BRICS Economies: China-South Africa Cooperation Enhances BRICS

South Africa, home to 55.9 million people, is widely considered the most industrialized country in Africa. The country is rich in natural resources and ranks among the world’s leaders in mining. It also has a relatively mature manufacturing sector, modern agriculture, a sophisticated financial system and relatively advanced infrastructure.

Challenges for South Africa’s Resilient Economy

For a long time, South Africa’s GDP accounted for over 20 percent of the continent. After the rapid development of other African economies during the last decade or so, South Africa’s share of the continent’s GDP has been declining. In 2009, due to the U.S. financial crisis and the following European economic recession, South Africa’s economy suffered negative growth of -1.5 percent. However, it recovered quickly in 2010 and 2011 with growth rates reaching 3 percent and 3.2 percent respectively. Its 2011 GDP was US$416.802 billion, and its per capita GDP was US$8,023.

Since 2012, South Africa’s economic development has slowed. That year, Nigeria surpassed South Africa as the biggest economy in Africa. In 2014, Nigeria’s GDP accounted for 22.4 percent of the continent, while South Africa’s share dropped to 13.5 percent. South Africa’s annual GDP growth rate was 1.5 percent in 2014 and 1.3 percent in 2015, largely due to the collapse in international commodities prices and losses in the domestic mining industry.

Poor economic performance has fueled protests, social instability, and criticism of the government. South Africa also faces the risk of a credit rating downgrade by some agencies. Still, the general attitude within the South African business community is that the economy is more resilient than most people think.

Efforts to Revitalize the Economy

The country’s economy has faced great difficulties since the 2008 financial crisis, and the government has responded by enacting structural reform to revitalize economic and social development.

South Africa’s industrial policy has focused on structural changes to move away from a commodity-dependent economy towards more diversification by increasing manufacturing, value addition, jobs and export growth.

In 2012, to advance the government’s strategic objectives to push industrialization, the 2030 National Development Plan (NDP) was adopted, following the Medium Term Strategic Framework (MTSF) for 2014 to 2019. Sectoral incentive programs were also implemented to foster NDP 2030. An Inter-Ministerial Committee on Investment Promotion was established to ensure the success of investment promotion initiatives of the Industrial Policy Action Plan.

Energy, infrastructure, Special Economic Zones (SEZs) and the automotive sector are among the priorities.

Electricity is the bottleneck hindering South Africa’s development. Although South Africa generates 50 percent of Africa’s electricity, it has been facing production losses due to increased demand and a capacity shortage. In order to stabilize electricity supply, the South African government had invested 83 billion South African rand (1 ZAR=US$ 0.07 currently) in its national electricity company, Eskom, by the end of 2015. Energy investment in 2016 will amount to 70 billion rand and increase to over 180 billion over the next three years according to its 2016 budget plan to meet the country’s rising demand for electricity.

The South African government has embarked on an aggressive infrastructure development program to stimulate growth. Every three years since the turn of the new century, the national budget calls for spending of 400 to 500 billion rand on infrastructure. For the years between 2016 and 2018, transport and logistics infrastructure expenditure will total nearly 292 billion rand.

The Special Economic Zone program is one of the most critical instruments to advance the government’s strategic industrialization, regional development and job creation objectives. Ten state-owned industrial parks are under construction.

South Africa’s automotive industry is a crucial cog in the economy that contributes at least 6 percent of the country’s GDP and almost 12 percent of its manufacturing exports. The government has invested 25 billion rand in the automotive sector since 2007. In 2015, a steady stream of new investments in automotive parts manufacturing was seen in South African plants. The Department of Trade and Industry recently announced the establishment of a team of technical experts to develop a post-2020 Automotives Master Plan.

Meanwhile, a fund aiming to support small- and medium-sized enterprises and grow the economy was established in September 2016. Finance Minister Pravin Gordhan called the contribution from the private sector a formidable achievement that would foster inclusive growth through joint activities by all social partners.

