China sneezes, should we be concerned?

The world second largest economy is for the first time in two decades seeing a slowdown in its growth. China’s growth has been the engine to global economic growth, moving centre stage in the aftermath of the 2008/9 Global Financial Crisis.

China has seen an average growth of 8%, and played a large role in production, supply and consumption. Chinese consumers’ increased appetite for global goods led to massive investment by international companies in the country, significantly increasing production as a result. Combined with other emerging markets, including its BRICS partners, China’s growth kept global economic outlook largely positive as traditional markets struggled with debt and restructuring.

The Chinese economy is expected to enter the 6% growth range in the medium term. The property market in the country which was largely speculative is now seeing serious signs of stress.

In recent weeks, panic has captured the economic sense in the East. The stock market has seen a serious dip with economists stating that it is going to maintain for a long time. Chinese investors have had to be rescued by government with a cash injection into the stock market to stabilise the situation.
As this all takes place, the question is, as China sneezes, will we catch a cold?

The richer the Chinese consumer got, the more diamonds they demanded, the more power thus increased coal consumption, the more copper and other materials they needed.

This spells trouble for resource rich countries like Botswana. China’s middle class has increasingly gained an appetite for luxury goods and this has over the years moved the country to a third place of the world’s largest consumers of jewel diamonds, thereby, becoming an important economic partner to Botswana.
First National Bank Botswana Research Manager, Moatlhodi Sebabole, said countries that have relied on Chinese growth through their exports will continue to see significant drops in revenue. “China is the second largest export destination, a lot of countries will care about their trade and current balances so a lot of markets that produce and export to China will be under pressure because export value will be reduced.” He said for most African countries the reduction in commodity prices will be disastrous.

Sebabole said for Botswana, while there have been efforts to diversify the economy beyond mining exports, the country continues to rely heavily on diamond exports. For coal production which was previously considered as the second coming of mining in Botswana, Sebabole said coal prices are expected to continue dropping through 2018 as the Chinese have been stock piling. “By the time we have fully explored our coal and export it, it may no longer give good returns, especially that our coal is of low quality and needs a lot of processing before export.”

Barclays Economist Katso Tshipinare opined that the slowing of growth in China’s economy is a global problem, “The Chinese economy is big in size and relative to the rest of the world. As much as Chinese investors are all over the world, world investors are also in China. None performance by the Chinese economy is therefore bound to affect the rest of the world by rippling down to individual countries with direct or indirect linkages with China.”

Tshipinare stated that if the problem persisted, there could be larger problems for our national reserves and possibly other foreign invested funds. “If developments in China are significant to an extent that we cannot register surplus (zero overall balance or deficit) then our reserves will be negatively affected in that we may even be forced to run them down to meet our deficit.”

Afinitas Executive Director Leutlwetse Tumelo whose company recently listed on the Botswana Stock Exchange venture capital board in order to invest in the non-commodity space across Africa is of the opinion that there might be a bit of an overreaction in the market. “One thing I’ve come to learn about the stock markets is that they tend to over react or over correct their problems, so if you’ve got negative news, you might see market dumping stock and everyone running to safer havens and eventually over shoot the true valuation on where the market bottom should be.” The former stock broker said that, however, he does not down play the current challenges, “I’m not saying that it’s a situation that should be ignored, however China will continue to grow albeit at a slower rate, meaning consumption will continue to play an important role in Africa.” Tumelo gave example of the World Financial Crisis stating that these are usually short term shocks that eventually stabilise.