SOUTH AFRICA/CHINA TRADE IS BOOMING

C O N F I D E N T I A L SECTION 01 OF 03 PRETORIA 000554 SIPDIS C O R R E C T E D C O P Y (TAGS) SIPDIS E.O. 12958: DECL: 01/30/2017 TAGS: ECON ETRD EFIN PREL CH SF SUBJECT: SOUTH AFRICA/CHINA TRADE IS BOOMING REF: 06 PRETORIA 03868 PRETORIA 00000554 001.2 OF 003 Classified By: Econ Counselor Perry Ball for reasons 1.4(b) and (d). ¶1. (U) Summary: China continues to expand its economic ties with South Africa. South Africa/China trade has more than doubled since 2003, and China is today South Africa's fourth largest trading partner. South Africa is one of the few mineral-rich African countries that runs a trade deficit with China, and in contrast to its African neighbors, it is a net investor in China, rather than the reverse. Local protectionist sentiments, good governance and transparency, and a saturated local mining market have slowed growth in Chinese investment in South Africa. End Summary. -------------- BOOMING TRADE RELATIONS -------------- ¶2. (U) China surpassed the UK as South Africa's fourth-largest trading partner in 2006, becoming South Africa's second-largest source of imports and the sixth-largest destination for its exports. According to the SAG's Department of Trade and Industry (DTI),trade with China has more than doubled since 2003, with total trade for 2006 (as of November) reaching 54.4 billion rand (7.8 billion USD). DTI projects that exports and imports in 2006 will increase from 2005 by 46.4 percent and 47.8 percent, respectively. South Africa's largest bilateral trade deficit is with China, and totaled 30.9 billion rand (4.4 billion USD) in 2006. Although Germany, Japan and the U.S. continue to lead as South Africa's largest trading partners, the gap is beginning to narrow. ¶3. (U) South Africa's booming consumer economy, the extension of bank credit, and a relatively high rand have driven the fast growth of imports in value-added manufactured products, apparel and textiles. The rapid and consistent growth in economic ties between the two countries over the past four years is best illustrated in the table below (figures in million Rand): SA/China Trade Nov 2006 2005 2004 2003 SA Exports 11,758 8,763 6,580 6,704 SA Imports 42,633 31,477 23,021 16,600 Trade Balance -30,875 -22,713 -16,441 -9,896 The growth of imports is even more dramatic when 2006 is compared to 1998, the year South Africa formally recognized China. At that time, exports to China were less than one billion rand and imports from China stood at R4.3 billion, with South Africa's total deficit at R3.4 billion. Trade has increased 10-fold increase in trade over eight years. ¶4. (U) As with most of Africa, the majority of exports to China (75 percent) are mineral products and base metals. In an attempt to curb the large influx of low-cost Chinese goods, the SAG instituted an import quota on Chinese textiles that went into effect on January 1, 2007 (reftel). However, the local manufacturing industry claims the quota will have little effect as retailers have simply shifted their purchases to other South East Asian markets. -------------- -- SA/CHINA INVESTMENT RELATIONS: A ONE-WAY STREET -------------- -- ¶5. (C) Unlike the majority of South Africa's mineral-rich neighbors, South African investment in China continues to expand faster than Chinese investment in South Africa. Although official statistics on outward investment are not maintained, DTI Chief Director for African Economic Relations George Monyemangene estimated that South Africa has at least two times the investment in China that China has in SA. This was confirmed by the Chinese Embassy's Economic and Commercial Counselor Wang Jingbo. DTI Americas Desk Officer Cobs Pillay informed econoff that DTI's "unofficial" statistics indicate that South Africa investors have 400 million USD in China. The majority of these investments are held by SAB Miller, Anglo American, media giant MIH, and a property group LRPS. Along with these major South African players, several mining and natural resource-related companies have also plowed money into China. Gold Fields became the largest shareholder in Sino Gold when it formed a joint venture in November to look for more gold in China. Sasol is considering a 10 billion USD coal-to-liquids plant investment to aid the diversification of China's energy PRETORIA 00000554 002.2 OF 003 supply. Anglo American has also announced in November that it may invest as much as 4 billion USD in a partnership with Shaanxi Coalfield and Geological Bureau to develop a clean coal chemicals project in