US embassy cable - 05PRETORIA658

UNCLAS SECTION 01 OF 03 PRETORIA 000658 
 
SIPDIS 
 
DEPT FOR AF/S; AF/EPS; EB/TPP/MTA 
USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND 
COMMERCE ALSO FOR HVINEYARD 
TREASURY FOR BRESNICK 
DEPT PASS USTR FOR PCOLEMAN 
 
E.O. 12958: N/A 
TAGS: ETRD, KTEX, ECON, SF, USTR 
SUBJECT: SOUTH AFRICA'S TRADE WITH CHINA 
 
1.   Summary.  A  report  by  a  South  African  bank  group 
describes  the  impact of China's growing  importance  as  a 
trade  partner  with  South Africa, particularly  since  its 
accession to the World Trade Organization (WTO) in  December 
2001.  Trade between South Africa and China has been booming 
since  the  late  1990s and is likely to  expand  even  more 
rapidly over the next decade. China is ranked South Africa's 
fifth  largest trading partner. In 2003, imports from  China 
accounted  for  6.5%  of total South African  imports  while 
exports  to  China  accounted for  2.4%  of  total  exports. 
Despite the rapid growth in South Africa-China trade,  South 
Africa's  two largest trade partners, Germany and  the  U.S. 
respectively, represent more than twice the value  of  China 
total trade.  End summary. 
 
2.   This  cable reports on South Africa's trade with  China 
and uses an Amalgamated Banks of South Africa Limited (ABSA) 
publication  on  South African foreign  trade  as  the  main 
source  document.  According to the ABSA publication,  China 
has  become a force to be reckoned with in the international 
trade  arena, particularly since its accession to the  World 
Trade  Organization (WTO) in December 2001. China is already 
the  world's second largest economy, in terms of  purchasing 
power  parity,  and  the  ABSA  publication  expects  it  to 
displace the United States as the biggest economy within two 
or three decades.  The World Trade Organization's 2004 World 
Trade  Report states that between 2000 and 2003,  China  was 
the  only country which continued to record a sharp increase 
in  both  export  and  import ratios,  reflecting  both  the 
increased  openness of the Chinese economy and its  role  in 
sustaining  the global trade expansion over the  last  three 
years. At current growth rates of close to 10% per annum and 
an  investment/GDP ratio of nearly 50%, concerns are growing 
about  a capacity overhang in and overheating of the Chinese 
economy.  There  are therefore reasons to believe  that  the 
current  super  high  growth rates will moderate,  but  that 
relatively  high growth rates will most likely be  sustained 
for another decade or more. 
 
3.   According  to  the  ABSA publication,  changes  in  the 
composition  of  Chinese exports have been transforming  the 
country  from  a  low-tech, low-value-added  exporter  to  a 
higher   value-added   exporter,   which   holds   important 
implications  for all countries that have trade  links  with 
China. The ABSA publication further states that whilst  many 
South African manufacturers may view the "red dragon"  as  a 
threat,  the  opportunities that China  presents  for  South 
African  exporters should not be underestimated. The Chinese 
market,  comprising more than 1.3 billion people,  is  still 
largely   untapped   and   could   provide   efficient   and 
internationally  competitive South  African  exporters  with 
very real growth opportunities. The ABSA report also focuses 
on how the Chinese presence has also become a reality on the 
South African domestic front. Trade between South Africa and 
China  has been booming since the late 1990s and the  report 
expects  an  even more rapid expansion over the next  decade 
amidst  talks of establishing a free trade agreement between 
the two countries. 
 
4.   South  African Revenue Service (SARS) trade data  shows 
that  in  2003 China was ranked South Africa's fifth largest 
trading partner, moving up eight positions over the past six 
years.  Total  merchandise trade  with  China  totaled  R5.3 
billion in 1998 and R23.3 billion in 2003. This represents a 
nominal  growth of more than 36% per annum over  the  period 
and  far  outweighs  the growth in trade with  Germany,  the 
United  States, the United Kingdom and Japan.  Despite  this 
rapid  growth, South Africa-China trade is still  less  than 
one-half  that  of  South Africa's trade  with  its  largest 
partners,  Germany and the U.S., respectively. Imports  from 
China  increased by an average of 34% annually  (in  nominal 
terms)  between  1998 and 2003, from R4.3 billion  to  R16.6 
billion.  This  represents  an  average  of  4.3%  of  South 
Africa's  total  import  value over  the  period  1998-2003. 
Exports to China increased from less than R1 billion in 1998 
to  R6.7 billion in 2003. During the first eleven months  of 
2004  total trade with China valued at R27.1 billion. (Note: 
the  base  year is 1998 because that is the year when  South 
Africa formally recognized China.) 
 
5.   The  ABSA  publication  points  out  that  despite  the 
strength  of the rand, which had a dampening effect  on  the 
overall value of South African exports in 2003, the value of 
goods  exported to China in 2003 was almost 42% higher  than 
in  2002. Even with this strong growth in the value of South 
African  exports  to  China,  however,  South  Africa  still 
maintains a sizable trade deficit with China. In 1998  South 
Africa's trade deficit with China stood at R3.4 billon,  and 
increased to R9.9 billion in 2003. 
 
