The risk of global financial markets: The case of China in a developing...

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Globalization has forced many countries to rely on one another for products and services which they are unable to source locally. More so, trade is used as the channel to procure those. South Africa and China share very close relations which are boosted by South Africa’s neo-liberal policy, and its membership of the BRICS bloc. Often, this relationship has been subjected to different interpretations leading to the inability to reach a consensus on South Africa’s intention and exact benefits from neo-liberalization and membership of BRICS bloc. On this basis, we affirm that a notable gap exists in scholarly literature which has not provided the full-fledged understanding of the impact of Chinese manufactured goods into South Africa. We draw from the concepts of protectionism and free trade to expatiate the concerns raised by many with respect to the nature and benefits of the relationship. The paper relied extensively on secondary sources of data from which the authors then analyzed, interpreted and drew conclusions to provide a contextual explanation of the phenomenon of Chinese invasion of South African market. This method was useful for two reasons; namely its capacity to generate new insights and secondly, access to comparative studies. While the results show that South African clothing firms are increasingly shutting down because of lower prices from international competitors (especially China), and also due to structural issues of the present South African economy, we are equally aware of the extensive pressure from interest groups for the South African government to protect major local industries such as steel and textile. We argue anyway that the South African government is playing its cards carefully to avoid a backlash, especially considering its position within the BRICS bloc.

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Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
THE RISK OF GLOBAL FINANCIAL MARKETS:
THE CASE OF CHINA
IN A DEVELOPING COUNTRY
Philemon Nji Kum*, Chux Gervase Iwu*, Samuel Augustine Umezurike**
* Faculty of Business and Management Sciences, Cape Peninsula University of Technology, South Africa
** Faculty of Commerce, Administration and Law, University of Zululand, South Africa
Abstract
Globalization has forced many countries to rely on one another for products and services which
they are unable to source locally. More so, trade is used as the channel to procure those. South
Africa and China share very close relations which are boosted by South Africa’s neo-liberal
policy, and its membership of the BRICS bloc. Often, this relationship has been subjected to
different interpretations leading to the inability to reach a consensus on South Africa’s intention
and exact benefits from neo-liberalization and membership of BRICS bloc.
On this basis, we
affirm that a notable gap exists in scholarly literature which has not provided the full-fledged
understanding of the impact of Chinese manufactured goods into South Africa. We draw from
the concepts of protectionism and free trade to expatiate the concerns raised by many with
respect to the nature and benefits of the relationship. The paper relied extensively on secondary
sources of data from which the authors then analyzed, interpreted and drew conclusions to
provide a contextual explanation of the phenomenon of Chinese invasion of South African
market. This method was useful for two reasons; namely its capacity to generate new insights
and secondly, access to comparative studies. While the results show that South African clothing
firms are increasingly shutting down because of lower prices from international competitors
(especially China), and also due to structural issues of the present South African economy, we
are
equally
aware
of
the
extensive
pressure
from
interest
groups
for
the
South
African
government to protect major local industries such as steel and textile. We argue anyway that the
South
African
government
is
playing
its
cards
carefully
to
avoid
a
backlash,
especially
considering its position within the BRICS bloc.
Keywords:
BRICS,
Protectionism,
Free
Trade,
South
Africa,
China,
Neo-Liberalism,
World
Trade
Organisation
JEL Classification: D53, L41
DOI: 10.22495/rgcv7i1art6
1. INTRODUCTION
of the local mills and factories have been forced to
close down.
The persistent interdependence of nations owing to
globalization firmly places trade as the conduit for
countries to sustain domestic demands for goods
and services of diverse nature. Since the inception of
democracy, and the adoption of the controversial
neo-liberal policy in the 1990s, South Africa has
reached out and engaged other nations in commerce.
The overwhelming advantages of international trade
that have been advanced by its proponents have not
necessarily eliminated its shortcomings. For
example, South Africa`s neo-liberalization policy of
1994 has shown some notable weaknesses, among
them are the flooding of South Africa’s markets with
‘inferior’ and ‘cheap’ Chinese products especially
with respect to textile and clothing industry.
