Briefings on political and economic relations between South Africa and China

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Meeting Summary

The Deputy Director-General of the Department of International Relations and Co-operation presented a briefing on the political relations between South Africa and China. The presentation included an overview of: China's foreign policy; China's involvement in Africa; China's agenda in South Africa; the evolution of South Africa-China relations; South African foreign policy instruments; key agreements between South Africa and China; South Africa-China economic relations; South Africa-China future relations; and challenges.

The Chief Director, Department of Trade and Industry: International Trade and Economic Development briefed the Committee on the trade and economic relations between South Africa and China. The presentation focused on the bi-lateral economic relationship and trade between South Africa and China.

The Members of the Committee were concerned about the omission of other issues concerning China such as Tibet, the fact that China did not respect human rights and the shocking labour practices prevalent in that country. The Members requested more information on these matters and queried the meaning of “economic diplomacy”. South Africa was subjected to economic sanctions during the Apartheid era yet China was treated with impunity and it would appear that South Africa was not concerned over the violation of human rights in that country.

China was engaging with the African continent as a whole and was exporting most of the continent's mineral resources. The Committee wanted to know if South Africa should allow China to continue exploiting the country’s resources without contributing to the development of skills. Members were concerned over the trade deficit of R22 billion and felt that China should invest more in infrastructure in South Africa. Chinese businesses brought Chinese nationals to South Africa to work but these foreigners did not pay taxes and few South Africans were employed. Member’s wanted to know what products could be exported to China to reduce the trade deficit.  The issues of cheap imports from China and the uncompetitive prices of South African goods were raised.  Members queried why goods were exported to China via Hong Kong rather than to destinations on the Chinese mainland.

Members queried the role played by the Southern African Development Community (SADC) and what the South African Government was doing to ensure that SADC functioned as intended. Members were aware that China planned to be a major economic force in the world, rather than a military force and wanted to know what South Africa’s strategy was on this aspect.  Questions were asked about reconciling the relationships between South Africa, Taiwan and China and when South Africa would join the Brazil/Russia/India/China (BRIC) group.


Meeting report

Presentation by the Department of International Relations and Co-operation on South Africa's political relationship with China
Mr Sisa Ngombane, Deputy Director-General, Department of International Relations and Co-operation (DIRCO) gave an overview of China's political and economic structure.  The recent projection compiled by Goldman Sachs showed that by 2050, the three largest economies in the world would be China, the United States of America and India followed by Brazil, Mexico, Russia and Indonesia.

In order to understand China one needed to look at its foreign policy. The Macro trends in the North East Asian region were the rapprochement of China, Japan and Korea, where a Trilateral Summit was in place since 2008. The rapprochement of China and Taiwan was based on the Economic Co-operation Framework Agreement (ECFA).  Competition between China and America had increased in recent years.

China had three long term diplomatic priorities.  The first priority was to preserve sovereignty and territorial integrity. This goal promoted unification with Taiwan where cross-straits rapprochement was taking place. China shared land borders with 14 countries and the coastline was 14 500km long. There had been territorial disputes with Japan and India as well as internal threats from Tibet and Xinjiang. The Chinese People's Liberation Army had been modernised.

The second long term diplomatic priority was economic development, with the intention of developing China as a “Great Power”. Economic prosperity had replaced ideology and the focus was on developing a “socialist market economy”.

The third long term diplomatic priority was the achievement of international status. China wanted to be respected as a “Great Power” with global influence. The major challenge was from the USA but China was reluctant to displace the USA at this point of time because of domestic challenges and the need to divert resources from national development. China wished to support a multi-polar world in which the power of the USA was constrained.

In terms of historical solidarity with Africa, China displayed political support in multi-lateral forums, for example the Forum for China-Africa Co-operation (FOCAC). The key mechanism for promoting co-operation from 2009 to 2012 was: infrastructure development in Africa (mainly hydro-electric); agriculture; natural resources and energy exploration and extraction; investment and business cooperation; the removal of barriers to trade and investment and the establishment of trade dispute mechanisms through friendly multilateral engagements; encouraging closer financial collaboration with the African Development Bank and regional development banks and encouraging Chinese commercial banks to establish their presence in most African countries; improving air and shipping links between China and Africa to enhance co-operation with each other; and providing training and information exchange in the fields of science, technology and information communication technology.

