0

South Africa-China relations at 20 years, Part II: Retracing economic engagements

Economic factors have always been at the heart of Chinese contacts and eventual formalization of relations with South Africa. Indeed, because of South Africa’s strong private sector, Pretoria has fashioned much of its diplomacy along economic lines with presidential visits to Beijing being accompanied by large business delegations.

South Africa-Taiwan ties particularly in the 1980s were underpinned by the provision of incentives by the former for entrepreneurs to set up businesses in the “Bantustans” (the partially self-governing regions of South Africa under apartheid), efforts that attracted a growing tide of Taiwanese investment. South Africa’s diplomatic switch to Beijing effective January 1998 sounded the death knell for Taiwanese companies and opened the floodgates for Chinese businesses from Mainland China of all kinds. In 2009, China became South Africa’s largest source of imports, beating the US and Germany in that order. Chinese products quickly became dominant in the South African market, outcompeting US and European products. At the same time, the penetration of Chinese products into Africa negatively impacted South Africa’s hitherto dominant export position on the continent. Complaints have also been raised by South African businesses about Chinese companies out-competing them in other parts of Africa.

During President Jiang Zemin’s 2000 visit to Pretoria, a bi-national commission was established with an eye on economic benefits in the form of expanding trade and investment, especially in the areas of natural resources, mining and manufacturing. One of the significant structural pickings thereafter included South Africa’s designation of a “market status” to China. Building on this, a Joint Inter-Ministerial Working Group was established in 2013 on the sidelines of the BRICS summit in Durban.

Interestingly, South African investments in China were higher than those of China in South Africa until 2007, a fact that some scholars latch on to to show that in some respects, South Africa is asymmetrical to China. Indeed, South Africa is one of the few African countries that had/has foreign direct investments in China. Some of the South African companies that have or have had a presence in China include Bidvest (logistics and infrastructure); Sappi (pulp and paper); Naspers (media and IT); SAB Miller (beverages); Richemont (consumer services); DiData and Naspers (IT/media); Sasol, Anglo American, Anglo Coal, Exxaro, Kumba Iron Ore, Anglo Gold Ashanti and Goldfields (minerals and materials); Barloworld (machinery); and Hollard Insurance, Old Mutual and FirstRand (financial services), among others.

Such is the strength of the South African economy that South Africa is the only African country with companies that have joint ventures with Chinese counterparts. An example is South Africa’s Sasol joint venture with Ningxia Lunergy and High Chemistry Investment Group. Although the venture did not work on the back of intellectual property disagreements, Sasol was seen as the superior partner in the deal in the early 2000s. In a 1998 deal, a joint venture was established between Limpopo Province Development Corporation and Sinosteel, establishing ASA Metals. ASA Metals is located in Dikolong in the Greater Tubase Municipality in Limpopo Province. Today Sinosteel is headquartered in the imposing Sinosteel Plaza in Sandton, Johannesburg.

Of all economic sectors, mining is said to be the one in which Chinese firms have invested the most. Apart from the ASA Metals investment, other mining operations include Zijin Mining, Minmetals, and Jiquan Iron and Steel (Jisco). Against this relatively recent but accelerated Chinese entry into the South African mining sector, some of the more established South African state-owned and private mining corporates have raised the tenor of China ‘buying into strategic’ resources sectors, ostensibly, those that should be the preserve of South Africans.

South Africa’s mineral exploitation is seen as problematic in that South Africa still exports unprocessed minerals. This challenge has been responded to through the Mineral Beneficiation Act and attendant policies and strategies with some thought leaders arguing that beneficiation (a euphemism for value addition) should underline South Africa-China relations in the extractive industries. It is interesting to note that the language of beneficiation made its way into the FOCAC Action Plan in 2015 during the co-chairmanship of the mechanism by South Africa and China, raising the possibility that South Africa pushed for the value addition component to be added into the entire Africa-China natural resources engagement.

Transactions between South Africa’s armaments manufacturer, Denel, and the Chinese military are said to be robust with China importing technologies related to anti-aircraft gun ammunition, anti-tank guided missiles and air-to-air missiles and unmanned aerial vehicles from South Africa.

