Strengthening strategic ties with China

Premier Wen Jiabao of China is to hold talks this week with President Thabo Mbeki during a two-day visit beginning on 21 June. Although most of the discussion is said to be centred on ‘deepening the strategic partnership’, the contentious issue of textile imports into South Africa is likely to be raised. Late last month China committed itself to restrict the amount of textile exports to South Africa. Zhou Yabin, director-general for western Asia and Africa in the Chinese commerce industry said this would be achieved by requesting some of China’s financial institutions to limit the amount of credit offered to the textile industry through stricter loan requirements. Furthermore, the agreement includes a commitment by China to focus production on higher-priced and quality goods.

Much of the ongoing antagonism directed at China results from the ability of the Chinese people to be more efficient than anyone else in the production of clothing and textiles. Along with producers elsewhere in the world, SA producers struggle to compete. However, the vast majority of South Africans are benefiting from being able to purchase the low cost, good quality, Chinese goods. An agreement that requires Chinese producers to focus their production on higher priced goods is therefore unfortunate and not in the interests of the majority of poor people in this country. It is typically consumers at the low end of the market that have benefited from the lower prices.

Saving on the purchase of clothing has given the poor the ability to spend more on other necessities, such as food and shelter. A figure for SA is not readily available but over the past decade or so imports from China have saved US consumers more than $600 billion dollars according to Morgan Stanley. Savings of SA consumers are likely to have been equally impressive on our much more modest scale. China is most certainly the best friend of the world’s consumers.

In late 1978 the Chinese leadership began moving the economy from a sluggish, inefficient, Soviet-style centrally planned economy to a more market-oriented system, through the implementation of special economic zones (SEZs) in strategic areas of the country. The result has been a quadrupling of GDP and a phenomenal increase in living standards. The World Bank estimates that approximately 250 million people have been lifted out of poverty since 1978.

The Chinese SEZs are now considered to be amongst the freest economies in the world. Not unexpectedly, the beneficial conditions have attracted corporate giants such as Nokia, Motorola, Philips, Intel, IBM, HP and Procter and Gamble who have established wholly owned facilities there. A measure of the Chinese success was the inflow of approximately $54 billion dollars of foreign direct investment in 2003 alone.

In 2003 China became the world’s biggest producer of steel, cement, aluminium and copper and its second largest oil consumer after the United States. These accomplishments resulted in the Chinese economy growing at a rate of 9.3 per cent in 2003, followed by a rate of approximately 9.5 per cent in 2004. The National Bureau of Statistics reported that gross domestic product (GDP) came to a staggering 13.65 trillion Yuan (US$1.65 trillion) as exports continued to fuel the Chinese expansion. Measured on a purchasing power parity (PPP) basis, China in 2004 had the second-largest economy in the world after the US.

Opening to the outside world has greatly promoted the development of China’s foreign trade. China’s import and export volume increased from 1.13 billion US dollars-worth in 1950 to 360.65 billion US dollars-worth in 1999, or an increase of 319 times. The total import and export volume in 1999 increased by 17.5 times, as compared with that in 1978. In terms of foreign trade, China ranked 32nd in the world in 1978, and rose to ninth in 1999

The per capita disposable income of urban households in 2004 was 9,422 Yuan (R7,858), a real growth of 7.7%, while per capita net income of rural households was 2,936 Yuan (R2,449), a real increase of 6.8%, both representing the highest growth since 1997. By the end of 2004, the savings deposits of urban and rural households totalled 11,955.5 billion Yuan, an increase of 1,592.9 billion compared to the beginning of the year.

Statistics from the ministry of Labour and Social Security indicate that 9.8 million new jobs were provided to urban residents in 2004. This resulted in the unemployment rate dropping by 0.1 per cent in 2003/04 leaving the urban registered unemployment rate at 4.2 per cent in 2004. Contrast this with the urban unemployment rate in South Africa of approximately 30 per cent in 2004. Life expectancy in China is now up to 72 years as opposed to the average South African who can only be expected to live for approximately 48 years.

Under protectionist regimes, government officials decide which industries are to receive protection and to what extent they are to be protected, a task that no one can have the necessary information to perform without causing harm to the economy. In open trade regimes it is domestic and foreign consumers that decide which industries will prosper and the increased competition leads to greater efficiency overall. The World Bank estimates that if we were living in a tariff free world, income around the globe would increase by $832 billion as a result of increased trade in all goods. Most of these gains ($539 billion) would flow to developing countries.

SA manufacturers should seriously consider following the example of their counterparts in New Zealand. Realising that they could never match the Chinese on price, NZ decided to move upmarket, competing on quality and style rather than on price. This approach has been most successful. If SA clothing manufacturers and designers were to concentrate on producing high quality, distinctively South African clothing they could capture niche markets where they are not in direct competition with the Chinese, especially in the local market. SA could then have the best of all worlds: a thriving local clothing manufacturing industry, continued access to low-cost clothing for SA’s poor, and no strife with China.

Authors: Eustace Davie is a director and Jasson Urbach an economist at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the authors. The views expressed in the article are the authors' and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 20 June 2006