South Africa faces traditional risks out of OECD countries (commodity downswings, interrupted 
capital access and assorted fat-tailed risks). Yet an even bigger challenge is steadily 
unfolding. Other countries, newly re-emerging, sometimes after centuries of being dormant, are 
posing unprecedented global challenges. 

This is especially so for small, open, internally strive-torn countries such as South Africa, 
trying to progress in the company of such advancing behemoths. 

It feels like the scene out of ‘A Hitchhiker’s Guide to the Galaxy’. Preoccupied with our own 
demolition derbies at home, attempting to transform society along more prefect lines, we aren’t 
perhaps every day quite focused on the greater demolition derby playing out in the larger world 
in whose path we find ourselves.

China is rampantly expanding its economy, since 1978 lifting its per capita income from $100 to 
$1500. China’s 1.3 billion people are still mostly rural, but 40% (500 million) are already 
urbanized, most living in 130 cities with populations over 1 million (a few over 10 million). 

Some 15 million people are annually migrating to the cities, fuelling a housing boom of 8-10 
million new apartments annually. Vehicles already number 30 million, new vehicle sales are 
5 million units annually, doubling again by 2010. There are 300 million cellphones in use. 

China’s rapid growth has various explanations that will remain in evidence for years. It 
includes reticent consumer spending, high savings, few investment outlets, reliance on bank 
saving, aggressive lending by state banks to State Owned Enterprises pursuing industrial and 
infrastructure expansion, abundant low-cost labour, growing surplus capacities and explosive 
export growth. 

Household savings are remarkably high. Older Chinese experienced extreme deprivation during 
Japan’s 1930s invasion, the long civil war ending in 1949, and the three decades thereafter 
during which Mao Tse Tung demanded extreme exertion from the population. Forced industrali-
sation in support of militarist Superpower ambitions led to widespread starvation, disruption 
and millions of deaths. 

For a century China has been in turmoil during which its population experienced hardship, 
extreme uncertainty and the absence of social safety nets. It made a historically frugal 
population yet more extreme in its saving habits.

Though people held back consumption relative to income, allowing high savings to balloon higher,
they didn’t have many options with their savings. Exchange control prevents investing overseas. 
Domestic investment opportunities are limited (Chinese equities overheating some years ago and 
in retreat since). Property ownership is becoming popular, but most Chinese prefer paying cash, 
delaying purchases. 

All this conspires to channel expanding savings into bank deposits. With government for years 
actively encouraging local authorities to induce state banks to support expansion ambitions of 
State Owned Enterprises (the status of local bureaucrats being governed by such effort), an 
aggressive borrowing and investment engine materialised. Some of the investment activity is 
aimed at exporting, with imported components, cheap labour and heavily undervalued currency 
creating competitive products. Annual exports amount to $600bn (35% of GDP), doubling every two 
years.

Just about everything about this juggernaut has further to run, just as much of it needs 
tempering. Both features will shape the coming few decades. 

Consumers will only gradually increase their consumption inclination and lower their savings 
ratios, doing so naturally over time. As the older generation passes on and younger age cohorts 
increase their sway over society, a modern consumer culture should steadily take hold.

China has since 2004 been concerned about overheating the economy through overinvestment. It 
paid over the top for commodity imports whose increased demand has disrupted traditionally staid
global supply lines. Also, surplus production capacity either went to waste or led to export 
deluges inviting increased trade protection in overseas markets. In addition, there are supply 
concerns, such as skilled labour shortages and infrastructure bottlenecks, encouraging a less 
frenetic pace. 

However, these preoccupations are of a temporary nature in order to achieve balanced growth, 
favouring less reckless investment expansion and more consumer spending. The state has since 
2004 intervened in key sectors (construction, cement, steel, cars, chemicals), demanding local 
government to be less inciting and banks to be less forthcoming with credit. 

For similar reasons, more efficient financial markets are needed, with banks acquiring cleaner 
balance sheets, a better credit culture and consumers obtaining a better spread of investment 
opportunities. Also, the currency should become more flexible, inviting less inflationary 
monetary expansion and better capital allocation. This should add to efficiency and enhance 
growth potential. 

China will take decades to convert its remaining 800 million low-productivity farmers into 
urbanised industrial workers. With its savings and investment arrangements remaining geared 
towards rapid expansion (necessary to meet rising social aspirations and limit political 
discontent), China should maintain GDP growth near 7% annually.

With growth focused on achieving more industrialization, China remains a primary commodity 
importer. Though global supply pipelines are responding to growing Chinese demand by expanding 
capacity, commodity prices should remain high for many years (though cyclicality will feature). 

China’s rapid capacity expansion, partly for export and generating output surpluses also 
competitively offloaded on foreign markets, suggests continuous export growth in an expanding 
range of industrial goods. This already includes textiles, electronics and household goods, 
increasingly bulk products such as steel and chemicals and beginning in hi-tech products such 
as cars.

South Africa faces increased displacement of local output by foreign imports, directly from 
China and indirectly by specializing global suppliers, themselves displaced by Chinese product 
and seeking new outlets.

Although this change is ongoing, its intensity should increase as China’s weight in global trade
increases. The only viable response to this onslaught is to remain competitive by managing costs
and further specialising product ranges and production capabilities, requiring investment in 
new technology, plant and labour skills. 

South Africa will benefit from growing global commodity demand and improved capital access that 
increased global savings levels bring in their wake. However, our manufacturing and services 
will need to remain on top of their ongoing restructuring efforts in order to survive the 
increasingly disruptive influences of China’s rapid industralisation and global trade 
displacement. 

Besides companies needing to remain proactive, a similar onus will increasingly fall on labour 
and government to be sensitive to the changing trade environment and be supportive of corporate 
efforts to adjust timely. 

This suggests greater emphasis on quality education, retraining, a flexible labour market, less 
regulation and non-wage costs and realistic wage demands reflective of productivity and 
competitive realities. 

Source: on www.fnb.co.za/economics1