Smoothing relations between labor, business and government is a pressing issue for South Africa’s economic and social development. To address related challenges, particularly the high youth unemployment rate, National Youth Policy 2020 was adopted to ensure that young people are provided the resources to grow and develop.

In 2015, about 700,000 new jobs were created. In the second quarter of 2016, South Africa’s GDP growth rate reached 3.3 percent, much higher than predicted. The primary contributors to growth were the manufacturing and mining industries. And the numbers foster hope that a full-scale recession will be avoided.

FDI on the Rise

Despite political challenges that have contributed its currency’s weakness, South Africa is still seen by international capital as “fertile ground” for the private sector. Foreign direct investment (FDI) inflow to South Africa was US$8.3 billion in 2013, and US$5.712 billion in 2014. Accounting firm EY ranked South Africa the continent’s most attractive FDI destination in 2015, and government debt levels and the budget deficit are well within limits.

Thanks to South Africa’s incentive-driven Automotive Production and Development Program (APDP), between 2013 and 2015, foreign motor companies including Ford, Volkswagen, BMW, and Toyota, invested some 25.4 billion rand in South African vehicle manufacturing.

Chinese auto companies have also made remarkable investments in South Africa. Chinese First Automotive Works (FAW) South Africa assembly plant in the Coega Industrial Development Zone cost600 million rand. The Beijing Automotive Industry Company (BAIC) joined the Industrial Development Corporation (IDC) of South Africa to plan a 12 billion rand plant in Port Elizabeth that will begin production in November 2017.

International financial institutions are also interested in posting representatives in South Africa due to long-term interest in South Africa and the continent at large. Germany’s Deutsche Bundesbank announced in August 2016 that it was opening an office in Pretoria, marking the first such representative in Africa.

China-South Africa Cooperation

China and South Africa established formal diplomatic relations in 1998. Since then, bilateral cooperation has been developing rapidly, driven by deepening political trust and the mutual benefits of economic cooperation. A strategic partnership between China and South Africa was established in 2004 and upgraded to a “comprehensive strategic partnership” in 2010.

South Africa became a member of the BRICS in December 2010. South Africa joined BRICS with an African agenda as well as unique attributes that complement the BRICS mechanism.

Bilateral trade surged quickly from 2010 to 2013 despite the slowdown of the international economy. China-South Africa trade totaled US$65.15 billion in 2013, 43 times that of 1998. In 2013, South Africa accounted for 32 percent of China’s total trade to Africa.

Meanwhile, China has been South Africa’s most important international trading partner. In 2011, China accounted for 71.5 percent of South Africa’s 263.5 billion rand trade with other BRICS countries.

China and South Africa both face challenges in economic structural reform, and more emphasis has been placed on investment driven cooperation in manufacturing and innovation.

China-South Africa cooperation in manufacturing has been energized by some major investment deals. China’s FAW invested US$100 million to build a vehicle and truck assembly plant in Coega. When it opens, the plant will assemble 5,000 trucks annually for the Sub-Saharan African market. BAIC’s minibus taxi assembly plant in South Africa started production in January 2013.

Aside from the automotive industry, China has also invested in South Africa’s railroads, information and communications technology, electronics, science and technology and financial areas.

Financial cooperation between China and South Africa has been increasing. The Forum on China-Africa Cooperation (FOCAC) and BRICS each formulated specific plans for financial cooperation between China and Africa as well as among BRICS countries.

The New Development Bank (NDB) has been established through an agreement and arrangement adopted by 2013 BRICS Summit in Durban, South Africa. The NDB is intended to finance infrastructure and sustainable development projects in BRICS and other developing countries. At the first NDB annual meeting in Shanghai in July 2016, discussions covered the bank’s five-year strategy, the role and scope of the Africa Regional Centre in South Africa, as well as preliminary issues on the expansion of the NDB’s membership.

China and South Africa share much in common as they work to shape a more inclusive multi-polar world. BRICS will become even more successful thanks to joint efforts and common development.

The author is a senior research fellow at the Institute of West Asian and African Studies, Chinese Academy of Social Sciences.