By Jaco Visser
Beset with deflation, a troubled housing market and an ageing demographic, the Chinese economy – the largest destination for South African exports – is proving to be a big drag on local miners and the government’s tax revenue.
Such is the economic fallout that the International Monetary Fund expects GDP growth to decelerate in the world’s second-largest economy, falling to 4.6% this year and dropping to 4.1% in 2025.
This is a crisis that is ricocheting across the world. And South African miners, in particular, have taken a serious knock from China’s travails.
The FTSE/JSE Resource 10 index, a gauge that measures the 10 largest resource stocks on the JSE, fell 26.5% over the past year – nearly half of which since the beginning of this year.
Paul Bosman, portfolio manager at Granate Asset Management, told Today’s Trustee that the issue is all about growth. “Lower growth in China results in lower demand for products [which is] pulling down growth, potentially on a global scale,” he says.
That is evident in the lower demand for certain minerals – except iron ore, which Bosman says is now being used for electric vehicles in China, rather than construction.
The silver lining that is iron ore demand may seem good news for South African industry. But the government’s handling of the infrastructure ailments – derailments on the Sishen-Saldanha iron-ore railway line, backlogs at the ports and crumbling roads – has put this industry on the back foot.
In Guinea, by contrast, China invested in a railway line to carry ore to the country’s coast, to be shipped out.
“Guinea is an example of how South Africa is losing market share,” Bosman says. “China has been investing in commodity corridors, such as in Guinea. We haven’t kept up with investing in infrastructure.”
Unfortunately, the problem in South Africa isn’t isolated to iron-ore producers. Coal miners have also lost billions of rand as Transnet failed to efficiently haul coal from Mpumalanga to Richards Bay, delivering a bruising own-goal to the economy. And manganese miners in the Northern Cape, home to more than 75% of the world’s known reserves, are also struggling to get their ore to China, where it’s used for making steel.
This combined hit – lower resources prices and Transnet’s inefficiencies – cost the fiscus R39bn in tax revenue, finance minister Enoch Godongwana said in his February budget speech. This hurt corporate income tax takings, he said.
What will concern the South African government is that the problems in China are far from over. The bursting of the housing bubble in that country has created forests of empty housing developments, leaving many banks that had funded these developments holding the debt.
Paul Bosman
“The Chinese consumer isn’t feeling rich, as he can’t sell his house at the price he thinks he can, on top that, he has a fair bit of credit. Their spending power is less, and the Chinese stock market isn’t running as it used to. So, Chinese consumers also have less wealth.”
The question now is whether the bad debt piling up in the housing and consumer sectors poses a systemic risk to China’s fiscal position and, by extension, its willingness to lend cash to resource-rich emerging markets.
Bosman says the Chinese central bank is delaying the impact by “massaging” the bad debts gradually, printing more money. “They can do that without causing inflation, because there is natural demand for what China produces,” he says.
Unlike other nations, China remains the world’s factory. This gives Xi Jinping’s government, which tightly controls the banking system, leeway to address rising bad debts without too much fear of inflation.
“The Chinese currency has a very strong underpin, due to the strong trade they’ve got with hard-currency countries,” says Bosman. “So, they can create money to gradually plug the holes. The problem with that is that they can’t grow, because the consumer is feeling less rich.”
Throw in the country’s ageing population and a looming credit crisis, and it appears as if big problems are brewing inside that country. And South Africa, which relies heavily on China using our metals, stands to get caught in the whirlwind.
