How Xi Jinping’s long shadow threatens SA

Any doubts that the 40-year-long China party is pretty much over were laid to rest at the closing session of the 20th congress of the Chinese Communist Party (CCP) this past week, when former president Hu Jintao was unceremoniously hauled out of his seat next to President Xi Jinping, and escorted from the hall.

Given that the international media had just been allowed into the hall, this humiliating ejection of an evidently frail Hu was a choreographed message intended not only for the thousands attending the congress, but for the world as well. Xi, who has just been anointed general secretary of the party for another five years, is in total control. Unquestioned obedience to him and the CCP is now core government policy.

While Xi had, during the congress, acknowledged some role for private business and the role of the market in resource application, he left little doubt that the state would be commanding the dominant heights of the economy for as long as he is in charge. That’s no small point of concern: already in power for a decade, Xi’s latest appointment is for five more years — but he’s expected to cling on for at least the next 10. He is 69.

Judging by the market response, investors aren’t too happy. In Hong Kong, which is right on the frontline, shares dropped to the lowest level since the global financial crisis in 2009. In mainland China, markets held up a little better, but it’s likely this involved some support from the government.

Monday’s collapse in the stocks of Naspers and Prosus, which control 29% of the Hong Kong-listed Tencent, told the nerve-racking story. Together, both stocks tumbled by more than 15%, shedding an unprecedented R432bn on the JSE — a staggering loss of value for the wide swathe of pension funds that hold shares in the two companies.

On Tuesday, both recovered slightly, but nothing close to the bloodletting earlier in the week.

It’s an illustration of why, with a powerful Xi at the centre, China has become too risky for many investors.

“This story has been two years in the making,” Sasfin’s David Shapiro tells the FM. He's speaking, of course, about Xi’s clampdown in late 2020, when Alibaba founder Jack Ma was slapped down and prevented from going ahead with his listing of Ant Group.

At the time, few people realised where the Xi regime was headed. “Along the way we were given assurances, but the congress was the final straw,” says Shapiro, who describes Monday’s collapse as very tough for the JSE.

Earlier gossip about a possible pushback from somewhere within the depths of the 100-million-member CCP was evidently little more than wishful thinking. After 10 years of remarkable political manoeuvring, the Xi gang has emerged in an impregnable position. It has secured the top positions across the party, the state and the army — a remarkable feat in light of the dominance of the Shanghai faction and the Communist Youth League faction for much of the past 40 years.

It is, an analyst told news service Reuters, “an emphatic statement of Xi’s dominance over the party”.

Put another way, Wen-ti Sung, a politics lecturer at the Australian National University, told The Guardian it’s an “unmistakable sign that the era of winner takes all politics is upon us”.

“Xi has reiterated several times that the performance indicator that matters above all in Xi’s new era is political loyalty. He felt no need to assign a spot to an alternative faction, which shows his priority is projecting dominance over magnanimity when he is facing international pushback.”

Inevitably, given that he’s here to stay, a cottage industry of Xi experts has blossomed, all trying to work out exactly who he is and what the next phase in China’s history might look like. At this stage, the rather vague conclusion seems to be that Xi is a hard-core nationalist who is deeply committed to the dominance — at any cost — of the CCP. National security, including economic security, will take precedence over economic growth.

This means the future might not look too much like the past.

Critically, the private sector is expected to play a much more constrained role in this environment of more constrained growth. And even more critical — here, at least — is what this means for South Africa.

SA’s China boon

While “modern China” dates back to the post-Mao Zedong period of the late 1970s and 1980s under the leadership of Deng Xiaoping, South Africans really only became familiar with it in the past 20 years.

In these two decades “modern China” has arguably been the single-biggest influence on the South African economy. This is only partly highlighted by the fact that, over that period, trade between the two countries grew at an annualised 14.4%, to $54bn in 2021.

China is South Africa’s largest trading partner (the US is second). At the same time, China’s  trade with South Africa accounts for 21% of its trade with the whole of Africa; Nigeria is in second place with just $26bn worth of trade with China.

It means China is a huge deal in South Africa’s life — and whatever happens to that country has major implications here.

The trade figures tell the big picture. Less noticed but more compelling is how this has played out at a micro level.

First, the really bad stuff: hundreds of thousands of low-skilled jobs in a slew of industries — clothing, textiles, glass and plastics — were destroyed in the early period of mass importation from China. This forced millions of people into a fragile, impecunious state of survival.

If you were an academic and not one of those newly unemployed, you might have taken some comfort from the fact that large numbers of low-skilled mining jobs were being sheltered by China’s strong demand for our commodities, or that the cheaper prices of imported Chinese goods created downward pressure on inflation.

