News- Chinese firm building 'New York of Africa' with US $7b South African Project

JOHANNESBURG: On the outskirts of South Africa’s economic hub, Johannesburg, a new city is being built. The project, owned by Hong Kong-listed Shanghai Zendai, is among the largest real estate deals by a Chinese firm in South Africa.

Chinese companies have been building roads and infrastructure across sub-Saharan Africa for years. But a new project in South Africa is being built on a scale never before seen on the tip of the continent.

Chinese investor Shanghai Zendai heads the 1,600-hectare development called the Modderfontein New City project. It is set to cost as much as US$7 billion and, when completed, will become a mini city with more than 100,000 residents. According to the developer's founder, the aim is to turn the mini metropolis into the “New York of Africa”.

There are already similar, albeit smaller, developments in Johannesburg. Not far from Modderfontein is the thriving suburb of Sandton - situated in an area referred to as the “richest square mile” in Africa.

Investors hope such projects will become the new hub for Chinese firms looking to invest in the continent's south. “The Modderfontein project is located slightly outside of Joha
nnesburg,” said Romain Dittgen, Senior Researcher, South African Institute of International Affairs. “They are planning to connect it to the Gautrain, so there is a direct connection between the airport and Sandton City. The idea is to create a city within or slightly outside of the city.”

China has been South Africa’s largest trading partner since 2009. But according to British law firm Linklaters, Japan has actually invested more in Africa in the past year. In 2014 alone, Japanese investors quietly ploughed in US$3.5 billion to finance infrastructure projects - almost three times what China committed.

The difference being Japan is focussed mainly on Nigeria, while China is betting big on South Africa. “South Africa is always the economic powerhouse of Africa,” said Ernie Lai King, Head of Tax and Asia Practice Group, Hogan Lovells. “Nigeria is slowly but surely taking over that label, but I think South Africa because of its infrastructure, its good legal and banking system, and its large economic base is seen as the attractive place to leap from into Africa.”

The hope for projects such as Modderfontein New City is that it will one day serve as a gateway to more trade and investment between China and South Africa.

Country Analysis -- Policy Recommendation

Major problem of the South African economy:

The unemployment rate is unreasonably high. About a quarter of the South African population is unemployed. According to a 2013 Goldman Sachs report, the unemployment rate is at around 35% including the discouraged workers (those who are so discouraged of after repeated failures and have given up on searching for a job) It does not just imply poverty problem. It as well means that South Africa actually has a huge idled labor force waiting for be mobilized to develop the economy. On the other hand, as so many people are unemployed and could not sustain their living, it resulted in a relatively high crime rate. Together with inequity, social unrest is more serious and it brings harm to not only domestic industries, it as well discourages foreign investment.

Proposed policy targeting the current situation:

Equipping the South African population with better skills so as to improve the labor quality is essential to increase the employment rate in South Africa. More vocational schools should be established to train the labor force of South Africa to make sure that the skills of the South Africans in line with the economic development. Improving the literacy rate is crucial.

Subsidizing domestic enterprises is helpful in terms of expansion of local job opportunities. The problem why so many people are unemployed is caused by the lack of job vacancies in the domestic market. If the government could allocate more resources to support the domestic enterprises, new enterprises can be opened up and the existing ones can go for further expansion as well.

Country Analysis -- Important Events Happened in Recent Years

Black Economic Empowerment

After the demise apartheid the South African Government proposed Black Economic Empowerment. Its purpose is to assist the blacks who had been treated unfairly during the apartheid and give them economic opportunities such as employment, vocational trainings and even early procurement. It is estimated to last till 2014 when more than at least 30% of the enterprises are owned by blacks. More rights are distributed to blacks for example, mining rights are given to blacks equally.

As though more blacks are becoming middle class under black economic empowerment, the problem of huge income disparity becomes much more serious as well. Higher unemployment is observed. Therefore, it is still a policy facing massive criticisms.

Financial Tsunami

In late 2000s, the financial downturn triggered by the USA’s subprime mortgage crisis is commented to be the most severe crisis since the second world war by the international monetary fund. because of the interdependency of the economies around the globe, all countries are affected and most entered the tough phase in the business cycle. However, unlike many other developing countries, South Africa did struggle through the crisis and gradually recovered because of the growth in both private and public consumption

Land Redistribution

The South African government proposed land redistribution aiming at transferring 30% of the 82% million hectares owned by white farms to black farmers. This is proposed by Gugile Nkwinti, Minister of rural development and land reform. 6.7 million hectares had been transferred by early 2012.

This policy faced severe criticism as well. Farmers complained the pace of the redistribution to be too slow while at the same time the policy is actually carrying racist treatment to a certain extent.

Country Analysis -- Main productions in South Africa

South Africa’s economy is reasonably diversified into sectors including mining, agriculture and fisheries, vehicle manufacturing and assembly, food processing, clothing and textiles, telecommunication, energy, financial and business services, real estate, tourism, transportation and wholesale and retail trade.

