Opinionista Thembinkosi Gcoyi 23 September 2015

South Africa and China: Embedding local value

Many are predicting turbulent times for the Chinese economy in the very near future. With these dire predictions, some have been forced to ask: What of those African economies that have hinged their success on that of the Chinese economy? In particular, many want to know what will become of economic cooperation between South Africa and China should China find itself in a deeper economic malaise in the near future.

Over the last four years, there has been a discernible shift in South Africa’s international relations towards the East, in particular China. In some circles this has created a heightened sense of dismay as some feel South Africa is turning away from its traditional economic partners in favour of an unpredictable entity because of a seeming discord over values, politics and economic models.

The ruling party’s recently released national general council discussion document on South Africa’s foreign policy has caused further dismay with its overt anti-western declarations and conjuring of conspiracies by western powers against South Africa and the broader developing world. In contrast, China is held up as a paragon of virtue, which has caused much consternation in people who have become accustomed to a neutral foreign policy which espouses the creation of a better South Africa, a better Africa, and better world.

It is undeniable that China has played an important role in sustaining South Africa’s exports over the last few years. However, it must be understood that this trade has been unbalanced. South Africa has exported a massive volume of unprocessed minerals, while importing even bigger volumes of manufactured goods from China. The reasons for this are well known and are not worth repeating. Both governments are cognisant of this fact and have openly acknowledged that bilateral trade cannot replicate South Africa’s colonial trade patterns. There has been a very deliberate attempt by the South African government to conscientise its counterpart about the need to ensure that bilateral trade does not entrench the unsustainable pattern of South Africa exporting primary products and importing mainly finished products. Unfortunately, this trend seems to be continuing, and not reversing.

It is also undeniable that Chinese investments in South Africa have grown at a much slower rate than would have been expected of the second-largest economy in the world and the most diversified economy on the African continent in this respect. Though slowly changing, these investments have also tended to be responsive to China’s need for minerals rather than the needs of the local economy. Of course, China cannot be blamed for this. This is simply a reflection of the money finding the best available opportunities.

Though South Africa still attracts a large volume of Chinese investments, it would appear that the more underdeveloped economies found in the rest of the African continent are a big attraction for Chinese economic actors Though learning fast, there is a quiet acknowledgment by Chinese business actors that South Africa is a bit too complicated for them at this stage, with its need for public tenders and reluctance to issue state guarantees or barter resources for investment. Energy constraints and robust labour relations also count as a negative consideration. Nonetheless, there is also acceptance that succeeding in South Africa is a test of character and a challenge to be seized rather than avoided completely.

What other African jurisdictions offer that South Africa is currently unable to match is a more relaxed regulatory environment that allows political leadership a much bigger say in commercial decisions. South Africa also proves more challenging because of the demands for transparency, elaborate public tendering processes and recourse to judicial review by aggrieved parties. Chinese investors find it is somewhat easier to do business in economies that are more desperate for capital and which can lay out the red carpet for investors who bring turn-key solutions, including financing packages backed by state-owned banks.

Contrast this with US and European companies that have been doing business in South Africa for decades. No doubt, a lot of these companies can be accused of having been complicit sustaining inequality in South Africa. No doubt, the American and European governments have not done enough to encourage their business sectors to act as agents of positive change and local empowerment in the economies of the developing and underdeveloped world. However, the point must be made that these companies have done a lot more to contribute to the economic development of South Africa than their Chinese counterparts. Of course, China is a late entrant in the foreign direct investment game, but the point is no less relevant.

The US alone has over 600 companies active in South Africa; Germany another 600 and France more than 300. These companies are to be found across different sectors of the South African economy. Much more importantly, they have made South Africa home and are investing in creating long-term partnerships that can enable them to leverage local resources for their success. The hard work invested by their countries in cultivating favourable local opinion continues to pay off as South Africans are generally more readily able to identify with a US company/brand than a Chinese one.

But then, the question remains, in the light of our seeming preference for a partnership uber alles with China, how do we want to advance the National Development Plan through China? What can we expect of China in return for our ‘strong loyalty’ to the Chinese brand? The answer is simple really; economic empowerment and transformation. For China to garner positive support beyond just government and big business circles, that country’s political and economic leadership will need to make an earnest commitment in deeds to embed local economic value in the South African economy and support economic transformation. It will not suffice to simply pledge allegiance to the goals of national economic development. A deliberate effort to partner with capable business players is required to ensure that investments benefit a larger pool of stakeholders than just shareholders.

To gain the requisite acceptance, Chinese companies must support broad-based black economic empowerment, transfer skills and technology, invest in enterprise development, hire locally, source local inputs, and above all, adjust business models to suite local economic conditions and regulations. What is good for Tanzania may not be good for South Africa and insisting on implementing the same model may be the quickest way to damage credibility.

China has an opportunity to do this with the massive contracts awarded to China South Rail and China North Rail (now merged into one company) for electric and diesel locomotives, respectively, as part of Transnet’s rolling stock procurement. Talk about improving Transnet’s capabilities in the manufacturing and engineering field through the development of railway parks will do much to spur economic activity and reinvigorate South Africa’s rolling stock manufacturing capabilities. If managed effectively, this transaction will transfer skills and technology, stimulate industry and provide access for black companies into the railway engineering sector.

Despite seeming tensions with the US and European Union (EU) at a political level, economic ties are continuing apace. Talk about Armageddon in this area is pure wishful thinking on the part of some who probably overstate their ability to influence public sentiment. It is also very unlikely that US and EU companies will loosen their grip on the local economy just yet. Bad as things may seem, they are still far better than they are often made out to be in public discourse on the issue. The anticipated exodus of companies is unlikely to materialise in the short term. If anything, the reverse is likely to occur. Many companies realise that countries go through different cycles. What matters most are the fundamentals. South Africa remains a very attractive market that offers world class infrastructure, transparent financial and legal regulation, and surpasses many countries on measurements of good governance, protection of investor rights, political predictability and a mature consumer base.

The question for South Africans is how to harness these tensions to unlock value in the South African economy. It does no good for any of us to sit in our little corners and moan about China and how it is ‘taking over’ our economy and continent. It serves no purpose whatsoever to be married to old partnerships and not seek new possibilities with new partners who need our guidance and managerial capabilities to thrive in the local market. For us to gain from the political relationship, we need to be alive to the opportunities it presents and approach each with a constructive and inquisitive attitude. The reverse is unproductive, retrogressive and myopic. DM

Thembinkosi Gcoyi is the managing director of Frontline Africa Consulting. He can be contacted on gcoyi@frontlineafricacons.co.za. He previously served as the economic counsellor at the South African Embassy in the People’s Republic of China.

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