There was strategic competition among major powers in energy (oil from Sudan, Chad, Nigeria, Congo and Angola); mineral resources (Ghana, Gabon, the DRC, Zambia, Zimbabwe and SA); access to markets for Chinese products; and the China-Africa Development Fund of US $5 billion. South Africa had found synergies between NEPAD and FOCAC to ensure the consolidation of the African agenda. South Africa would be co-hosting the fifth FOCAC Ministerial Conference in 2012 and would host the FOCAC Ministerial Conference in 2015.

China's agenda in South Africa concerned energy security (SASOL technology); mineral security (iron-ore, chrome, manganese); access to markets and support for China in international organisations. China understood South Africa's role and influence in Africa. South Africa had an attractive investment base for the African market and Chinese companies were leveraging existing networks of South African companies.

When looking at the evolution of South Africa-China relations, one has to consider both bilateral and multi-lateral partnerships. South Africa had a One China Policy in December 1997. Diplomatic relations were established In January 1998.  The Pretoria Declaration on Partnership was issued in April 2000. A Bi-National Commission was established in 2001. A Strategic Partnership was declared in 2004. A Programme for Deepening Strategic Partnership was established in June 2006. A Comprehensive Strategic Partnership was agreed upon in principle during 2010 and a state visit by President Jacob Zuma to China in August 2010 was proposed.  In terms of a multi-lateral partnership there was support for South Africa's non-permanent seat on the United Nations Security Council (UNSC) from 2011-2012; a common vision on climate change (BASIC grouping); South-South Co-operation (G77 and China and New Africa-Asia); strategic partnership (NAASP); support for South Africa's BRIC membership; and co-operation in the G20.

In terms of South Africa's foreign policy instruments one had to consider the Bi-National Commission (BNC). South Africa had Deputy President Motlanthe and China had Vice President Xi Jinping to represent their respective countries. The fourth Plenary of the BNC was to be held in South Africa in November 2010 and there would be a review of the BNC process. There would be further alignment of South Africa's five national priorities. There were three sectoral committees, i.e. the Foreign Policy Commission; the Joint Economic Trade Commission; and the Human Resource Development Commission. A new sectoral committee was proposed for Mineral and Energy Resources. In terms of a strategic dialogue forum, a meeting of Deputy Foreign Ministers would be held later in 2010. A comprehensive strategic partnership agreement would be signed during the planned state visit.

There were nine key agreements between South Africa and China. On 30 December 1997, a joint communiqué was issued by the Governments of China and South Africa on the establishment of diplomatic relations. The Pretoria Declaration on the Establishment of Partnership between China and South Africa was issued in April 2000. Notes on the establishment of a bi-national commission were exchanged between the Governments of China South Africa in December 2001. A programme of co-operation on deepening the strategic partnership was announced on 21 June 2006. A memorandum of understanding on promoting bi-lateral trade and economic co-operation was issued on 28 August 2006. An agreement of co-operation in the minerals and energy sector was announced on 24 September 2007. In February 2010, South Africa and China were in the process of drafting and negotiating a comprehensive strategic partnership agreement.

In terms of the economic relations between South Africa and China there was a Joint Economic Trade Commission (JETC) sub-committee of a bi-national commission. The total trade between the two countries amounted to R119.7 billion in 2009. China was the largest export destination for goods amounting to R48.7 billion in 2009. China was the largest import partner and goods amounting to R70.8 billion were imported in 2009. The trade deficit was R22.2 billion. Tourism from China to South Africa had increased.

Chinese investments in South Africa were mainly in the banking, construction and mining sectors and in the cement and electronic goods assembly industries.  South African investments in China included the food and beverage, energy, luxury yachts, media, banking, insurance, mining, consulting and paper and pulp industries.

Future relations between the two countries included the alignment of the five national priorities in CSPA; future procurement missions; new trade capacity; investment for IPAP2; skills development; an increase in tourism; science and technology (particularly green technology transfer); implementing the Sharm El Sheik Action Plan for 2010-2012; and preparations and co-ordination of South Africa hosting the FOCAC Ministerial Conference in 2015.

South Africa's competitors in the Chinese market were resource- and expertise-rich countries such as Australia and Canada and high value exporters such as western European and Asian manufacturers, India, South Korea, Brazil, Vietnam and Singapore.

South Africa's five national priorities were education and training, the fight against crime, health, creating decent jobs and land and rural development.

There were a number of challenges facing South Africa, including the trade deficit with China, the beneficiation of South African minerals and the diversification of exports. South Africa needed more value-added and local sourcing in manufacturing processes. Gaining market access for South African agricultural value-added products was another challenge. Tourism was impeded by the perception of a high crime rate. There was a lack of capacity to take advantage of FOCAC opportunities. The South African economic diplomacy model in Asia needed to be re-aligned. An effective skills transfer strategy was required. South Africa needed to develop project implementation capacity in order to access funding from FOCAC. IPAP2 objectives needed to be linked to investment and export strategies. South Africa had to conclude the Comprehensive Strategic Partnership Agreement with China. There was a lack of trade agreements with the North East Asian region. The Proliferation of Free Trade Agreement with China, Japan and South Korea excluded South Africa from the supply chains in Asia.

