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South Africa should be concerned about China’s economic slowdown

China’s 2018 economic growth fell to a three-decade low, 6.4% year-on-year in the fourth quarter, from 6.5% in the previous quarter, according to official data released earlier this week.

As the world’s second largest economy this has far reaching effects because it accounts for a third of global economic growth.

China took on substantial debt as it borrowed to stimulate growth in recent years. As such, a slowdown was expected but the extent to which it has occurred is a cause for concern as analysts question China’s ability to pay back its substantial debt.

The decision this week by the International Monetary Fund (IMF) to cut its global growth outlook is testament to this.

 
Growth in China is becoming increasingly reliant on consumption and moving away from commodity-intensive investment. 80% of growth in gross domestic product (GDP) came from consumption in China in 2018, which is up from 35% in 2003.

Conversely, activity in manufacturing, exports and the property market is slowing. We expect Chinese growth to slow to 6.2% in 2019, partly due to the ongoing rebalancing effect (shifting the economy away from investment and towards consumption) and concerted efforts to deleverage, but also as a direct consequence of the Sino-US trade war.

Should US President Donald Trump extend the current 10% tariff on $200 billion (about R2.8 trillion) worth of Chinese imports to 25%, nearly 0.8% could be shaved off baseline growth in China by 2021.

If trade tensions escalate and the US imposes a 25% tariff on the remaining $250 billion worth of imports from China (of which about 40% is consumer-related imports), almost 1.7% could be detracted from Chinese GDP growth by 2021.

Despite this, Chinese authorities are unlikely to engage in a large-scale stimulus plan as they remain committed to relieving the economy from its elevated debt levels.

As such, a target stimulus response to prop up the economy is under way.

China has forged ahead with significant structural reform, which has placed the country at 46th out of 190 countries in the World Bank’s Ease of Doing Business Survey for 2018, from 78th position only a year before.

The country has improved its access to credit, by providing credit enhancements and meeting corporate demand for loans through a quota system.

Moreover, China has sought to foster competitive neutrality, to ensure that its state-owned enterprises no longer have an advantage over its private sector counterparts.

China has also taken steps to reduce most tariffs on intra-Asian trade through its participation in the Regional Comprehensive Trade Agreement, providing a boost to future exports.

South Africa and China have substantial investment and trade ties – making the slowdown a concern for us as well.

China is currently our primary trading partner, making up more than 15% of our total imports (primarily textiles) and close on 10% (mostly raw materials) of our total exports in 2017. Coupled with this, China has committed to substantial investment into South Africa.

With the Chinese economy rebalancing towards consumption-led growth, its reliance on the commodities that South Africa produces will slow.

This will be negative for South Africa’s terms-of-trade (export prices relative to import prices), which could weigh negatively on the rand in the medium term.

In addition, if promised investments are not realised, we could see further negative impacts.

A faster-than-anticipated slowdown in China could pose an additional threat to South Africa through a deterioration in sentiment, should risk aversion spike and volatility climb in global financial markets.

• Sanisha Packirisamy is an economist for Momentum Investments


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