Will SA lose its footing amid China’s great rebalancing act?

China’s dominance was on full display during last week’s Brics summit — starting with the fanfare surrounding President Xi Jinping’s state visit on Tuesday morning and ending with what some view as the bloc’s “Beijing-led” expansion. 

This was to be expected. 

Afterall, the economic superpower is the largest trading partner to all but one of the original Brics member countries. China (and oil) also binds together the expanded alliance — which includes Saudi Arabia, Argentina, Ethiopia, Egypt, the United Arab Emirates and Iran. 

South Africa, the summit’s host, appears particularly keen on deepening its ties with China, as the country attempts to navigate its way out of the economic malaise that has accompanied its 15-year energy crisis.

However, though China’s dominance within the bloc is undisputed, the Brics summit also took place against the backdrop of the Asian giant’s flagging growth — a fact that has prompted a number of analysts to seriously question Xi’s economic plans. 

China’s might will probably prevail well into the future. But when its economic strength falters, its trading partners must try not to be thrown off kilter.

Official inflation data out of China showed that prices had slipped into deflationary territory for the first time since early 2021, when pork prices collapsed. In July, the consumer inflation rate recorded a 0.3% year-on-year decline. Producer prices were also down, by 4.4% year-on-year, marking a sharper decline than consensus expectations.

The data added to the grim picture painted by China’s trade data, which showed that imports fell 12.4% year-on-year in July. Meanwhile exports slumped 14.5% compared to the year before. As the Bureau for Economic Research (BER) noted at the time, the trade data reflects the weaker demand environment, both globally and in China itself.

In other worrying news, new loans extended by Chinese bank’s fell 89% month-on-month in July to the lowest level since November of 2009. According to the BER, lending tends to decline in July due to seasonal factors, but the latest reading was 679 billion Chinese yuan below the same period last year. 

The credit data also suggested that trouble is brewing in China’s property sector. Household loans, mostly mortgages, were down by 200.7 billion yuan year-on-year and corporate loans fell to 237.8 billion yuan from 2.28 trillion yuan in June.

By all accounts, the Chinese economy is falling short of expectations. 

In February, the International Monetary Fund (IMF) projected that China’s economy was set to rebound this year — following the battering inflicted by the country’s zero-Covid policy — expanding 5.2% in 2023. “That’s good news for China and the world as the Chinese economy is now expected to contribute a third of global growth this year,” IMF economists said in an official blog post.

The IMF also predicted that after the initial economic boost in 2023, growth would moderate over the next five years.

In its July World Economic Update, the IMF left its China forecast unchanged, but noted that the country’s economic recovery was already losing steam off the back of its ongoing real estate crisis, sparked by the financial collapse of Evergrande, China’s second-largest property developer. Evergrande recently filed for bankruptcy. 

Speaking to the Mail & Guardian on the sidelines of last week’s state visit, Finance Minister Enoch Godongwana suggested China’s economic wobble was less of a threat to South Africa’s fiscal position than the country’s own internal problems, namely Transnet’s decline. Though a slowing China does not bode well for exports, it is true that the state port company’s failures have prevented South Africa from fully cashing in on the superpower’s rebound.

Minister of Trade and Industry Ebrahim Patel was similarly undaunted by China’s faltering, pointing out that South Africa’s largest trading partner is still a powerhouse, even with a smaller growth rate. “China is not going into recession. It is a reduction from sky-high growth rates to something in the order of 4% to 5%. And at that level, there is still significant demand in the Chinese economy,” Patel said.

The question is, Patel noted, whether China’s measures to stimulate its economy will have the desired effect. South Africa benefits most when China invests in infrastructure, he pointed out.

As it turns out, this question is very much in dispute. This is as various Western analysts cast doubt on China’s ability to create sustainable growth without relying on debt-financed stimulus.

Following the 2008 global financial crisis, China’s government announced the largest stimulus package in the world, which caused fixed asset and infrastructure investments to sky-rocket. Even then, commentators raised questions over whether the nature of China’s meteoric economic growth would be sustainable given asset bubble fears. 

Meanwhile, household consumption as a percentage of GDP has remained muted, standing at 39% between 2017 and 2020. In contrast, in the United States, China’s economic rival, household spending accounted for 67% of GDP in 2020. In 2020, investment accounted for about 43% of China’s GDP — the highest in the world.

While analysts have argued that China simply cannot afford to continue to use a disproportionate share of its debt to fund investment, Xi’s government has turned towards consumption-led growth. But some remain sceptical that Xi will manage to pull his plan off, considering pushback against any effort to shift a significant amount spending away from investment, as well as China’s still inadequate social safety net.

If Xi sees his consumption-led growth strategy through, the shape of China’s economy will change significantly, affecting how and where it grows. 

As Michael Pettis, a senior fellow at Carnegie China noted earlier this year: “The parts of the Chinese and global economies that depend heavily on Chinese investment growth, including metals and industrial commodities, will bear the brunt of a Chinese adjustment. The parts of the Chinese and global economies that depend heavily on Chinese consumption, including agricultural commodities, will be affected much less.”

With South Africa’s exports to China dominated by two categories, namely ores and iron and steel, the country seems to fit neatly into the former category. That is unless President Cyril Ramaphosa’s expert wooing of Xi last week pays off.