Key points:
- Over the past decade, SA has made a strategic decision to align itself more with China than its Western trading partners. At first, the decision seemed to make sense because China was growing far quicker than the West and seemed to be the central manufacturing hub of the world that would secure solid demand for SA exports.
- Over time, it appears that that alignment was less constructive than anticipated. There have been geopolitical and economic consequences to the alignment with China and the BRICs group of countries. Although one could argue that over time, these countries allow SA to strategically benefit from the oil and other minerals that they mine, as well as the emerging growth dynamic which will likely exceed the West, in the short-term, SA will have to weather the weaker demand that will likely stem from China’s economic downturn.
- The implications for SA are obvious. Weaker demand from China means a deteriorating trade balance and less support for the ZAR. Most countries with heavy exposure to China are experiencing similar constraints, including but not limited to the AUD and the NZD. China’s downturn is turning into a global problem that will affect SA.
Baseline View:
Although it is impossible to draw a straight-line argument for ZAR depreciation based solely on SA’s relationship with China, the evidence suggests that the ZAR will not enjoy the same degree of support by exporting to China, mainly due to the anticipated moderation of growth in demand. Growth in exports at the moment is minimal. That will contrast with SA’s improved consumptive demand, given the rate cuts that have been announced and the improvement in overall sentiment. It is just one more factor that will weigh on the performance of the ZAR.
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