Presentation by the Department of Trade and Industry on South AfricaChina trade relations
Ms Xolelwa Mlumbi-Peter, Chief Director, Department of Trade and Industry: International Trade and Economic Development noted that Mr Ngombane had covered the economic overview and the historical relationship between South Africa and China.  Her presentation was limited to the bi-lateral platform between the two countries.

The two-way trade between China and South Africa had experienced an upward trajectory since 2002. The total trade between the two countries grew by 2% in 2009, as compared to R118 billion in 2008. Over the previous eight years, trade had significantly grown from R23 billion in 2003 to R119.7 billion in 2009. To date, South African trade statistics depicted a trade surplus in favour of China since 2003, but the deficit had declined from R46 billion in 2008 to R22 billion in 2009.

At the end of 2009, China was South Africa's largest export partner, followed by the USA, Japan, Germany and the United Kingdom. In Asia, China was the first largest export partner followed by Japan and India. China was South Africa's largest import partner, followed by Germany, the USA and Saudi Arabia.

It had to be noted that South Africa's trade figures differed from the Chinese statistics. A possible reason was differences in calculating trade statistics. South African gold and diamonds were sold through third party markets and were excluded from export statistics but China recorded these products as imports originating from South Africa. China was one of the largest importers of gold in the world and it was necessary for both parties to develop common statistical methodologies. 

South Africa's top ten export sectors as at the end of 2009 were iron ore and concentrates (including roasted iron pyrites); ferro-alloys; chromium ore and concentrates; manganese ore and concentrates (including ferruginous); platinum in unwrought or semi-manufactured forms; flat-rolled stainless steel products; petroleum oils and oils obtained from bituminous minerals; semi-finished iron or non-alloy steel products; wool (not carded or combed); and nickel plates, sheets, strips and foil.

South Africa's top ten import sectors by the end of 2009 were telephone sets (including telephones for cellular networks); automatic data processing machines and units; printing machinery used for printing with plates; footwear; monitors and projectors (excluding television); electric water heaters; flat-rolled products of other alloys and steel; luggage; and women’s clothing.   

It was clear that the South African export basket was not very diverse and focused on metals, minerals and other commodities, while imports were more diverse and had a higher value-added component. South Africa believed that more value-added products could be exported to China by South Africa.

The economic relations between South Africa and China had registered fast and healthy growth since the establishment of diplomatic relations in 1998. China's dramatic rise as the largest developing country in the world had created a platform for building mutually beneficial interaction with South Africa. China offered vast export opportunities and the potential to absorb a higher proportion of value-added exports from South Africa. China offered unique opportunities in terms of investment, joint ventures and technology transfer for South Africa and remained a strategic partner for South Africa in the Asian region.

A number of recent high-level visits had underscored the strength and importance of South Africa's bi-lateral relationship with China. Former President Thabo Mbeki undertook a state visit to China on the occasion of the Beijing Summit of the Forum on China-Africa Co-operation (FOCAC) in November 2006. Three months later, President Hu Jintao paid a state visit to South Africa. The two countries were currently co-ordinating all Governmental relations on matters of mutual interest through the Bi-National Commission (BNC) mechanism.

China offered both opportunities and challenges in the international markets due to its growing international market presence, which had an impact on South Africa's market share. There was an opportunity to leverage synergies where South Africa could operate in third party markets. In Africa, both countries could co-operate in support of multilateral economic development initiatives, particularly within the NEPAD framework. Another area of cooperation was the South-South developmental region where China had made commitments and South Africa had an important multilateral diplomacy focus. This interaction bound South Africa and China in a common purpose and strong synergies had been cultivated.

The work of the IRPS Technical Team on the Partnership for Growth and Development with China on the construction of an economic relationship aimed to address the strengthening of trade structures and increase investment between the two countries. The process began in 2007 and the aim was to build an economic relationship that would balance trade and increase the flow of investment between the two countries. As a result, South Africa had drafted a memorandum of understanding, which included aspects such as market access, mineral beneficiation and infrastructure facilitation and development. 

