SOUTH AFRICA'S TRADE WITH CHINA

UNCLAS SECTION 01 OF 03 PRETORIA 000658

SIPDIS

DEPT FOR AF/S; AF/EPS; EB/TPP/MTA
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND
COMMERCE ALSO FOR HVINEYARD
TREASURY FOR BRESNICK
DEPT PASS USTR FOR PCOLEMAN

E.O. 12958: N/A
TAGS: ETRD KTEX ECON SF USTR
SUBJECT: SOUTH AFRICA'S TRADE WITH CHINA


1. Summary. A report by a South African bank group
describes the impact of China's growing importance as a
trade partner with South Africa, particularly since its
accession to the World Trade Organization (WTO) in December

2001. Trade between South Africa and China has been booming
since the late 1990s and is likely to expand even more
rapidly over the next decade. China is ranked South Africa's
fifth largest trading partner. In 2003, imports from China
accounted for 6.5% of total South African imports while
exports to China accounted for 2.4% of total exports.
Despite the rapid growth in South Africa-China trade, South
Africa's two largest trade partners, Germany and the U.S.
respectively, represent more than twice the value of China
total trade. End summary.


2. This cable reports on South Africa's trade with China
and uses an Amalgamated Banks of South Africa Limited (ABSA)
publication on South African foreign trade as the main
source document. According to the ABSA publication, China
has become a force to be reckoned with in the international
trade arena, particularly since its accession to the World
Trade Organization (WTO) in December 2001. China is already
the world's second largest economy, in terms of purchasing
power parity, and the ABSA publication expects it to
displace the United States as the biggest economy within two
or three decades. The World Trade Organization's 2004 World
Trade Report states that between 2000 and 2003, China was
the only country which continued to record a sharp increase
in both export and import ratios, reflecting both the
increased openness of the Chinese economy and its role in
sustaining the global trade expansion over the last three
years. At current growth rates of close to 10% per annum and
an investment/GDP ratio of nearly 50%, concerns are growing
about a capacity overhang in and overheating of the Chinese
economy. There are therefore reasons to believe that the
current super high growth rates will moderate, but that
relatively high growth rates will most likely be sustained
for another decade or more.


3. According to the ABSA publication, changes in the
composition of Chinese exports have been transforming the
country from a low-tech, low-value-added exporter to a
higher value-added exporter, which holds important
implications for all countries that have trade links with
China. The ABSA publication further states that whilst many
South African manufacturers may view the "red dragon" as a
threat, the opportunities that China presents for South
African exporters should not be underestimated. The Chinese
market, comprising more than 1.3 billion people, is still
largely untapped and could provide efficient and
internationally competitive South African exporters with
very real growth opportunities. The ABSA report also focuses
on how the Chinese presence has also become a reality on the
South African domestic front. Trade between South Africa and
China has been booming since the late 1990s and the report
expects an even more rapid expansion over the next decade
amidst talks of establishing a free trade agreement between
the two countries.


4. South African Revenue Service (SARS) trade data shows
that in 2003 China was ranked South Africa's fifth largest
trading partner, moving up eight positions over the past six
years. Total merchandise trade with China totaled R5.3
billion in 1998 and R23.3 billion in 2003. This represents a
nominal growth of more than 36% per annum over the period
and far outweighs the growth in trade with Germany, the
United States, the United Kingdom and Japan. Despite this
rapid growth, South Africa-China trade is still less than
one-half that of South Africa's trade with its largest
partners, Germany and the U.S., respectively. Imports from
China increased by an average of 34% annually (in nominal
terms) between 1998 and 2003, from R4.3 billion to R16.6
billion. This represents an average of 4.3% of South
Africa's total import value over the period 1998-2003.
Exports to China increased from less than R1 billion in 1998
to R6.7 billion in 2003. During the first eleven months of
2004 total trade with China valued at R27.1 billion. (Note:
the base year is 1998 because that is the year when South
Africa formally recognized China.)


5. The ABSA publication points out that despite the
strength of the rand, which had a dampening effect on the
overall value of South African exports in 2003, the value of
goods exported to China in 2003 was almost 42% higher than
in 2002. Even with this strong growth in the value of South
African exports to China, however, South Africa still
maintains a sizable trade deficit with China. In 1998 South
Africa's trade deficit with China stood at R3.4 billon, and
increased to R9.9 billion in 2003.

