TRADERS, ISSUE 24, November 2005-February 2006

African business journal TRADERS spoke with Mr Ling Guiru, Chinese Counsellor on Economic and Commercial affairs to get his views on the state of bilateral trade between China, South Africa and the greater African continent.

TRADERS: Please provide an overview of bilateral trade between South Africa and China.

LING: Although there are no official agreements in place with regards to bilateral trade between South Africa and China, there is an agreement to avoid double taxation on bilateral investment revenue.

In 2004, bilateral trade volumes nearly surpassed US$6 billion, an increase of 52.8% over the previous year. China's export to and import from SA grew 45.5% and 60.9% respectively. The total volume of two-way investment between China and SA is now well above US$500 million. Over the last six years the trade volume has tripled, it evolved naturally according to the market needs.

TRADERS: What are the major trade exports to China from SA?

LING: 53% of China's imports from South Africa comprise raw or semi processed goods. China's largest South African import is iron ore-last year's figure was 11 million tons at a cost of nearly US$600 million. The second largest import is copper ore, valued at US$260 million. The third is chromium ore, valued at US$240 million. Manganese ore, diamonds and other precious stones, processed steel; aluminium and chemical products follow these.

TRADERS: What are South Africa's main imports from China?

LING: The offering is quite diverse and includes machinery and electronic appliances, followed by textiles, shoes, commercial automobiles and spare parts. Hi-tech products contribute substantially to South Africa's imports as well as finished garments, car tyres, motocycle spare parts and medicines and household ceramics.

TRADERS: Is this profile similar to other African countries?

LING: I think it is more or less similar. Other countries have bigger hardware and light industry imports. Also very popular in Africa are less-expensive daily necessities such as bicycles. I think in the less developed countries, specifically in central Africa, our exports are less sophisticated because the consumption power is low than, for example, in South Africa.

TRADERS: Many companies are concerned with how the local manufacturing industry can sustain itself in the face of intense competition from China. Could you comment?

LING: Local textile manufacturers are saying that the Chinese influence in South Africa has affected the local industry and caused them to close down, causing workers to lose their jobs, but one need to look at the broader market conditions and not at the Chinese importers and investors. It is true that Chinese imports into SA increased by 60% after 2003 and in the last three years textile imports have tripled in value, but this was due mainly to the increase in the Rand's strength and increased local demand. Many local manufacturers had focused their attention on export of their product into foreign markets due to the higher profit margins on these products when the Rand was weak. With the increased value of the Rand however, their product became less competitive in the global market. This outward vision had left a gap in the local market, which importers from the Asian block filled. Imports entered the SA market as the Rand increased and local manufactures could not fulfill the local market demands.

Labour productivity is also an important factor. According to our judgment, the Chinese labour productivity is two times higher than local figures even though labour wages in South Africa are more or less the same or slightly higher than in China. And so, in my opinion, it is the strong Rand and the constant demand for salary increases that are affecting South Africa's manufacturing base. If we had raised salaries according to the inflation rate it would be better for the industry, for without increasing production and ensuring a nation's wealth through stability, ordinary people's wealth cannot be improved. You must first work hard to create a stable economy and then ask for salary increases, not the other way round.

The Chinese government has been cognizant of these developments since 2003 and has actively engaged with the local trade unions-along with the Department of Trade and Industry (DTI)-to address these concerns. During round table discussions with the DTI, it was agreed that China would assist in solving the textile issue. China thus adopted several measures to reduce export quantities to SA, one being reductions on the tax rebate for the export of Chinese textiles. The second measure was to create an automatic export license and the third to increase export duty. We have also held discussions with the DTI aimed at developing SA's textile industries through the provision of productive support. Last year we donated about R4 million for the training of human resource capacity development, including the training of technical skills in the textile industry. We also encourage Chinese manufacturers to invest in South Africa, either through joint ventures, providing technical assistance or by setting up a plant. More recently a delegation from the DTI went to China for further discussions in this regard.

TRADERS: Since the surge of initial investments in the African textile industry, linked to AGOG, many factories have closed down, specifically in Lesotho and Swaziland. What are your views on AGOA's current benefits? Is it still an attractive option for investment?

LING: AGOA is a good opportunity for the sub-Saharan countries, but they still need to make their environments competitive in order to maximize on the benefits it offers, and attract investment. Issues such as high labour costs, and security concerns detract from the advantages.In South Africa, local competition is very strong even though their prices are higher.

TRADERS: Can you provide insight into the nature of China's investments and donations into Africa? Where do the priority areas lie?

LING: Chinese contributions towards infrastructure development throughout Africa are based on donations and economic aid strategies. We give governments loans and donations to build roads, bridges and housing. Once completed these projects are handed over to the local government for management.

Usually the Chinese government will provide funding to African governments in the form of an interest free loan. There are two alternative methods to this type of investment: Firstly we invest according to local government needs in order to receive income from the users.

In terms of private sector investment, we invest mostly in agriculture and textiles, for example in Zambia we have a rice and cotton farm.

Because China opened its market late we do not have much private investment. But investors such as Hair, a large company making washing machines, TV sets and air cons, have investments in Europe and the US, as well as in Africa.

Priority areas include railways, highways, mining, farming, textiles, electrical appliances, machinery, and commercial vehicles. Appliance assembly for the local market is also prominent.

TRADERS: In your opinion, which countries and sectors in Africa offer the best potential for Chinese investment and why?

LIN: I think light industry goods and daily necessities are areas with the most opportunity. Creating product variety is also an opportunity in South Africa specifically.

In textiles certain manufactures dominate the South African market, so there is not sufficient competition in my view. Due to historic reasons, I think that South Africa is very protected, I think that regarding the textile industry South Africa should open the market further and not rely on too much government protection.

South Africa has a manufacturing capacity higher than other countries in Africa, and its purchasing power is also larger, but the market is still small.