During February 2010, the Minister and representatives of the Department visited China to prepare for the proposed state visit. During the visit, a proposal was made by South Africa to elevate the current Bi-lateral Partnership Agreement to a CSPA, which would be concluded and signed by both heads of state during the forthcoming state visit.  The Department proposed that the PGD would be included in the broader CSPA and was currently involved in compiling inputs to be incorporated in the CSPA. These inputs were drawn from the agreed PGD elements, particularly the beneficiation of raw materials and minerals, infrastructure support and development, trade promotion and investment facilitation.

Market access had been an area of interest for South Africa. The Chinese had refused to grant duty free access to South Africa's value-added products. China always cited that the arrangement would be inconsistent with the World Trade Organisation (WTO) rules. This element would not be incorporated in the new CSPA but the discussion around the issue would continue.

The under-development of infrastructure facilitation and development in the Southern region affected the movement of goods and services. The DBSA had submitted four potentially new local infrastructure development projects and the medium-to-long term regional projects intended to replace the earlier list of projects. The projects would serve as inputs to be incorporated in the new CSPA.

The beneficiation strategy was a critical area, as it attempted to shift the structure and patterns of South African trade onto a more sustainable path by increasing the value of exports to China. China had given the assurance of MOFCOM's support for the beneficiation strategy. The Department of Minerals and Resources had indicated that the strategy had been finalised and was currently subjected to the process of obtaining Cabinet approval.

Discussion
Mr A Lees (DA, Northern Cape) was concerned about the omission of other issues concerning China from the briefing, such as Tibet, the fact that China did not respect human rights and the shocking labour practices prevalent in the country. He requested more information on these issues from both Departments. He wanted to know what was meant by “economic diplomacy”.  South Africa was subjected to economic sanctions during the Apartheid era and China should also face economic sanctions because of its atrocious human rights record. He was concerned that South Africa appeared not to be concerned over this issue.

Ms Mlumbi-Peter explained that economic diplomacy meant that South Africa was attempting to enhance economic relations in a co-ordinated effort by the Department of Trade and Industry (DTI), DIRCO and other Departments. Economics was a very important factor in international relations. South Africa was engaging with China on the basis of a team.

Mr B Mnguni (ANC, Free State) wanted to know what security issues the Committee would have to avoid when the Members visited China later in the year. He noted that China was engaging with the African continent as a whole and were importing most of the continent's mineral resources. He questioned whether South Africa should allow China to continue exploiting the country’s resources without contributing to skills development.  He felt that China would simply abandon the country once all the raw materials had been exhausted.

Mr K Sinclair (COPE, Northern Cape) queried the trade deficit of R22 billion reported in 2009. He said that the relationship with China was a demanding exercise and as soon as one party received more benefits than the other there was a problem. At some stage South Africa needed to decide for how long the deficit would be allowed to increase. South Africa also needed to demand from China to start adding some value to the country and refuse to allow China to continue the exploitation of resources without providing some benefit to the country. China needed to start investing in infrastructure in South Africa. With regard to South Africa's role in Africa, he wanted to know if the Department considered that the Southern African Development Community (SADC) was not working as intended and what the South African Government was doing to ensure that SADC was functional. He felt that the Department should consider the number of Chinese nationals who came into South Africa to do business but did not add to the economy by paying taxes and employing South African citizens. He referred to the statement that the Chinese planned to conquer the world through the economy and asked what South Africa's strategy was on this aspect.

Ms Mlumbi-Peter replied that the trade perspective in terms of SADC needed to be clarified. There were challenges but customs tariffs should be set sometime this year in accordance with the SADC road map. It would appear that the tariffs were unlikely to be set as envisaged.

Ms S Chen (DA, Gauteng) said that everyone was so keen to enter into relationships with China but South Africa needed look after itself in the first instance. The challenge faced by the DTI was to encourage China to set up manufacturing plants in South Africa instead of merely importing raw materials to be manufactured.

Mr Lees agreed with Ms Chen’s comment and wanted to know what prevented Chinese industry from coming to South Africa.  It was important that South Africa encouraged China to set up industries.  He requested guidance from the Departments on how the Members of the Committee should behave during the visit to China.

The Chairperson asked why South Africa was late in entering the Shanghai Expo when Cabinet had approved the decision to enter in 2007. He asked when South Africa would enter the BRIC. He asked how South Africa should deal with the relations with both China and Taiwan. He asked what South Africa should do to reduce the trade deficit. He felt that South Africa needed to consider the importing of Chinese goods by South Africa as the same product made in South Africa was more expensive. He asked what could be done to ensure that South African goods were more competitively priced.

