China’s economic slowdown threatens SA exports

The fallout from China’s economic downturn is a risk to the economies with which it has deep trade ties. The combination of slow economic growth, high unemployment, a struggling real estate sector and low household demand in China will have ripple effects for countries that have a high export concentration in hard commodities. SA is particularly exposed — 93% of our exports to China are hard commodities. 

There’s debate over whether China’s economic decline is cyclical or secular. Perhaps the sky-high growth rates of the 1980-2018 period will fall to more moderate levels in the long term in a more multipolar world. Or maybe it’s a blip owing to low household demand following unpredictable Covid-19 lockdowns. The jury is out among global economists.  

Either way, SA and other commodity-exporting countries are on the front line. SA’s trade relationship with China has a significantly higher export concentration in hard commodities than its next three biggest export partners — 93%, compared with 73% to the US, 48% to Germany and 75% to the UK. 

It’s unsurprising that a reduction in China’s aggregate demand by 1.4-billion people has larger consequences. Households are buying fewer houses, cars, jewellery and other luxury goods. In light of lower fiscal revenue, China’s ambitious infrastructure development plans, which would require significant resource imports, have slowed. 

We’ve already seen China’s economic growth-commodity price nexus manifest. Recall that at the start of 2022 JPMorgan analysts took a bullish stance on minerals and metals, arguing that the world is likely to have entered its fifth commodity supercycle since the start of the 20th century. By definition a supercycle lasts for a minimum of 10 years. This was owing in part to China’s expected economic rebound after the initial lockdowns and announcements of infrastructure programmes. 

SA benefited from significant resource windfalls during this period. However, the rise didn’t last long as the world contended with a potential recession and China went back into a lockdown. 

In the medium term the state of China’s sluggish economy has put forecasts for SA’s three biggest exports to China — gold, diamonds and iron ore — in peril. 

We can start with iron ore, SA’s third-biggest export to China and a key input for real estate development. Analysts at Australia’s Commonwealth Bank have forecast that iron ore prices will continue to fall as the outlook for China’s property market continues to deteriorate. 

China’s consumers

Consecutive years of lockdowns have put financial pressure on China’s consumers, who are buying fewer homes. Country Garden, one of the country’s largest developers, reported losses of roughly $7.6bn for the first six months of 2023. China Evergrande, another large real estate developer, filed for bankruptcy after it defaulted on $300bn of debt.  

Australian mining giant BHP, a major iron ore producer, reported its lowest annual profit in three years as a result. Underlying profits for its year to the end of June were down $13.4bn, or 37% year-on-year, and its dividend was cut by almost half. 

SA’s second biggest export to China is diamonds, amounting to 22% of exports. In the medium term diamond demand is also in peril due to lower household spending. Earlier this year Al Cook, CEO of De Beers, noted that rough diamond demand was being influenced by China’s macroeconomic uncertainty and a slower than expected pace of economic recovery in consumer demand.  

China’s 20%-plus youth unemployment rate may also undermine the extent to which its millennial and Gen Z population are proposing with diamonds.  

And finally gold, SA’s biggest export to China, accounting for 24.5% of exports, is also vulnerable. Gold prices are fairly inelastic and prices skyrocketed in 2022 and 2023, reaching a record high as central banks flocked to it amid recession fears. But medium-term volatility is a real possibility.  Bloomberg recently flagged China’s gold demand easing up as a result of the sluggish economy. The World Gold Council echoed this sentiment, noting that high gold prices (due to central bank stockpiling) and a weak underlying economic environment in India and China could result in lower demand in coming months. 

SA’s economy is sensitive to changes in commodity demand. It benefited significantly from commodity windfalls in 2021 and 2022. But in June, as commodity demand began to waver, the IMF cited volatile commodity prices as a driver of SA’s weak growth performance. 

Ultimately, SA’s export concentration in its trade with China will have consequences. SA policymakers should take this into account when fiscally planning in coming years, especially given the uncertainty over whether China’s economic challenges will be cyclical or secular. Otherwise, we’re likely to see SA’s debt-to-GDP ratio rising.