Arguably, the industry is a shadow of its former self
owing to that (Vlok, 2006). Therefore, one can
squarely situate the blame on South Africa’s
diplomacy and trade relations with China. As
Netshiozwi and Edoun (2015) note, China’s presence
in South Africa has resulted in the shedding of jobs
in the local textile and clothing industry while some
China’s role in South African market has been
enhanced by two major factors namely (1) South
Africa’s neo-liberal policy, and (2) South Africa’s
membership of BRICS . These two factors have been
subjected to different interpretations by many
leading to the inability to reach a consensus on
South Africa’s intention and exact benefits from neo-
liberalization and membership of BRICS. Therefore,
a notable gap exists in scholarly literature which has
resulted in a lack of understanding of the impact of
Chinese export of manufactured goods into South
Africa. In our view, scholarly literature has not
provided the necessary framework that clarifies the
complex trade relationship between the two
countries which may not be said to be conclusively
advantageous or disadvantageous to South Africa’s
socio-political economy. We are aware that some
studies have tried to address these issues, yet none
has duly considered the socio-economic
implications of Chinese - South Africa trade
relationship within the context of the textile and
clothing industry. This is the gap that this paper
seeks to fill.
46
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
2. RESEARCH METHOD
sectors of Africa while China remains a major role
player in import penetration into Africa. South
This paper explores the effects of Chinese products
on South Africa’s local clothing and textile industry
as well as the ongoing debate among interest groups
on whether to protect or further liberalize the
already neo-liberal economy of the country. The
paper relied extensively on secondary sources of
data from which the authors then analyzed,
interpreted and drew conclusions to provide a
contextual explanation of the phenomenon of
Chinese invasion of South African market. This
method was useful for two reasons; namely its
capacity to generate new insights and secondly,
access to comparative studies. Furthermore, this
paper benefits extensively from firstly establishing a
theoretical basis that helps in contextualizing its
arguments (Harris, 2001). Often thematic analysis is
facilitated by secondary data. In our own case we
instead undertook a review of literature that
poignantly buffers our objectives of sieving
constructive data from propaganda in order to carry
out an “objective analysis of the messages” (Berg,
1998) in the material’s consulted.
Africa remains the most industrialized country in
Africa and like any other country in Africa (see
Umezurike & Asuelime, 2015); China has outplayed
South Africa in the continent’s markets (Centre for
Chinese Studies, 2015) resulting in the notion that
South Africa is near deindustrialization.
Interestingly, China has long been a trading
partner of South Africa even before the advent of
democracy in 1994. However, the dawn of
democracy further facilitated trade relations
between the two nations. The neo-liberalization of
South Africa’s economy and its re-admission into the
world’s socio-political economy were instrumental to
the enhanced trade between the two countries.
Increase in South Africa’s international trade was
part of the signals that marked the end of its
existence as a pariah state in the global affairs
(Adebajo, 2007; Umezurike, 2015). Thus, China’s
trade export to South Africa has continued to be on
the increase especially manufactured products. For
example, China’s top 10 exports to South Africa are
finished products (Ballim, 2012).
The claim however is that African continent’s
3.
LITERATURE REVIEW
strong ties to China offers the continent clearer
opportunities to play a bigger role in the
3.1. China’s Economic Prowess
international political economy. It is clear however
that this relationship is unequal and interestingly,
Abraham and Hove (2011) are of the view that since
China’s economy became competitive at global level,
it has continually encouraged free trade with
subsequent increased exports of finished
commodities into the Organisation for Economic Co-
operation and Development (OECD) markets.
Evidently, China’s emergence as a major producer of
manufactured products has reduced the export
market shares of OECD member countries. The big
deal about China’s global trade penetration is that
OECD member countries like most countries do not
have adequate strategy to cope with Chinese
competition in manufacturing industries. It is
possible for China to be a major producer of
manufactured products of labour intensive-
industries because its population and location
provide it with access to cheap labour and the
necessary raw materials. African countries, like
both governments (i.e. South Africa and China)
appreciate its structural deficiency (Ballim, 2012).
Therefore, rising from the acceptance that the
relationship is skewed and unsustainable, both
countries have agreed to use a policy framework to
correct the imbalance. Firstly, both countries have to
cooperate with each other to boost value-added
exports from South Africa to China, and secondly to
raise China’s investment in South Africa. South
Africa has also put forward the quota option for
Chinese products but it may not be the answer
because China is against trade barriers. For instance,
in 2010, China accounted for between 48% and 77%
of total imports into South Africa of knitted and
crocheted fabrics, clothing, leather and leather
products, foot wears, household appliances,
electrical lamps, and furniture (Edwards & Jenkins,
2015).
OECD member countries have become victims of the
flooding of China’s finished products. South Africa’s
membership of BRICS and World Trade Organization
3.2. The Impact of Cheap Chinese Clothing Imports
in South Africa
(WTO) has thus helped to open more space in its
market for China’s finished products.
