. Few details of these pledges are available but Chinese banks have lent a combined $2.8 billion to state-owned enterprises Eskom and Transnet, according to a Reuters report.

In 2018, SA’s exports to the China trade group accounted for 11.4% of its total exports. Imports from China accounted for 19.8% of SA’s total imports.

South Africa’s trade deficit with the China trade group is determined primarily by its net import deficit of R111.2 billion in machinery, R17.1 billion in textiles, R15.1 billion in chemicals, R12.9 billion in plastics and rubber, and R10.9 billion in toys and sports apparel. These major deficit categories were partially offset by a net trade surplus of R79.5 billon of mineral products, R15.4 billion of precious metals and R5.9 billion in vegetables.

In 2018, South Africa’s trade deficit with the Asian region, which includes the Middle East, was R165.3 billion – with China, Hong Kong and Taiwan representing 58.8%, Saudi Arabia 39.9%, Thailand 18.5%, and the balance by the rest of Asia and the Middle East.

Limited impact on SA-China trade

China has a long-term global development strategy that is likely to continue regardless of the outcome of the current phase of the tangled US-China relationship.

China is expected to continue to invest directly and give aid to South Africa given SA’s resource-rich base and its important role in the sub-Saharan African market.

If an all-out trade war was to develop, it is likely that China would reinforce its trade and investment ties with its Brics partners and would more urgently expand its investment base in South Africa.

However, one of the key issues affecting direct investment in new production and existing businesses remains South Africa’s racial empowerment quotas regarding investment, ownership, mining rights, management, staffing and procurement.

For now, the trade war has had a limited impact on SA’s trade with China, given the mix of key product categories that dominate imports and exports. In the event of a trade truce or a trade deal, SA will benefit along with the rest of the world due to the improved sentiment around global trade. In the event of an all-out trade war, base and carbon steel commodity prices are likely to come under downward pressure in the short and medium term, which would erode the value of SA’s exports.

Effect on South African equity investors

An escalation of the trade war should be negative for international commodity prices in the short term. Commodity base metals and carbon-based steel raw material are likely to be negatively impacted. However, the effect should mostly be offset by a rise in precious metal prices, especially gold. This means that investor positioning in the mining sectors would take on added importance.

An escalation in the trade war would likely be negative for SA companies invested in Europe, given Europe’s dependence on trade with China. This could slow Eurozone GDP growth, which would affect apparel, food service and real estate companies in European markets, especially real estate.

South African domestic companies are unlikely to be materially affected, other than the overall softening of market confidence due to an escalating trade war. Chinese investments in SA are in non-listed companies so South African investors can get no direct exposure.

If Chinese lenders and developers can get to a mutual arrangement with South African partners on the latter’s racial empowerment quotas, then some important infrastructural and industrial developments can get underway. Again, SA equity market investors will have very limited if any ability to participate or benefit as these businesses are likely to be non-listed.

Most likely outcome

The most likely outcome of the current US-China trade negotiations is a truce, which amounts to a trade deal that is long on form and short on substance. The global equity markets are likely to respond positively to this outcome in the short term. The deal is unlikely to be comprehensive and the policing of intellectual property and cybersecurity issues are expected to remain unresolved, which suggests further trade disagreements are likely in the medium term.

The confrontational relationship between the US and China remains far deeper than just trade, mainly due to the growing global power and influence of China, which the US sees as a threat to its global power position. In the short term, a trade deal between the two largest economies in the world should be good for global trade, market sentiment and confidence in global growth. On this basis, we still see stronger real GDP growth in advanced economies and larger EMDEs (emerging markets and developing economies) than in South Africa in the medium term.

A trade deal would improve the global outlook, while the South African investment outlook remains structurally constrained by its empowerment policies, tighter labour legislation framework, protectionist trade unions, necessary fiscal consolidation and badly underperforming state-owned companies, which are undermining economic stability and expansion.

The South Africa equity market has substantial exposure to metal commodity producers, companies with international subsidiaries growing in faster economies than in South Africa, and multinational dual-listed companies.

Mike Haworth is an investment strategist at Sasfin Wealth.

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