China. ¶6. (C) Chinese investment in South Africa lags far behind other mineral-intensive African markets. The South African Reserve Bank (SARB) officially reports total foreign direct investment by China at 340 million Rand (48 million USD). Note: SARB calculates South Africa's investment position for balance of payment purposes. It may understate Chinese investment because many South African companies are listed on the London Stock Exchange or for other technical reasons. Estimated Chinese investment in South Africa has been estimated as high as 150 million USD, while DTI puts the investment at 120 million USD -- still a small percentage of China's total 1.8 billion USD FDI in all of Africa. End Note. According to Jingbo, as well as DTI officials, the majority of investment by China involves mining-related commodities such as aluminum or chrome ore for large Chinese stainless steel production companies. ¶7. (C) Jingbo cited two main reasons for the lack of Chinese investment: SAG bureaucracy and the high crime rate. China has openly complained to the SAG that red-tape and paperwork are too difficult. Jingbo explained that China treats potential investors "like gods" and provides them with amenities and extras, while a specialist does all the paperwork. Chinese investors complain they do not receive the "same treatment" and are required "to jump through too many hoops." Jingbo provided a short story to highlight the problem with crime: Chinese businessmen are rich and usually carry large amounts of money for "donation" when developing investment in a country. One Chinese businessman brought $10,000 in cash to South Africa, but was robbed in Johannesburg Airport upon arrival. The businessman immediately returned to China without pursuing any business. According to Jingbo, this story is but one of many incidents that deter Chinese investors. Note: Jingbo was not reporting hearsay. The Chinese Ambassador told South Africa's Minister of Security and the assembled diplomatic community on January 15 that the Chinese embassy and his residence had been broken into five times in the past twelve months. End Note. ¶8. (C) SAG officials counter these complaints by claiming that Chinese concern about "paperwork" is little more than irritation with South Africa's transparency and good governance. A DTI official informed trade and investment officer that Chinese investors have often tried to circumvent the rules through bribes or contacts. He cited one example in which a Chinese company contacted the Department of Foreign Affairs (DFA) when DTI refused to make a "deal", but that the DFA immediately referred it back to DTI. South Africa's wariness about Chinese trade methods and its pattern for extracting minerals without any long-term benefits to the local economy, as well as an already saturated mining market, were also cited as reasons for lack of Chinese investment. Still, the SAG is hoping that further Chinese-Africa forums will help to facilitate trade and put South Africa on Chinese investors' "radar screens." ¶9. (U) Regardless of the barriers to investment, Chinese investors in recent months have begun to buy larger interests in South African firms. Chinese mining company Zijin Mining's recent purchase of 16 million shares (29.9 percent) of London-listed platinum miner Ridge Mining was considered the "first high-profile investment" by the Chinese. Ridge Mining is developing two platinum projects in South Africa. In November, Oppenheimer sold a 1.13 percent stake in Anglo American, the world's second-biggest mining company, for 803 million USD to China Vision Resources Limited. Other smaller investments include a joint venture in a ferrochrome plant and a stake in Ferro Metals by Chinese steel producer Jisco. -------------- COMMENT -------------- ¶10. (C) Trade with China continues to grow at a faster pace than with South Africa's other trading partners. The ballooning trade deficit has stoked South African anxieties about China and about so-called sharp Chinese practices, such as extracting minerals using Chinese employees in harsh conditions with little benefit to the local economy. These concerns have given rise to calls for diversified exports to China beyond minerals. However, despite all these voiced worries, the SAG has not yet formed a comprehensive trade agenda to handle the large volumes of trade and investment (septel). Instead, it has only taken intermediate emergency PRETORIA 00000554 003.2 OF 003 steps in response to domestic complaints, such as the recent quota on Chinese textile imports. BOST