SA gets shivers as China growth cools
Emerging markets keep close eye on commodity demand
● A shift down in gear for Chinese economic growth has sparked concerns about the future health of the global economy, particularly in emerging markets such as SA.
China, the world’s second-largest economy, has reported the slowest economic growth rate since 1990, causing Beijing to ramp up stimulus measures and seemingly heightening the urgency to settle trade scores with the US.
China grew 6.6% last year from 6.9% in 2017 as domestic demand waned and due to economic and trade disputes with the US. The International Monetary Fund (IMF) forecasts 6.2% for 2019. US growth is expected to be 2.5%.
In the past five years the Chinese economy has also shifted from commodity-intensive infrastructure investment towards consumption, which may become problematic for SA.
Momentum Investments economist Sanisha Packirisamy said though SA had benefited from previous higher infrastructure investment growth in China, “in an environment where the growth focus shifts to the consumer, future Chinese commodity demand will be heavily influenced by the types of commodities needed to manufacture fridges, microwaves and other consumer-related white goods, for which SA is not well positioned”.
Last year, almost 80% of China’s GDP growth was consumption-based and its slowing infrastructure investment suggested “a modest rise, at best, for commodity prices from a demand perspective”, said Packirisamy.
When it comes to commodity consumption, China accounts for nearly 50% of global coal, copper and steel demand.
Higher commodity prices are necessary for SA as a commodity exporter of coal, platinum and gold, among others. If the prices of the commodities SA exports fail to increase as fast as imported oil prices, this could be negative for the rand in the medium to longer term.
“If China slows down considerably and a large-scale stimulus is needed (which is not our view), this could additionally trigger a risk-off event, causing emerging-market currencies, including the rand, to sell off,” said Packirisamy.
More recently, weaker demand from large energy and commodity importers, including China, resulted in a “demand shock” in December.
Charlie Robertson, chief economist at Renaissance Capital, said: “That’s why you’ve already seen the oil price fall in the fourth quarter [of 2018].”
China accounts for about 15% of global oil demand.
Packirisamy said: “All else being equal on the supply side, fuel prices could face less pressure. However, geopolitical risks and supply cuts in other regions of the world could keep a floor underneath oil prices.”
Grain prices are expected to remain stable as China’s growth model leans further towards consumption.
China consumes about 16% of the world’s wheat and 31% of global rice production.
It is the worst Chinese manufacturing performance in eight years, recorded in December, and negative export figures have some analysts worried, particularly for the emerging-market growth story.
China accounted for 31% of emergingmarket GDP in 2017 and 18% of world GDP, according to the IMF.
However, Martyn Davies, MD for emerging markets & Africa at Deloitte, said even with at least 41 countries counting China as their No 1 export market, “it’s nonsense. This panic about sweating decimal points off China’s growth is just scaremongering and it’s silly. Look at general trends rather than micro-specific.
“Of course China’s growth is normalising, you can’t grow at 8% to 9% forever. China’s growth is miraculous, no-one has really explained how they engineered it. But 5% to 6%, 6.5%, is incredibly strong performance for the world’s second-biggest economy.”
Davies said China is expected to add about $900m (R12.43bn) to its economy this year.
China’s GDP is about $13.5-trillion. Robertson said if China reignited trade deals with the US, in addition to implementing planned economic stimulus measures that include investing in new railway infrastructure, cutting the amount of money banks hold in the central bank so that they can lend more, and possibly tax cuts, then “growth is back up again in China in the second half of this year, commodity prices can recover and Africa is OK”.
Packirisamy said Chinese authorities had “become more dedicated to a slower, but more sustainable, growth pattern in China, which is positive in that there is a smaller chance of boom-bust activity, which could have led to bouts of negative emerging-market sentiment”.
Davies said China’s stimulus interventions would be more measured than during the 2008 economic meltdown.
“What you are seeing now is more qualitative spend, more measured spend.
“One thing is positive from this clumsy/hawkish position on China is that for the first time it’s forcing the Chinese to take a hard look at themselves. And it is forcing reform in China. So short term disruptive; long term positive.
“We are seeing reform in China around unilateral property issues, around non-tariff barriers and the role of the state in joint ventures.
“That’s something I don’t think we should ignore.”