China now: What SA boardrooms should be discussing

The bilateral relationship between South Africa (SA) and the People's Republic of China has evolved significantly since the establishment of diplomatic ties between the two nations in 1998. Political engagement, economic cooperation, cultural exchanges and tourism are examples of key areas where this partnership has developed substantially.

Over the span of 20 years, two-way trade has increased considerably and investment flows between the two countries have soared. Furthermore, despite geographical distance, cultural differences and the language barrier, there has been a deepening mutual understanding of business systems between the two economies.

A number of large SA companies have entered China successfully and the Chinese business community in SA has snowballed. These developments reflect the positive, tangible achievements of the past 20 years. But SA companies may not be doing enough to tap the full potential of China's rise.

Partners in trade

According to data provided by the United Nations Commodities Trade, total trade between China and South Africa in 1998 amounted to $2bn. Following China's accession to the World Trade Organisation in 2001, this figure surged to $16 bn by 2008 and $39 bn by 2017.

It is worth noting, nonetheless, that SA mostly exports raw materials, while it imports manufactured and high-value goods such as machinery and equipment. The balance of trade also continues to be characterised by a substantial trade deficit for SA when metals and minerals trade is excluded.

This composition and balance of trade underscores the need for more progress in the trade domain for the relationship to fully yield benefits for SA. To be sure, SA households and industrial consumers have benefited from being able to import a range of products, from simple commodities to complex items and, lately, more services and high value-add products as China has moved up the global value chain.

Looking ahead, SA must leverage China's substantial imports and market potential for agricultural and high-end manufacturing products and services where SA can be a reliable supply chain partner. This would ensure a sustainable trade partnership and mutual benefit over the long term. But we are clearly not there yet. SA business leaders are simply not paying enough attention and our bilateral relations have not yielded enough market access in China.

Investment partners

Growth in trade over the past two decades has been mirrored by increased bilateral investment. Chinese investments into SA's mining, banking, automotive, and media sectors have made Chinese-owned or co-owned businesses in SA significant employers. Meanwhile, South African investments in, for example, China's media and technology, health insurance, and beer markets have been very successful.

There is significant potential for further growth in two-way investments. Mutual awareness, understanding and trust are constantly increasing, and the next 20 years will likely see sizeable growth in bilateral investment flows. China's market potential and investment reform is creating more opportunities for SA investors looking to tap its burgeoning consumer and industrial markets.

Meanwhile, Chinese companies are internationalising rapidly, increasing proximity to their various consumer bases globally. As China's cost base increases, SA's location, sound institutions, and solid infrastructure offer an ideal strategic and operational soft-landing for Chinese companies that are looking to target Africa and markets in the Americas and Europe. The formation of a team of special envoys could for example lead to focus on how Chinese and SA interests can dovetail in order to harness increased investment in SA.

Partners in Africa

In Africa, China's 'going out policy' also saw an increased presence of Chinese companies across the continent, in search of commodities, construction contracts and other opportunities. To illustrate, Chinese construction contractors command over 50% of Africa's international engineering, procurement, and construction market, and China is the number one infrastructure financier on the continent. Chinese foreign direct investment is also the fastest growing on the continent, targeting resources, manufacturing, construction, real estate, and services.

While the increased presence of Chinese construction firms (with their superior construction capabilities) implies competition for SA firms, it also presents an opportunity for them to offer their deep understanding of the African market, provide insight into cultural nuances, and assist with compliance to regulations. This partnership in third markets can assist SA and Chinese firms to benefit and grow their respective capabilities – and, meanwhile, play a key role in the transformation of Africa as they unlock potential in host countries. There is substantial scope to develop a SA-China partnership in several areas of project value chains.

Partners of choice

In 2010, China and SA upgraded their diplomatic status to 'Strategic Comprehensive Partnership', a move by both Beijing and Pretoria to work more closely together under different strategic pillars. Business-to-business cooperation has also developed and increased trade and investment However, a lot more needs to be done to better tap and synchronise opportunities. Fora such as the Forum on China-Africa Cooperation (FOCAC) and BRICS, as well as institutions such as the New Development Bank, China Africa Development Fund, and China Overseas Infrastructure Development and Investment Corporation, provide a supportive backdrop.

The new drivers of China's economy – innovation, efficiency, reform, and a large and rising middle class, currently consisting of over 420 million people and predicted to reach 550 million by 2020 – are now core considerations in most corporate boardrooms across the world. China has now become the world's largest auto market, second-largest healthcare market, and the growth in premium food imports has been surging. Chinese consumers, largely driven by the middle class, are increasingly buying services and experiences as well. In 2016, an astounding 135 million Chinese tourists travelled abroad and spent $261 bn in the process, making Chinese people the top travel spenders in the world, even ahead of the US, the second largest spenders, totaling $122 bn in the same period.

The opportunity is very real and, for many SA businesses, it is a strategic imperative to gain a foothold in the Chinese market. Healthy bilateral government relations between China and SA mean that there is political will to see both nations reach their respective goals, politically and economically. These ties should serve as a conduit and allow ease of access to their respective marketplaces.

Above all, business leaders from SA and China must make the SA-China opportunity landscape a strategic priority in corporate boardrooms. This is true for large companies but also for small and medium-sized firms. Thus, key focus areas ought to be to:

  • Raise awareness of one another's markets – and achieve a more strategic understanding of our respective journeys.
  • Understand and leverage China's ongoing economic transformation and market demand.
  • Work together to leverage Africa's growth via SA-China corporate partnerships.
  • Balance trade opportunities more pro-actively and through concerted and coordinated policy.
  • Prioritise investments that meet both economic criteria and social objectives.
  • Continue to ensure that the two-way business relationship evolves from a transactional one to a more strategic business relationship.
  • Bring institutions – such as universities, think tanks and other research platforms – into the picture in order to prepare a China-literate business community in South Africa and vice versa.
  • Enable bodies such as chambers of commerce and business associations to play a role in allowing access to shared knowledge and to foster mutual understanding among relevant partners.

Way ahead

The year 2018 marks the fourth decade since China instituted market-oriented reforms, from which a sustained period of economic growth ensued. During this period, a fundamental change in China's economy has taken place, transitioning from a previously commodity-intensive growth model to a more consumer-driven model. This means that resource-rich countries like SA who have long benefitted from China's appetite for commodities will inadvertently feel the pinch as demand for natural resources steadily declines. But SA can still benefit from the new demand that forms as China's economic transitions.

In July SA hosted the annual BRICS Leadership Summit in Johannesburg and in September African Heads of State travelled to Beijing for the three-yearly FOCAC meeting. So, as we celebrate 20 years of diplomatic ties between the two nations, it is time for astute business leaders from across all industries to capitalise on the China opportunity.

Mills Soko is Associate Professor of International Political Economy at UCT GSB. Kobus van der Wath is Founder and CEO of The Beijing Axis.

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