China or Greece: Who will affect SA more?
Peter Worthington, an economist at Barclays Africa Group, is reported to have said: “Unlike Greece, China is a very important country directly to South Africa. It’s the main market for [the] export of iron ore, it’s also a key source for global demand of commodities generally, so a very important underpinning for commodity prices.”
China and South Africa
China and South Africa have a well-established trade partnership, with China being South Africa’s largest trade partner. If China’s economy fails, experts believe that it could have a huge impact of local exports, as it could lower the demand for commodities, such as copper, coal and iron ore, which are among some of the items that South Africa exports.
However, Worthington has noted that it is not yet clear the impact that the situation in China will have on the global economy, as well as on South Africa.
Mamello Matikinca and Alex Smith, economists at First National Bank (FNB) said that China is a bigger concern for South Africa than Greece. “The bigger concern for SA is China, where a massive stock market rout is wiping out much of the past year’s spectacular gains. While this largely reflects the clearing out of leveraged positions and highly stretched valuations, it also highlights a growing concern about the real economy.
“Indeed high levels of debt and slowing demand in China are placing growth under pressure. This is a significant concern for SA as China is our biggest export destination. We remain of the view that the Chinese slowdown will be a gradual and manageable one, but risks are skewed to the downside.”
The situation in China
While the world focuses on Greece, Chinese companies have lost more than 15 times the value of the Greek economy in the last four weeks as stocks drop, reports claim. This is approximately $3.9 trillion (about R48.4 trillion).
To try and curb the slide in share prices, the Chinese government has implemented a number of restrictions. Among these restrictions are a halt on stockholders owning more the five percent of a single company selling those stokes for the next six months.
The decline in the stock market followed the government imposing restrictions on the “amount of margin lending that stock brokers could do,” explained a report.
This was as a result of the opening of more than 40 million new stock accounts between June 2014 and May 2015, which pushed the Chinese stock market up by an astounding 150% in less than one year. This led to fears that the stock prices were rising too quickly.
However, following the government’s interventions, the stock market starting dropping much quicker than anticipated, with the government relaxing the previous restricted margin trading rules. The country’s central bank also provided funding to finance margin trading.
Not all commentators fear the worst following a crash in China. Jeremy Warner, a journalist for the Telegraph, stated that China has denied the normal rules of economics, which has assisted it in achieving its past growth. He believes that as a result of this, if the stock market continues to drop, “the impact will be no worse than 2007-08, when the Shanghai Composite fell by two-thirds. Yet after a massive fiscal and monetary stimulus, the wider economy barely lost a beat.”