Since the inauguration of official diplomatic relations, a number of Chinese companies, prominent for their sheer size, have penetrated into the South African market. These include Hisense Group (Cape Town-based manufacturer of consumer electronics), Huawei Telecommunications (which partners with South Africa’s MTN) and several large property developers such as Shanghai Zendai Properties. Indeed, a good number of African regional headquarters of Chinese companies are based in South Africa. Much of the investment has the intermediary of Chinese policy banks and the China Africa Development Fund (CADFund), which set up its African headquarters in Johannesburg. Examples of CADFund’s involvement include cement manufacturer Jidong Development Group’s acquisition of a majority stake in two cement businesses (2010 and 2013); China’s Suntech investment in solar and wind power projects; and China’s FAW’s (a motor vehicle manufacturer) investment in an assembly plant.

While Chinese FDI in South Africa is growing it is modest compared to investment from other partners such as the EU and the US. The biggest Chinese investment is the 2007 deal whereby the Industrial and Commercial Bank of China (ICBC) acquired a 20% stake in South Africa’s Standard Bank for about US$5.5 billion, making it the biggest single one-off incidence of FDI in South Africa and Africa at large at the time.

A basic issue on trade figures is the mutual estimation of data imperfections as exact figures on trade volumes are disputed. At some point in the past engagements often turned sour especially with respect to the importation of Chinese products and their impact on local businesses with a trade balance in favour of China. Job losses supposedly due to the negative impact of Chinese imports on the South African manufacturing sector made the Congress of South African Trade Unions (COSATU) one of the most vocal critics of China, at least a couple of years ago. Due to the vociferousness of South African trade union criticism towards China, Chinese authorities have on occasion acted to curb its export prowess especially in the textile sector. For instance, to try and manage the avalanche of Chinese products in South Africa and the resultant de-industrialization and consequential job losses, an import quota on textile products was imposed between 2007 and 2008.

In some respects, South Africa is no different from other African countries in terms of absorbing relatively affordable Chinese products that benefit citizens with lower purchasing power. A challenge for Chinese products is the perception that many of them are of inferior quality, derogatorily referred to as ‘Fong Kong’. Such is Fong Kong’s catch-all butt-of-jokes that it became the title of a popular kwaito (a South African music genre) hit in 2010.

Alongside job losses has been the criticism on the alleged impact of Chinese imports on South Africa’s de-industrialization, a matter raised by President Jacob Zuma at the fifth FOCAC conference in Beijing in 2012. Moreover, while Chinese imports may be bad news for uncompetitive South African firms, some point out the positive dimensions of this in that manufacturing productivity would ultimately be boosted as South African manufacturers are forced improve their productivity.

Around 70% of China’s imports from South Africa are minimal value-added products such as minerals and agricultural products; South Africa mainly imports Chinese manufactured products (clothing, data processing machines, printing machinery, bulldozers, motor vehicles, construction machinery, electronic equipment, household appliances, leather products and textiles).

China finds that it cannot export certain products into South Africa due to the maturity or maturing nature of South African industries in areas such as military hardware. Other factors that militate against the entry of Chinese investments and trade include a regulatory structure more stringent and complex than other African country as well as the strong hand of labour organizations. To go around some of these challenges, a good number of Chinese firms have opted for joint ventures. One of the regulatory strictures is the Black Economic Empowerment (BEE) legislation that requires shareholding by African South Africans in economic ventures. Nonetheless, advocates point out that this arrangement is a “good model” because the Chinese provide finance and market access while South Africans handle on-the-ground issues like management of production.

Joint ventures also have their challenges. A case in point is the ICBC-Standard Bank deal where Standard Bank was supposed to help ICBC tap into local and African business. Anticipated contracts from governments failed or were delayed, however, triggering ICBC’s re-evaluation of the partnership. In addition, ICBC is said to have ventured out on its own in the search for business on the continent.

Addressing challenges in these economic engagements has been the hallmark of the two countries’ economic diplomacy. For instance, with specific reference to the textile industry, China has trained South Africans on textile manufacturing skills and technology as well as on how Special Economic Zones (SEZs) run successfully in China. Technology transfer negotiations can be seen in the South African logistics company Transnet’s negotiation for training of staff in a deal involving provision of locomotives from China’s CSR Zhuzhou Electric in 2012. South Africa is also a major recipient of Chinese official finance to Africa and is estimated to have received US$2.3 billion between 2000 and 2011 in addition to a US$2.5 billion China Development Bank (CDB) financial cooperation agreement with the Development Bank of Southern Africa (DBSA).

In next week’s second installment: Politics & diplomacy.

Bob Wekesa (bobwekesa@gmail.com) is a Research Associate at the Africa-China Reporting Project.

email

Leave a Reply

Your email address will not be published. Required fields are marked *