Hidden force putting pressure on the rand  

Shaun Jacobs • 28 January 2025

A weak Chinese economy is dragging down the rand as traders expect lower commodity demand from South Africa’s largest trading partner.

This will limit the foreign exchange South Africa earns from the export of minerals to the world’s second-largest economy.

At a media roundtable, Bank of America analysts revealed that they expect the Chinese economy to move sideways throughout 2025.

This is despite massive stimulus from the Chinese government and loose monetary policy, which has not had the desired effect on the economy.

China’s economy grew by 5% last year, perfectly matching the government’s target of increased exports and industrial production.

Economist for Europe, the Middle East, and Africa at Bank of America, Michalis Rousakis, said the bank expects the Chinese government to go deeper into debt to support this economic performance.

Export-led growth has been partly underpinned by deflation, which makes Chinese goods more competitive in global markets.

However, this also makes it highly vulnerable to potential trade tariffs from the US that are placed either on it directly or on its trading partners.

If the US imposes tariffs on Chinese exports and government debt continues to climb, the world’s second-largest economy could stagnate in 2025.

This spells trouble for global growth and emerging market currencies, such as the rand, as commodity exports heavily support them.

As a small economy that is highly open, South Africa is uniquely vulnerable to a slowing global economy and declining international trade.

This means that much of the local currency’s value is determined by international events, particularly developments in the United States or China.

A weak Chinese economy primarily impacts South Africa through commodity prices, with demand from the second-largest economy in the world largely determining these prices.

As a large commodity exporter, declining prices negatively impact South Africa’s economic growth and its foreign exchange earnings. This, in turn, weakens the rand.

A weak Chinese economy has been coupled with a very strong dollar since Donald Trump’s election victory in November 2024, resulting in the rand tweaking significantly since then.

The Chinese government has announced several rounds of stimulus to try to boost its economy and reignite growth, providing some support to global commodity prices.

However, Rousakis said these measures have only effectively created a floor for the Chinese stock market and ensured the local economy does not come to a halt.

It will not be enough to rekindle animal spirits or fundamentally resolve the fiscal difficulties faced by most local governments.

The perception is that the government’s commitment to boosting domestic demand remains incremental and vague.

While China is South Africa’s largest trading partner, it is far from the only game in town, and a potential slowdown in the Chinese economy could be mitigated.

Sub-Saharan Africa economist at Bank of America, Tatonga Rusike, explained that South Africa’s exports are among the most varied in the world.

This provides a natural buffer in the form of diversification, but it would be very difficult for the country to replace Chinese demand in a world of trade tariffs.

Given its position as president of the G20 and its significant role in Africa, Rusike said South Africa can expect to be somewhat insulated from a global trade war.

However, to fully mitigate the declining demand from China and reduce global trade, the South African government has to be nearly faultless in its foreign policy.

Rusike said the Government of National Unity (GNU) must work to improve global sentiment towards South Africa and consider policy measures to avoid the negative impact of tariffs.

The implementation of tariffs, even if not directly on South Africa, will have a significant impact on local financial assets but will have a minor effect on the country’s fundamentals.

These are largely within the control of the government, with reforms to the logistics sector, improved financial health, and a better business environment being local issues rather than global.

 

Articles and other information on Daily Investor is for information purposes only and is not financial or investment advice. It should not be seen as a recommendation to buy shares in any company. Our content is produced without considering the objectives, financial situation, or needs of individuals. Before making any investment decision, prospective investors should consider the appropriateness of the information to their own objectives, financial situation and needs and seek legal and taxation advice appropriate to their jurisdiction.