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China's impending financial crisis will have repercussi...

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Opinionista

China’s impending financial crisis will have a ripple effect on South Africa

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Nqophisa Diko is a research assistant at the University of Johannesburg’s Institute for Pan-African Thought and Conversation and a PhD candidate in International Relations at the University of Pretoria focusing on South Africa-China relations.

In recent weeks, there have been many conversations about how Russia’s war against Ukraine will affect global economies. But right now, there is also a financial crisis looming in China that will have repercussions for many countries around the world, including South Africa.

One of China’s biggest property development companies, Evergrande, found itself in a financial crisis when it missed its interest payment deadline to international investors in September 2021. 

This sparked a panic in the global investing world, as these things usually do. Evergrande’s missed deadline exposed its debt liabilities, estimated at more than $300-billion. This makes Evergrande the most indebted property company in the world. 

Why does this matter? When a company as large as Evergrande faces such big losses, it’s an indication that there are more problems on the horizon. 

One of the major indicators of the economic crisis of 2008 was the collapse of the US property market in 2007. This created a ripple effect on the global economy. The collapse was driven by insufficient regulations, low interest rates and easy credit. China’s looming economic crisis can be attributed to deeper structural and policy issues. 

The troubles facing Evergrande have exposed more property development companies and their debt liabilities. Some analysts have even asked if Evergrande is the next Lehman Brothers. The difference between the two is that government interventions have been taken in order to stem the property development debt liabilities. 

These liabilities point to a bigger financial crisis on the horizon if the measures being implemented by the government do not resolve the problem.

China has vast foreign direct investments, including in many African countries, worth billions of dollars. China is the second-largest economy in the world and South Africa’s number one trading partner. If China is facing an economic crisis, it will only be a matter of time before that trickles down and puts further stress on an already weakened South African economy. 

South Africa has designated areas called Special Economic Zones (SEZs) for targeted economic activities. One of these SEZs is Musina Makhado in Limpopo. These zones aim to create more than 53,000 jobs, including through a coal power plant designated for Musina Makhado. 

However, in November 2021, two months after the Evergrande default news, China announced that it would no longer finance new coal-fired power stations abroad. This includes the plant meant for the SEZ in Musina Makhado. 

Although there were those who were against the development of a new coal power plant on environmental grounds, the fact remains that these envisaged jobs will now not be created.

Renaissance Capital says that South Africa – as a developing country and a close trading partner with China – is one of the African countries that are vulnerable to China’s debt problems. This is because South Africa exports large quantities of metals and minerals including gold, platinum and coal. 

So far, SEZs such as the one at Musina Makhado have not yielded the desired results, including the creation of tens of thousands of jobs. 

Besides the immediate economic instability caused by Russia’s invasion of Ukraine, another financial crisis is building up after Evergrande defaulted on its interest repayments. Once other Chinese companies begin defaulting – as they are projected to do this year – the effects will be felt throughout the world. 

It’s difficult to accurately predict where this will leave South Africans who are already struggling with rising fuel and other prices, but it does seem likely that things are about to get worse. BM/DM

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  • The same scenario played out in Japan 25 years ago and the so called “Asian Tiger” economies in the 1990s. Massive developments based on future ridiculous property rentals. Now with covid exposing the fact that not many businesses need to operate from large office blocks all these multi billion developments in China are in trouble.Japan has yet to recover.

  • A very good assessment of the ‘potential’ for a possible Chinese financial crisis and the parallels with the 2008 US crisis are understandable but I am not sure this is valid at this time. I think we need more financial and economic information from China in the coming months before a clearer picture emerges. So really, I am saying you could be a bit premature.

    However, It is always good to issue warnings and prepare investors and workers to be aware of the risks. I have spent many years doing this and writing my book about the global financial system, of which China is a major part of course as its economy is growing, but it is not governed the same way as America.

    I will be looking in much greater detail at the functioning of the Chinese economic model in the coming months and, as PhD aspirant, you may find this academic network worth applying for membership because I have found it a wonderful aid to research. My book, ‘The Financial Jigsaw’ is published here: https://www.researchgate.net/publication/358117070_THE_FINANCIAL_JIGSAW_-_PART_1_-_4th_Edition_2020

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