Imports
--------------


6. SARS trade data indicates that Chinese imports are
steadily making inroads into the South African economy. In
1998, imports from China accounted for 3% of total South
African imports. In 2003 China's share increased to 6.4% and
based on the available eleven months' trade data for 2004,
China's share could increase to above 7% in 2004.
Based on the average share of imports over the period 1998
to 2003, the following product categories represented South
Africa's largest imports from China:
-- Machinery and mechanical appliances; electrical
equipment; parts thereof; sound recorders and reproducers,
television image and sound recorders and reproducers, and
parts and accessories of such articles (chapter 16);
-- Textiles and textile articles (chapter 11);
-- Footwear, headgear, umbrellas, sun umbrellas, walking-
sticks, seat-sticks, whips, riding-crops and parts thereof;
prepared feathers and articles made therewith; artificial
flowers; articles of human hair (chapter 12);
-- Products of the chemical or allied industries (chapter
6); and
-- Miscellaneous manufactured articles (chapter 20).

Together these five product categories accounted for 70% of
the total import value from China over the period 1998 to
2003.Almost one third of the value of imports from China was
accounted for by a single product category, i.e. machinery,
electrical equipment, sound recorders etc, while textiles
and textile articles accounted for an additional 13%.
Footwear and chemical products accounted for 9% and 8%,
respectively, of South African imports from China, with
miscellaneous manufactured articles accounting for an
additional 8%.


7. The ABSA publication highlights very high levels of
growth in imports from China in most of the product
categories. In the case of footwear products, for example,
imports from China grew at a nominal rate of 43% per annum
between 1998 and 2003, increasing China's share of total
South African footwear imports from 27% in 1998 to 70% in

2003. Textile and apparel imports from China increased by
42% annually (in nominal terms) between 1998 and 2003,
accounting for almost 70% of the apparel imports in 2003 and
resulting in China capturing 30% of the local market in 2003
against an 8% share in 1998. Newspaper reports indicate that
many South African producers feel threatened by the high
level of very competitive Chinese imports that have
penetrated the South African market over the past six years.

Exports
--------------


8. International trade data shows that China has already
started to increase its level of imports from the rest of
the world and this represents an opportunity for South
African exporters to exploit. According to SARS trade data,
South African exports to China have traditionally been
concentrated within the mineral products and base metals
segments of the market. Between 1998 and 2003, mineral
products accounted for almost 42% of the total value of SA
to China and base metals for an additional 26%, thus more
than two thirds of total export value to China. In 2003 the
share increased to more than 70% of the value, although it
was the base metals product category that started to play a
greater role. Other top exports to China, based on the
average share of exports over the period 1998 to 2003,
include:

--- Machinery and mechanical appliances; electrical
equipment; parts thereof; sound recorders an reproducers,
television image and sound recorders and reproducers, and
parts and accessories of such articles;
--- Products of the chemical or allied industries; and --
Pulp of wood or of other fibrous cellulosic material; waste
and scrap of paper or paperboard; paper and paperboard of
paper or paperboard; paper and paperboard and articles
thereof.
These top five export categories together accounted for 85%
of the total export value of South African goods exported to
China. The growth in exports for these five product
categories was in excess of 30% per annum between 1998 and

2003.


9. According to the ABSA publication, almost 80% of mineral
product exports to China comprised iron ores and
concentrates (HS2601),with China being the largest
destination of such exports from South Africa, accounting
for 35% of South Africa's total export value in 2003. The
composition of base metal exports to China was more evenly
spread, with copper bars, rods and profiles (HS7407),flat
rolled stainless steel products (HS7219) and ferro-alloys
(HS7202) on average accounting for 18%, 17% and 15%,
respectively, of the total value of base metal exports
between 1998 and 2003. An interesting fact from the ABSA
publication is that although China was South Africa's single
largest destination of copper bars, rods and profiles over
the period 1998 to 2003, the growth in exports of such
products to China declined since 1998. As a result China's
share of South Africa's total exports of copper bars, rods
and profiles decreased from 31% in 1998 to 19% in 2003. The
publication also points out that South Africa's largest
chemical export product to China between 1998 and 2003 on a
product level was ketones and quinones, whether or not with
other oxygen function, and their halogenated, sulphonated,
nitrated or nitrosated derivatives (HS2914) accounting for
30% of such exports over the period. China was the fifth
largest consumer of these exports from South Africa,
representing 9% of South African exports. Acyclic alcohols
and their halogenated, sulphonated, nitrated or nitrosated
derivatives (HS2905) was another important chemical export
product for South Africa. China was the third largest export
destination of such exports, accounting for 10% of total
exports of these products over the period 1998 and 2003, but
growing at an average annual rate of more than 73% over the
period.

FRAZER