Source: Statistics South Africa

Finance, real estate, business services

The finance and business services sector is the largest sector in the South African economy. The South African banking system is well developed and effectively regulated, comprising a central bank, a few large, financially strong banks and investment institutions, and a number of smaller banks.

Manufacturing

South Africa has developed an established, diversified manufacturing base that has shown its resilience and potential to compete in the global economy. The sector contributed 15.2% to South Africa's GDP in 2013, making it the third-largest contributor to the nation's economy. Manufacturing is dominated by industries such as agro-processing, automotive, chemicals, information and communication technology, electronics, metals, textiles, clothing and footwear.

The automotive industry is one of South Africa's most important sectors, with many of the major multinationals using South Africa to source components and assemble vehicles for both the local and international markets. The sector accounts for about 12% of South Africa's manufacturing exports, making it a crucial cog in the economy. The automotive and components industry is perfectly placed for investment opportunities. Vehicle manufacturers such as BMW, Ford, Volkswagen, Daimler-Chrysler and Toyota have production plants in the country, while component manufacturers (Arvin Exhaust, Bloxwitch, Corning, Senior Flexonics) have established production bases here. Companies with production plants in South Africa are placed to take advantage of the low production costs, coupled with access to new markets as a result of trade agreements with the European Union and the Southern African Development Community free trade area.

Wholesale and retail

This is the largest sector of the South African economy. Retailers in textiles, clothing, footwear and leather goods are major contributors to the industry.

Tourism

Tourism has been earmarked as a growth industry in South Africa, as the industry is ideally suited to adding value to the country's many natural, cultural and other resources. According to the World Travel and Tourism Council, tourism directly and indirectly constitutes approximately 7% of GDP and employment in South Africa. The 2010 Fifa World Cup boasts the tourism industry as South Africa received exposure from the event.

Communications

The communications sector has been one of the fastest growing of the South African economy, reflecting the rapid expansion of mobile telephony across the country. According to the Economist Intelligence Unit's Information Industry Competitiveness Index 2008, South Africa ranks 37th out of 66 countries reviewed, owing to well-established business and legal sectors.

Mining industry

South Africa is a world leader in mining. The country is famous for its abundance of mineral resources, it is accounting for a significant proportion of world production and reserves. South African mining companies of gold, platinum, base metals and coal are key players in the global industry. The mining industry contributed 4.9% to GDP in 2013. Though its contribution to GDP is not significant, its contribution to the export of the country’s exports is as significant as 60%.

Agriculture

Agriculture as a percentage of GDP has decreased over past four decades. This implies that the economy has gradually become more advanced. In 1960, agriculture constituted 9,1% of the total economy; this has decreased to only 2,2% in 2013. Though this decrease would seem to be a negative trend from a farmer's perspective, it signals that the South African economy is reaching maturity as the secondary and tertiary sectors become more important. Maize is most widely grown - followed by wheat, oats, sugar cane and sunflowers.

Country Analysis -- Specialization and Production Pattern in South Africa

South Africa, which was acknowledged as the 35^th country with highest agricultural production in 2006 by the World Development Indicator Database, has been facing a significant decline over years. The agricultural production accounts for 2.7% of South Africa’s GDP in that particular year. This might be caused by lacking commensurate amount of public support, causing black farmers to suffer. Take the Land Act that happened in 1913 and the cooperatives act in the 1920 as examples; these act excluded black farmers from participating in farmer cooperatives. In order to solve the problem, South African government establish several programs, such as the Land Redistribution for Agricultural Development program, the Comprehensive Agricultural Support program that provides post-settlement support for black farmers. Although these regulations caused number of farms to decline, AgGDP continued to grow inflation-adjusted terms, US $3333/capita in 1970 to US $6747/capita in 2004.

Country Analysis -- Composition of South Africa's GDP

South Africa Per Capita GDP (USD)

South Africa GDP (Million USD)

 Source: OECD Database

  

Analysis of the breakdown of GDP

  Source: Worldbank database

Household Expenditure: It consists of expenditures of resident households for consumption of both domestically produced and foreign goods and services. The relatively high percentage of household expenditure represents the high consumption power of local residents and the high reliance of economy on internal demand of goods and services. This datum at a certain extent reflects the income of South Africans is stable and quite high.

Government Expenditure: It consists of government expenditures on goods and services. Although the percentage of government expenditure is quite small compared to household expenditure. However, if compare the data of South Africa to the rest of the world, it can be observed that it has a relatively high percentage of government expenditure, which can mean government intervenes greatly into the market or spends a lot of money on national defense.

Net Export: It is given by deducting total import from total export. Negative number shows that the country has greater import volume than export volume, which may indicate that the country has a low level of national saving relative to investment as net export can also be expressed by the difference between national saving and investment– that means the country might be currently borrowing money from other countries.

Investment: Investment consists of the formation of capital. Investment represents deferred current consumption for increased future consumption thus such a level of investment is good for the country as it represents a relatively reasonable proportion of the country’s money is used for increased future production.