Imports 
------------- 
 
6.   SARS  trade  data  indicates that Chinese  imports  are 
steadily  making inroads into the South African economy.  In 
1998,  imports  from China accounted for 3% of  total  South 
African imports. In 2003 China's share increased to 6.4% and 
based  on the available eleven months' trade data for  2004, 
China's share could increase to above 7% in 2004. 
Based  on the average share of imports over the period  1998 
to  2003, the following product categories represented South 
Africa's largest imports from China: 
--   Machinery   and   mechanical   appliances;   electrical 
equipment;  parts thereof; sound recorders and  reproducers, 
television  image  and sound recorders and reproducers,  and 
parts and accessories of such articles (chapter 16); 
-- Textiles and textile articles (chapter 11); 
--  Footwear,  headgear, umbrellas, sun umbrellas,  walking- 
sticks,  seat-sticks, whips, riding-crops and parts thereof; 
prepared  feathers  and articles made therewith;  artificial 
flowers; articles of human hair (chapter 12); 
--  Products  of the chemical or allied industries  (chapter 
6); and 
-- Miscellaneous manufactured articles (chapter 20). 
 
Together these five product categories accounted for 70%  of 
the  total import value from China over the period  1998  to 
2003.Almost one third of the value of imports from China was 
accounted  for by a single product category, i.e. machinery, 
electrical  equipment, sound recorders etc,  while  textiles 
and  textile  articles  accounted  for  an  additional  13%. 
Footwear  and  chemical products accounted for  9%  and  8%, 
respectively,  of  South African imports  from  China,  with 
miscellaneous  manufactured  articles  accounting   for   an 
additional 8%. 
 
7.   The  ABSA  publication highlights very high  levels  of 
growth  in  imports  from  China  in  most  of  the  product 
categories.  In the case of footwear products, for  example, 
imports  from China grew at a nominal rate of 43% per  annum 
between  1998  and 2003, increasing China's share  of  total 
South  African footwear imports from 27% in 1998 to  70%  in 
2003.  Textile and apparel imports from China  increased  by 
42%  annually  (in  nominal terms) between  1998  and  2003, 
accounting for almost 70% of the apparel imports in 2003 and 
resulting in China capturing 30% of the local market in 2003 
against an 8% share in 1998. Newspaper reports indicate that 
many  South  African producers feel threatened by  the  high 
level   of  very  competitive  Chinese  imports  that   have 
penetrated the South African market over the past six years. 
 
Exports 
------------- 
 
8.   International trade data shows that China  has  already 
started  to increase its level of imports from the  rest  of 
the  world  and  this  represents an opportunity  for  South 
African exporters to exploit. According to SARS trade  data, 
South  African  exports  to China  have  traditionally  been 
concentrated  within the mineral products  and  base  metals 
segments  of  the  market. Between 1998  and  2003,  mineral 
products accounted for almost 42% of the total value  of  SA 
to  China  and base metals for an additional 26%, thus  more 
than two thirds of total export value to China. In 2003  the 
share  increased to more than 70% of the value, although  it 
was the base metals product category that started to play  a 
greater  role.  Other  top exports to China,  based  on  the 
average  share  of  exports over the period  1998  to  2003, 
include: 
 
---   Machinery   and   mechanical  appliances;   electrical 
equipment;  parts thereof; sound recorders  an  reproducers, 
television  image  and sound recorders and reproducers,  and 
parts and accessories of such articles; 
---  Products of the chemical or allied industries;  and  -- 
Pulp  of wood or of other fibrous cellulosic material; waste 
and  scrap  of paper or paperboard; paper and paperboard  of 
paper  or  paperboard;  paper and  paperboard  and  articles 
thereof. 
These top five export categories together accounted for  85% 
of the total export value of South African goods exported to 
China.   The  growth  in  exports  for  these  five  product 
categories was in excess of 30% per annum between  1998  and 
2003. 
 
9.  According to the ABSA publication, almost 80% of mineral 
product   exports   to  China  comprised   iron   ores   and 
concentrates   (HS2601),  with  China  being   the   largest 
destination  of  such exports from South Africa,  accounting 
for  35%  of South Africa's total export value in 2003.  The 
composition  of base metal exports to China was more  evenly 
spread,  with copper bars, rods and profiles (HS7407),  flat 
rolled  stainless  steel products (HS7219) and  ferro-alloys 
(HS7202)  on  average  accounting  for  18%,  17%  and  15%, 
respectively,  of  the  total value of  base  metal  exports 
between  1998  and 2003. An interesting fact from  the  ABSA 
publication is that although China was South Africa's single 
largest  destination of copper bars, rods and profiles  over 
the  period  1998  to 2003, the growth in  exports  of  such 
products  to China declined since 1998. As a result  China's 
share  of South Africa's total exports of copper bars,  rods 
and  profiles decreased from 31% in 1998 to 19% in 2003. The 
publication  also  points out that  South  Africa's  largest 
chemical export product to China between 1998 and 2003 on  a 
product level was ketones and quinones, whether or not  with 
other  oxygen  function, and their halogenated, sulphonated, 
nitrated  or nitrosated derivatives (HS2914) accounting  for 
30%  of  such exports over the period. China was  the  fifth 
largest   consumer  of  these  exports  from  South  Africa, 
representing  9% of South African exports. Acyclic  alcohols 
and  their  halogenated, sulphonated, nitrated or nitrosated 
derivatives  (HS2905) was another important chemical  export 
product for South Africa. China was the third largest export 
destination  of such exports, accounting for  10%  of  total 
exports of these products over the period 1998 and 2003, but 
growing at an average annual rate of more than 73% over  the 
period. 
 
FRAZER