Ms Mlumbi-Peter replied that imported goods had to conform to certain standards.  She agreed that there was a problem with the competitiveness of the South African clothing and textile industry and for this reason, South Africa had to enter into a memorandum of understanding with China.

Ms E Van Lingen (DA, Eastern Cape) said that the trade deficit was unhealthy. She felt that China was looting the country in a similar manner to the colonial powers of the past.  She cautioned against the country falling into the same trap.  She felt that South Africa needed to add more value to its products. She asked why South African good were exported to China via Hong Kong rather than to destinations on the Chinese mainland.  She asked how the trade agreement would affect the trade deficit.

Ms Mlumbi-Peter replied that South Africa needed to engage with China in way that benefited both countries.  The various forums played a role in changing the situation.  South Africa was considering entering into a CSPA with China in an attempt to reduce the trade deficit.

Mr Phillip Mtsweni, Acting Chief Director, Department of Trade and Industry explained that South Africa used FOB while China used SAPS to calculate trade statistics. He believed that the trade deficit would be reduced and that South Africa would be able to close the gap once it exported gold directly to China. Gold was exported to Frankfurt, Germany and all countries that received gold from South Africa obtained it through Frankfurt.  In a similar manner, goods were exported to China via Hong Kong.  The DTI needed to consider how the export of gold and other products directly to China would affect South Africa.

Mr Ngombane explained that South Africa worked with China on an international forum to address political issues.  The issue of human rights violations had to be raised with China. South Africa had to find a way to raise concerns without ruffling any feathers. He felt that China would consider South Africa’s concerns if the issues were raised in an appropriate manner. For example, a woman was arrested for possession of drugs and under Chinese law she would have been put to the death. South Africa had raised the matter and pleaded for the death sentence to be commuted to life imprisonment. He conceded that labour conditions and wages were very bad in China.  South Africa had a minimum wage and unions and disagreed with the labour practices in China. These were difficult issues to deal with and it was important for continued mutually beneficial relations to strike a balance. He said that the imposition of quotas would allow local industries to compete with cheaper imports. 

Mr Ngombane said that foreign nationals coming to do business in the South Africa needed to have work permits.  Both DIRCO and the Department of Home Affairs were responsible for ensuring that the conditions of the permits were adhered to.  Foreign nationals working in South Africa did not encourage job creation and rarely contributed to the development of skills.  This was a growing threat and most African states were too weak to deal with the issue. There was a lack of communication between Government and business.

On the subject of the Committee’s visit to China, Mr Ngombane advised that the Members kept in mind that China was not a democracy, although the country was slowly opening up.  The Chinese Government was very sensitive about issues concerning democracy and governance.  The issue of colonialism was a major challenge and China was known for extracting as much as it could from a country.  South Africa had to take this into account when setting policies that could affect the future of the country.  An equitable partnership with China had to be developed.  Maintaining the relationship with Taiwan was also important.

Ms Van Lingen noted that the Minister of Trade and Industry had visited Brazil and had met with BRIC representatives.  She wanted to know what had transpired during the visit and if any agreements had been entered into.

The Chairperson asked both Departments to recommend three issues that the Committee could investigate during the forthcoming visit to China.

Mr Lees asked if a comprehensive agreement would be signed during the President's state visit to China in August. He mentioned an ESKOM project underway in Ladysmith, KwaZulu-Natal where Chinese labourers were employed as labourers.  He had received complaints from the local community and wanted to know why ESKOM was allowed to employ foreign workers in unskilled jobs instead of local labourers.

Ms Mlumbi-Peter said that support for policies was important and the China-Africa Development Fund was an important joint venture. In terms of CSPA, DIRCO was leading the process, which was still at the input phase. She confirmed that no agreements were signed during the Minister's visit to Brazil. 

Mr Ngombane advised that South Africa was prepared to enter the BRIC at the following summit to be held in 2011. The only challenge to membership was Russia, who was trying to build a powerful alliance and felt that the inclusion of South Africa would dilute its power.  The question concerning the ESKOM project concerned both the Department of Home Affairs and DIRCO.  He undertook to investigate the matter further.

Mr Ngombane said that the three issues that the Committee could consider for the Chinese visit were communication, planning and the educational farm system.  Communication involved communicating South African views on development to the Chinese.  Much could be learnt from the Chinese on planning, for example how a rural area such as Shanghai was developed into a thriving economic centre in 20 years.  The educational farms could provide useful insight into addressing the training, education and skills challenges in South Africa.

The Chairperson commented that South Africa had to think locally but act globally. The trade deficit was not desirable but China was prepared to do business with South Africa.

The meeting was adjourned.


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