Edoun and Netshiozwi’s (2015) study of the impact
Kasongo (2011), and Guillaumont and Hua
(2015) explored the economic relations between
of Chinese imports on employment in South Africa’s
textile and clothing industry found that the rise in
Asian Tiger’s economies that are fast industrializing
imports
from
China
brought
about
a
decline
in
and developing African economies. Their view is that
employment levels in the industry.
The textile and
the relationship has produced an unequal balance of
clothing industry, according to Edwards and Jenkins
power. The main thesis here is that the systematic
check of trade relations between the two continents;
(2015) has lost well over 150, 000 jobs. In the face of
this, clothing and textile imports from China are
Asia and Africa reveals speedy growth in Asian
political economy while Africa is subjected to a
estimated to have surged to 110% since 2003 (Nevin,
2010). There is no doubt that the influx of Chinese
lower
level
of
production
of
raw
materials
for
textile and clothing materials into South Africa is
industries in Asia and elsewhere. The Asian Tiger’s
not without consequences to domestic textile and
supply of manufactured goods to African market
clothing industry.
has grossly reduced growth in the manufacturing
47
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
Figure 1. Manufacturing employment and import penetration
Source: Edwards, Flowerday, Rankin, Roberts and Schöer (2014)
The
figure
above
shows
that
increase
in
removal of import quotas (Ramdass & Pretorius,
Chinese products in South Africa ultimately leads to
2011). In addition, the following can be associated to
decrease
in
employment
in
the
manufacturing
the decline in the industry in South Africa:
lack of
sector. Nevin (2010) thus suggests that South Africa
resources
to
adapt
to
changes
in
the
industry,
should devise a strategy to break the impasse as
ineffective
management
techniques
and
poor
local industries are fast losing grip in the home
leadership
qualities,
conservative
approach
to
market
due
to
cheap
China`s
goods
including
business,
and
lower
investment.
Other
factors
especially importation of inferior and pirated goods.
include shortage of versatile knowledge and skills,
The Department of Trade and Industry’s plan to
proper training techniques, lack of strategic thinking
protect the textile and clothing industry through the
and positioning, a pressurized industry, and local
enforcement of a quota system did not yield positive
politicking by home companies (Adewole, 2005, in
results
(Business
Day,
2014).
Nonetheless,
some
Ramdass & Pretorius, 2011).
analysts view Chinese incursion into South Africa
These problems have led to lower levels of
differently. Nevin (2010) reports of academics who
productivity
as
well
as
the
lack
of
capacity
to
claim
that
increased
Chinese
import
into
South
compete
with
Chinese
products.
Ramdass
and
Africa
is
beneficial
because
(1)
owing
to
its
Pretorius
(2011)
believe
that
local
garment
affordability, more sales are generated hence more
producers should understand the factors that make
sales assistance jobs are created; and (2) the high
the market environment complex so as to improve
sales volume also results in more taxes especially
production. It is therefore necessary to use the right
value added tax (VAT) which capacitates government
techniques
to
understand
the
complexities
that
to deliver more services. It therefore suffices to say
surround the textile and clothing industry. It goes
that
because
lower
income
earners
get
their
without saying that if the composite elements are
preferred products at lower prices, the tendency is
understood,
there
is
a
better
chance
for
South
that they may have more resources saved for other
Africa’s textile and clothing industry to reasonably
needs such as food, transport, education and several
compete with manufactures from outside its borders
other
needs.
On
the
other
hand,
Vlok
(2006)
including
China.
According
to
Ramdass
and
maintains that although the principal cause of lower
Pretorius
(2011),
Adewole
(2005)
suggested
the
growth rate in the textile and clothing industry may
following
as
areas
that
facilitate
a
better
be structural, the view of many is that the crisis is
understanding
of
the
complex
nature
of
the
largely
caused
by
a
high
increase
in
imports,
industry.
particularly from China. The survival of the industry
Throughput time per unit: This means the
is
thus
seriously
threatened
and
it
is
doubtful
required time needed to accomplish a single unit of
whether the local producers will survive the surge
production activity versus the time to accomplish
on the long run.
the next task;
Inventory
of
processes:
This
is
used
to
3.3. Structural Issues in the Textile and Clothing
Industry
buffer stock, machine breakdowns, and line
balancing;
Critical path: This underlines the need to
Beside the cheaper imports from China, other
factors influencing its triumphant existence in
textile and clothing industry in South Africa may
involve the following: mechanization and
automation, research and development, skills and
expertise base, quality orientation and, the near
arrange things in parallel or in series to enhance
production activities;
Bottleneck operations: This refers to the
identification of necessary actions to be taken
without delay in order to ensure enhanced
production in the industry;
48

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