China Trade Wars Effect on the Emerging Market

China Trade Wars Effect on the Emerging Market
Written by:
Tsveta van Son
13th December 2018
Updated: 21st May 2019

With the focus on Britain’s exit from the European Union, China’s trade war with the emerging market is going unnoticed

With Brexit negotiations in the UK stalling, many in the UK are becoming frustrated and believe the government should just “get on with it” and reach an agreement. This is partly so they know what to expect and to provide some sort of groundwork for future trade negotiations with other countries.

Simmering Trade War Between The US and China

Lurking in Brexit’s shadows has been the emerging trade war between the US and China. This started in March 2018 when Trump imposed tariffs of $60bn on imports. China responded accordingly with tariffs on US imports; the constant retaliation between the two countries has damaged China’s economy. The economic damage is not only confined to the US and China though, emerging markets rely heavily on investment from both countries for growth and may find it lacking as the two countries scrabble for available funds.

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China Looking Inward And Increasing Trade With South East Asia.

China is South Africa’s biggest trading partner, and bilateral trade grew by 11.7% to 39.17bn dollars in 2017. China also heavily invests in South Africa, with foreign direct investment reaching USD 15.2bn in 2017, accounting for 19% of all investment in South Africa.

Even though China’s Xi committed to $35m of investment in July 2018 investment like this cannot be guaranteed for the future, with tariffs imposed by the US affecting the economic environment in China. It also has a ripple effect on other economies, which may mean they too would find it difficult to trade and invest in South Africa.

It has recently come to light that Chinese conglomerate HNA Group has put its $18 billion real estate assets in Sydney, New York and Hong Kong up for sale according to Reuters. Rumors are that China has ordered international companies to repatriate foreign reserves in order to bolster the RMB for further trade wars.

In future, China may choose to concentrate trade in south-east Asia, which has already increased in the past decade, especially in places such as Cambodia and Vietnam. If China is diverting its attention to its own economic state and trading with countries that are geographically closer, what will the impact be on South Africa?

Confidence in SA Economy Waning

Confidence is also slowing in South Africa and demand for bonds has already dropped 67% from the previous sale, and to its lowest since March.

S&P Global Ratings have also kept their credit rating for South Africa below investment grade on Friday 23rd November. Poor economic growth and liabilities continue to lay heavily on South Africa’s prospects, and this can deter foreign investment. South Africa was once the preferred country in Africa to receive foreign investment, however according to Ernst & Young, its position has been challenged and it now shares that top spot with Morocco, indicating that attention is turning elsewhere in Africa.

Policies such as land expropriation without compensation has already done much to disincentivise investors. South Africa has done little to thwart their concerns by withdrawing from treaties which were created to give foreign investors some protection. These include bilateral investment treaties with European Union members Germany and Spain, with plans to cancel further treaties in the future, or to be accurate – with the whole EU trade bloc. These actions will make South Africa a less attractive country to invest in and could explain why countries such as Morocco are becoming preferable to investors.

Alleged Corruption In Zambia

It is not just South Africa’s turbulent political environment that has deterred investors.

In Zambia, mining accounts for 12% of the country’s GDP and 70% of total export value. This sector is the country’s main source of income and employment, and it is heavily reliant on investment to ensure the country’s growth and prosperity. Zambia was viewed as an attractive place to invest due to its long history of mining, political stability and good economic climate. Sentiment seems to have changed lately due to accusations of corruption in the government.

Corruption has affected the level of investment in Zambia, with Ireland, Finland, Sweden and now the UK stopping funding as it had emerged that £3.3m intended for poor families had gone missing. This money was vital to the prosperity of the country and failure to get rid of corruption will only reduce foreign investment further.

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