The official China story makes much of the fact that economic growth and government policy mean an estimated 800-million fewer Chinese citizens are living in poverty today than would otherwise be the case. Less talked about are the 1,000-plus Chinese billionaires created in this deeply unequal society. And even less talked about is the likelihood that modern China has, in the past 20 years, been the single-biggest creator of millionaires and multimillionaires in SA — another deeply unequal society.

The Asian giant’s ability to mint South African millionaires has tended to focus on Naspers and its legendary $32m investment in a little-known Shenzhen IT company called Tencent, back in 2001.

Tencent turned out to be the caricature of  the “modern China” success story. This was the first generation of entrepreneurs whose amazing talent and energy had been unleashed by Deng’s market economy reforms. All they lacked were the funds to finance their ambitious plans for growth in a market that knew little about IT or the internet.

Xi Jinping looks unassailable after his re-election at the recent Chinese Communist Party congress. SA’s economy could feel the pinch as he turns his focus towards security amid rising tensions with the US 

—  What it means:

Helped by a mix of dynamism and intuition — as well as government-imposed restrictions on Western IT operators such as Google, Twitter, Amazon, Facebook and WhatsApp — Tencent, with Naspers’s backing, became a huge hit on its home turf.

But it wasn’t until a few years after Tencent’s 2004 listing on the Hong Kong Stock Exchange that its  huge popularity turned into enormous profits and propelled the share price to unexpected highs. Inevitably, the share price of Naspers, as the single-largest shareholder, was dragged along after it.

For anybody owning Naspers shares, this generated a windfall of unprecedented proportions; recall that the share price had plunged to a low of R12 in 2001, when the dot-com bubble burst, making then Naspers CEO Koos Bekker’s insistence on being paid only in share options appear a tad misguided. But the share price recovered, slowly at first and then at a dizzying pace, until it reached a record high of R3,812 in February 2021.

A lot of people owned Naspers shares; not just South Africa’s Government Employees Pension Fund (GEPF), the largest shareholder, nor even just members of the Afrikaans community who had tucked barely performing Naspers shares away and forgotten about them years ago. Huge swathes of employees also benefited. After all, if share options were good for the CEO, they were surely good for everyone. But, of course, the closer you got to executive level the more generous the share option packages were.

There probably weren’t too many millionaire journalists created as a result of Naspers’s China investment, but over the years scores of Naspers executives and directors —  even those who had voted against the deal in 2001 —  became multimillionaires thanks to China. A few, such as current CEO Bob van Dijk, became billionaires.

But Naspers is really only the poster child of the China spoils. So extensive has China’s impact on the South African economy been since 2001 that it’s difficult to think of any executive whose enormous wealth hasn’t in some or other way been linked to China — even the already super-wealthy ones, such as Johann Rupert and Christo Wiese became a little richer thanks to China.

In the old days you had to own a few mines or have your name on a long-established mining business to make a fortune from digging up the earth. But that all changed in the early part of the 21st century. And it was thanks to the coincidence of two totally unrelated developments.

The first was the requirement to disclose executive remuneration packages, which were by then bursting with share options. Disclosure had the unintended effect of guaranteeing ever-increasing remuneration levels.

The second was the launch of what Peter Major, director of mining at Modern Capital Solutions, describes as the longest super-cycle in commodities the world has yet experienced.

“There would have been no super-cycle without China,” Major tells the FM. There were two or three pullbacks during the 20 years, but they were brief affairs.

The second-biggest super-cycle was back in the 1970s, but that lasted just eight years, he says.

“This time around, everything except uranium took off — iron ore, coking coal, fluorspar, chrome, manganese, platinum, palladium and gold,” says Major. “It’s scary to think what would happen without China.”

Trawl through the resources sector of the JSE and you’ll get some idea of the lucky beneficiaries: executives at Glencore, BHP, Merafe, South32, Anglo, AngloGold, Anglo American Platinum (Amplats), Impala Platinum, African Rainbow Minerals (ARM), Northam and Sibanye-Stillwater, to name but a few.

Executives with shares, share options and share-appreciation rights stuffed into their remuneration packages banked the sort of money undreamt of by earlier generations of managers as share prices skyrocketed on the back of China’s unprecedented demand for commodities to fuel its rapid industrialisation.

Assore’s Desmond Sacco and ARM’s Patrice Motsepe regularly topped the African billionaire list thanks to China’s seemingly insatiable demand for their metals and minerals. Executives such as Amplats’s Barry Davison, Kumba Iron Ore’s Norman Mbazima, Anglo’s Tony Trahar or Sibanye’s Neal Froneman should have been able to score multimillion-rand rewards by cleverly riding the occasional troughs and frequent peaks of share price movements driven by China.

