An interesting report on the development of Chinese enterprise in SA was released on 8 December by the SA-China Economic and Trade Association (SACETA). The association tracks the progress of Chinese investment in SA, provides services to Chinese enterprises and assists in business management.
The report objectively analyses the macroeconomic situation in SA including opportunities and challenges facing Chinese investment into the country. It provides a useful insight from an influential foreign investor.
Africa is seen as an important emerging market with special significance for the internationalisation of China’s renminbi.
In April 2015, the People’s Bank of China and the South African Reserve Bank signed a 30-billion renminbi/ZAR54bn bilateral currency swap agreement for a three-year period with an option to renew, for the purpose of facilitating bilateral trade and investment and maintaining regional financial stability.
On 8 July 2015, the Bank of China (Johannesburg branch) was designated as the official renminbi clearing bank in SA and the first clearing bank in Africa.
By the end of 2015, China’s investment in SA approximated US$13bn, with more than 300 Chinese enterprises in the country. According to statistics from Chinese customs, bilateral trade in 2015 reflected China’s exports to SA at US$15.9bn, with imports from SA at US$30.2bn.
SA - the only G20 member state from Africa - is considered a middle-income, developing country and the most developed economy on the continent. Its competitive advantages include abundant natural resources, a sound financial and legal sector, favourable communication systems and capable port and ocean transportation facilities.
Weaknesses include security and crime (including occasional xenophobic attacks), high unemployment, power shortages, insufficient infrastructure investment, insufficient railway capacity, the volatile rand exchange rate and a trend of weakness in the currency.
In the short term, SA is still seen as the market leader and driving force of Africa’s economic growth, and according to IMF predictions, SA’s economy should enter a recovery period and stabilise during 2017.
In the mid-term, SA is expected to continue benefiting from regional integration with multinationals including Chinese enterprises, investing on the continent. Due to its good communication systems and sound financial and legal systems, multinational companies are expected to find SA an attractive gateway into Africa. The long-term prediction is that SA will benefit as the future world economy recovers and commodity prices improve.
However, increased infrastructure investment (especially in power and railways) and improved economic efficiency and governance capability within the public sector are urgently required.
The report urges SA to consider China’s success in the use of industrial and scientific parks and special economic zones. Such initiatives would improve production capacity, facilitate complementary transfers of technologies and skills and utilise Africa’s significant market capacity and relatively low labour costs.
The challenges experienced by Chinese enterprises in SA include public security, strained industrial relations, a shortage of technical professionals, a cumbersome visa system, insufficient energy supply, foreign exchange regulations, a continuous declining trend in the rand and infrastructure backlog.
Violent crime in SA continued to increase in 2014 and 2015, with sexual assault, robbery and murder on the rise.
Labour strikes occur frequently in the country, seriously affecting business operations and causing significant trading losses. According to statistics from the South African Department of Labour, during the period 2008 to 2012, lost work days per annum per 1000 people due to strikes averaged 440 days. In comparison, Britain lost 24 days.
According to a report released by South African human resources company SAdcorp, almost 830,000 highly skilled jobs are vacant. Highly qualified technical professionals are not available and cumbersome immigration procedures and regulations make it difficult for foreigners timeously to obtain work permits. Critical technical and managerial personnel cannot enter the country.
SA’s power shortage has led to a "coal supply crunch". Although rich in coal reserves, Eskom is required to store new coal resources, and domestic policy instability and high labour risk have caused uncertainties relating to the future development of the local coal industry.
Processes for the approval of the outflow of foreign currency are an administrative burden. Chinese investment is generally priced in dollars and significant exchange losses have been incurred.
The effect of foreign exchange risk management on profitability has the same priority status as business operational risk.
SA has more than 30,000 km of railway lines, but due to disrepair about half are not operational. Poor operational capacity and efficiency have seriously harmed the international competitiveness of exported goods such as iron ore and manganese.
The speed of passenger lines connecting Pretoria, Johannesburg, Durban, Cape Town and other metropolitan centres is unsatisfactory. The lack of financial investment and infrastructure and the significant funding gap is a significant concern.
Suggestions for enhancing the South African economy include an economic structure and policy adjustment, improvement of the investment environment, improvement of public transport, energy and water supply and greater emphasis on human resources.
Industrialisation is a key prerequisite for tackling poverty. SA’s economy is too dependent on resource exploitation and exports of primary products.
Implementing an industrial-park economy and special economic zones to increase infrastructure investment and attract foreign investment would achieve a more diversified economy. Pragmatic industrial policies, based on specific local conditions, are required to step up the growth of SA’s economy.
The development of the agricultural, tourism and service industries should diversify the economy and present job opportunities.
SA should develop unified and clear policies dedicated to encouraging and protecting foreign investment through appropriate legislation. The country is also encouraged to improve the stability and transparency of its economic policies to protect and build investor confidence. Appropriate tax-incentive policies should be considered to stimulate foreign investment, especially in advanced technology, industrial restructuring and exports, power and energy infrastructure, transportation and communications, and agriculture and forestry.
Improving the efficiency of government departments, upgrading social security and reducing violent crime are seen as priorities. The deficiencies in social services, public transport, energy and water supply are seen as inhibitors of economic and social development.
Economic globalisation and foreign direct investment into SA will require high-quality management and technical personnel. Consideration should be given to relaxing immigration and work-permit policies, as this would help fill the gap of high-quality talent and would develop and promote local skills.
In conclusion, the UN Conference on Trade and Development World Investment Report, released towards the end of 2016, records a rise in global foreign direct investment (FDI) of 38% to US$1.8 trillion, but a drop in FDI into Africa of 7% to US$54bn for 2015.
Investment trends are shifting to less risky developed economies and developing economies in Asia.
FDI into Asian developing countries for 2015 rose to US$540bn - or 10 times more than into Africa. The report predicts that overall FDI into Africa continued to drop in 2016 and over the next two years will decline by 10% to 15%.
In 2015, FDI into SA dropped 69% to US$1.8bn - the lowest level in 10 years. Is anyone out there listening?