Beware the Chinese ripple effect

The rise of China over the past 40 years is the greatest economic story of our time. When Deng Xiaoping launched his first reform agenda in 1978, shortly after the death of Chairman Mao, China was a desperately poor country with a GDP per capita of only US$227 and an agriculture-led economy.  Last year China’s GDP per capita was US$7 595 (according to official state statistics), a leap which goes some way to explaining how the country has managed to lift more than 500 million people out of poverty in such a short space of time.

 Today, China is the second-largest economy (in US dollar terms) and the largest on a purchasing power parity-adjusted basis. China is the world’s largest trading nation and the dominant consumer of most commodities, including iron ore, aluminium, coal and oil.

It is no surprise, given this footprint, that ripples in China’s economy are felt far and wide around the globe. For a few years now, economists and investors have been worried about the prospects for Chinese growth as the economy inevitably slows down from the unprecedented rapid growth rates of the past. These fears have grown in recent months, following a combination of weak manufacturing data, falling commodity prices, a bungled attempt to prop up a crashing equity market and the decision to weaken the currency, albeit modestly so far.

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Over the last few months these ripples have grown into an all-out tsunami. As just one example, the rand has been on a rollercoaster ride the likes of which we haven’t seen in over 20 years. The rand’s historic low of R13.84 to the US dollar, reached in December 2001, was breached in early September 2015 when the local currency hit R13.98 to the greenback. With the rand breaking through the R14 to the US dollar mark in late-September, the talk on everyone’s lips was not of South African fundamentals or infrastructure or electricity constraints (although, these do factor), but China. The pressure being brought to bear on commodity prices, in the wake of a Chinese economic slowdown, are behind this currency pressure; and South Africa is not alone.

As our Head of Asset Allocation, Tristan Hanson, noted in a recent opinion piece carried in The Star newspaper on 2 September 2015 (What happened to the emerging markets dream?) the events unfolding in China have rumblings not only in Africa and other emerging markets, but around the world. Although, emerging markets are, it seems, bearing the brunt.

This is not a positive time for emerging markets, but, as we explore in contributions from the likes of Tony Cadle, Mark Appleton, Derry Pickford and Craig Farley, the situation for Africa – and specifically South Africa – is not all negative.

He wrote: “Emerging market growth rates are down, their currencies have plummeted and their equities have been a great disappointment – essentially flat over the past five years (+ 5% in US dollar terms) during which time developed market equities have gained nearly 80%. With the exception of India, where the consensus view remains optimistic, it is hard these days to find someone with a positive outlook on growth prospects in the other BRICS nations – Brazil, Russia, China and South Africa.”

This is not a positive time for emerging markets, but, as we explore in contributions from the likes of Tony Cadle, Mark Appleton, Derry Pickford and Craig Farley, the situation for Africa – and specifically South Africa – is not all negative.

Like India, Africa’s demographic dividend and its rapidly emerging middle class will continue to shape the continent’s prospects into the future. The commodity market, too, will evolve as rapidly urbanising emerging market economies shift commodity demand away from China and will take market share away from the ‘global factory’. But, before we see these moves transpire, the coming period will be one in which China’s sneezes continue to send the world running to the doctor.

The impact of China on Africa, the impact of China on the world, the impact of China on individual investors cannot, at this point, be overstated. But a realignment – not only of the Chinese economy but also of the world economy – is currently underway.

As Mark Appleton notes in his article, which looks in depth at the situation in South Africa and Brazil: “The downdraft currently taking place across emerging markets at large has been well publicised in the media of late. The ‘easy’ times of the past flowed courtesy of debt-driven consumption in the developed world (creating strong demand for emerging market exports), strong investment driven growth in China and the consequent commodity price boom. In this new environment, however, countries need to be productive and efficient in their own right in order to grow.”

Therein lies the rub: China’s current woes are shining a spotlight not only on the world’s second-largest economy, but also on the fundamentals of those developing economies that, until now, have been riding on the dragon’s coat tails. It’s time for them to step up.