And, in a commendable break with tradition, just over 6,000 employees of Kumba’s Sishen Iron Ore Company shared in the spoils of the boom in iron ore prices after the global financial crisis in 2009. In 2011 they each received a dividend payment of R576,045.

Between Naspers and the mining sector, China has been the major driver on the JSE for much of the past 15 years, says Anchor Capital CEO Peter Armitage.

Though Armitage is disappointed by the tone of the recent CCP congress, he cautions against too pessimistic a take on China’s future. 

“For the past 15 years commentators have been writing off China, but they overlook the huge ability the government has to direct economic growth,” he says. “China isn’t over, but its growth will be slower.”

And, as Armitage points out, the China boom wasn’t just about Naspers and mining. The retail sector also saw its fair share of China-made multimillionaires. It stands to reason, given that almost everything purchased in our shops — other than food —  seems to have a “Made in China” sticker on it.

Mr Price was one of the first big clothing retailers to get the hang of sourcing huge chunks of its merchandise from China at knock-down prices. While that helped to devastate the local clothing industry it proved to be enormously profitable for shareholders, including entrepreneurial founders Laurie Chiappini and Stewart Cohen, as well as most of the group’s top executives.

Edgars was also quick to organise the logistics needed to suck up the China advantage, boosting profits sufficiently to pay enormously generous share option-enhanced remuneration packages to all its top executives. In 2005 alone, CEO Steve Ross made more than R100m on his share options as Edgars soared on the back of low-priced Chinese imports.

Unfortunately, not even the China advantage could protect Edgars from the existential damage caused by Bain Capital’s highly leveraged buyout in 2007.

Independent retail analyst Syd Vianello says once one of the retailers perfected the China sourcing model, all the others were forced to follow. He tells the FM the retail industry was competitive enough to ensure a good portion of the benefits of lower prices were passed on to consumers, “but retailers still managed to make a heck of a lot of money”.

The growth in social grant payments and increasing access to consumer debt — part of an international trend — combined with the historically low China prices to generate bonanza conditions for retailers and their executives.

It wasn’t just clothing retailers, says Vianello, alluding to all manner of white goods, electronics and even pharmaceuticals.

Sadly, Massmart didn’t manage to do quite so well with its huge sourcing from China. Quality of management is evidently a crucial factor.

And not even sourcing much of its product from China could save Steinhoff’s shareholders from the damage wreaked by CEO Markus Jooste’s accounting habits.

Again, it wasn’t just the executives and the private sector that enjoyed the spoils of the China miracle. As the single-biggest shareholder on the JSE, the Public Investment Corp (PIC), which manages investments on behalf of the GEPF, saw its assets under management balloon to R2.5-trillion in its 2022 financial year. The seemingly guaranteed rise in China-related equities enabled the PIC to report growth no matter how distracted its management was or how many value-destroying unlisted investments it made.

Finally, of course there’s the biggest beneficiary of all: SA’s government coffers. In fiscal 2022 alone, tax revenue was a stonking R182bn more than budgeted, largely due to mining companies that benefited from a boom in commodity prices. And that benefit continued to roll on through calendar 2022.

Of course, not all commodity demand can be tied to China, but as Major says, there would be no super-cycle without China. Which is why he, like most China-watchers, is now nervous.

“No-one had forecast the post-Covid run we’ve just seen,” Major says. “But now it looks like the sector is heading into a long dark winter.”

A new world order?

How long and how dark that winter will be depends largely on the extent of rupture between the increasingly hostile US leadership and the increasingly assertive and nationalistic Chinese one.

Globalisation appears on ice for now. But what will replace it?

One analysis, from Capital Economics, talks of a “fracturing” of the global order and the emergence of US- and China-aligned blocs that will fundamentally reshape economies and markets.

“Fracturing will affect everything from cross-border financial flows and transfers of technology to labour and product standards and supply chain security,” the London-based research house says in a recent report. “Central to this analysis is the idea that geopolitical considerations will play a far greater role in formulating policy than they have for a generation.”

The potentially good news for South Africa in this grim projection is that the country escapes alignment with either of its two biggest trading partners, and that it continues to enjoy near-monopolies on key commodity supplies.

If the government can play its hand well — which, admittedly, it hasn’t tended to do in the past — South Africa could maintain a reasonably stable economic environment. Or not.

Whatever happens, it will be, as Armitage notes, “a very different world that my kids grow up in”.