Two decades of ties bring China, South Africa closer

By Bryonie Guthrie

The year 2018 marks several milestones in the China-South Africa partnership. It is the 20th anniversary of diplomatic ties between the two countries, the 10th BRICS Summit will be hosted in South Africa in July, and the 2018 FOCAC Summit will be held in China in September, co-chaired by both countries.

China's relationship with South Africa was elevated to the Comprehensive Strategic Partnership (CSP) level in 2010, thus enhancing high-level cooperation between the countries for trade and investment, as well as political exchanges and cooperation. The benefits of the CSP was evident during President Xi's 2017 State visit to South Africa wherein 23 agreements, valued at US$7.38 billion, were signed. As emerging markets, both China and South Africa are vulnerable to currency fluctuations but the RMB has been relatively stable in recent months and the Rand has rallied since January and is now 2:1 to the RMB. While China's foreign exchange reserves are massive, South Africa's have edged down as the US stock market and dollar have surged, but remain average and well above the low points under the previous government. In addition, ratings agency Moody's has confirmed the country's investment status as stable. These developments provide fertile ground on which to build trade, finance and investment flows between the two countries.

Workers assemble televisions at a factory of China's Hisense Group, a Chinese white goods manufacturer, in Western Cape Province, South Africa, July 21, 2015. [Photo: Xinhua]

For nearly a decade, China has been South Africa's largest trading partner and South Africa has been China's largest African trading partner. South Africa exports primarily agricultural products to China and was the first African country granted license to export beef to China in 2017. China and South Africa have strong investment ties as well. China has invested heavily in South Africa in manufacturing, infrastructure, mining, energy and services, among other industries. Major Chinese banks, including Bank of China, the China Development Bank and the China-Africa Development Fund, among others, have invested a combined $6.6 billion in South Africa, estimated to have created 10,000 jobs and yielded $100 million in tax revenue. From the Hisense factory, to Coega Plant, and the Mining in Phalaborwa, Chinese investment is significantly benefiting South African industries.

South Africa remains an appealing destination for foreign investment because of its sound legal system, world-class financial and tax regulation, and its wealth of expertise on expanding investment across the African continent. In March 2017 South Africa, through its Department of Trade and Industry (DTI), signed a Memorandum of Understanding (MOU) on strategic cooperation with Bank of China. The MOU allows the parties to treat each other as a preferred partner and share information on investment opportunities. It will also enable both parties to optimize their own advantages in initiating mutual investment promotion campaigns. July 2017 saw the opening of Standard Bank's Africa-China banking centre in Johannesburg, staffed by bankers with Chinese language and cultural capability and so as to realise the full potential of Standard Bank's strategic partnership with the Industrial and Commercial Bank of China (ICBC). The centre is a practical transactional platform for deepening Africa-China trade and investment deals.

As this relationship matures, it can be expected that the partners will look beyond traditional trade and investment sectors – mining, infrastructure, commodities. Certainly, for South Africa to secure continued growth, both of its economy and its investment relationship with China, services and technology are sectors to be explored. This sentiment was recently echoed by South Africa's Reserve Bank Governor Lesetja Kganyago. Kganyago was recently appointed chair of the influential International Monetary and Financial Committee (IMFC) and has stated that fintech will transform the financial sector and disrupt traditional banking, recognising that digital currencies could be adopted by central banks and fintech could assist in fighting corruption.

In this regard, China's LUN investment has participated in MFS Africa's Series B investment round, which raised $4.5 million. MFS Africa provides for payment to 170 million mobile money recipients across all major networks in Africa and, while this is a relatively small-scale investment on China's part, it is cognisant of the growing potential of this sector. In West Africa, this industry is expected to add $50 billon to the economy over the next five years and in East Africa, specifically in Kenya, three times more people use mobile payments than in South Africa. This is a market ripe to be explored. South Africa's sophisticated financial and technology sectors enable the country to drive growth and development in this industry. South African businesses seeking to develop and deploy Fintech to drive financial inclusion and serve the large unbanked population across the continent will find a large market keen to adopt technology that offers more than convenience, but the financial tools to allow small businesses to develop, fees to be paid, services to be delivered and could have real and impactful effects on recipient's livelihoods. South African headquartered companies such as Paycode – providing real-time, offline, biometrically secured payments – are perfectly positioned to attract significant Chinese investment given their base in a stable regulatory environment but their reach far beyond traditional financial institutions.

Outside of the bilateral relationship, South Africa and China also cooperate closely on a multilateral level. The rollout of the Chinese Belt and Road Initiative (BRI) will provide opportunities for the countries to increase their cooperation, the long-term outcomes of which cannot yet be determined. This year's BRICS and FOCAC Summits offer the two countries high visibility platforms to drive their agendas. For South Africa, chairmanship of BRICS affords an opportunity to reinvigorate BRICS. The economic grouping has achieved little of what it set out to do and has fallen far short of its intended goal of counterbalancing the IMF and World Bank, though the New Development Bank (NDB) did approve $1.5 billion in loans in 2017. However, the grouping remains relevant by the sheer size of its combined populations and GDP and as a counterweight to the power of the G7 within the G20. South Africa would be savvy to use the Summit to look at ways of preserving and promoting economic growth in a climate of increasing protectionism from the US, something which is obviously a priority for the other BRICS members and could drive goodwill for the grouping within the G20, and even the G7, as well as within each member's regional sphere of influence.

The FOCAC Summit will likely take stock of the Action Plan developed in Johannesburg in 2015 and should look to identify opportunities for advancing cooperation and trade following the AU's recent launch of the African Continental Free Trade Area (AfCFTA) Protocol. While the agreement has not been signed by all member states, and is yet to be ratified, it represents the potential establishment of a common market with 1.2 billion people and a gross domestic product (GDP) of $2.5 trillion. It is also a market that will be home to 25% of the world's working-age population by 2050.

Going forward, the South Africa-China relationship can be expected to strengthen following BRICS and FOCAC 2018, especially as South Africa will participate in both of these events under its newly-minted and business-minded President, Cyril Ramaphosa. Politically, both countries emphasize the growing importance of the global south on the international political-economy and the need to rebalance the traditional Western-leaning stance of Bretton Woods institutions. South Africa and China have found natural partners in each other and a similar understanding of, and appetite for investment into Africa.

(Bryonie Guthrie is a former South African diplomat. Now she is an analyst with Acorus Capital, a Hong Kong-based consultancy with expertise in Africa.)