【2010.8.23 华尔街日报】A Chinese Challenge for Rand

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http://online.wsj.com/article/SB ... 47254045871606.html

South Africa Weighs Cooling Currency, Which Has Been Juiced by Asia Demand

LONDON—As South African President Jacob Zuma visits China this week, he will be acutely aware of how important the world's largest country is to his own nation's currency.

South Africa's rand is sky high despite shaky economic fundamentals and violent strikes in recent months. The government is so concerned about the rand's rise, and its effect on exports, that it is considering a tax on financial inflows to bring the currency back down, a move that could supercharge the country's cost of borrowing.

And yet, the main factor behind the rand's strength, and a possible drop in the future, is China, South Africa's biggest trade partner and a major consumer of its metals exports. Mr. Zuma wants to strengthen those ties, which is why he is visiting China this week as the head of a delegation of business and political leaders. The China trip comes after similar ventures to Brazil, Russia and India, the other so-called BRIC countries.

For now, the Chinese economy is motoring along fine, indirectly supporting South Africa and the rand in the process. But if China slows down sharply, the rand could take a hit, too.

South Africa's currency is a symbol of big themes in global financial markets over the past two years. Along with other emerging-market currencies, the rand plunged lower as investors fled to safety when Lehman Brothers Holdings Inc. collapsed in 2008. Since then, however, it has become one of the fastest-climbing currencies in the world.

In real terms, the rand has strengthened about 40% over that period, data from Morgan Stanley show, putting the rand a shade behind the Brazilian real in the global rankings.

Strong currencies make exports appear more expensive abroad and rarely please politicians. South Africa is no exception. This month, a document released by its ruling African National Congress party proposed capital controls, taxes on inflows, as a way to rein in the currency. The document, which lays out topics for discussion at September's party assembly, noted that "the state must respond more effectively to factors that impose unnecessary costs on business and the economy, notably around the value of the rand."



While currency analysts criticized the party's plans, they also expressed doubts over its effects, and the rand barely moved. Brazil took similar steps last year, and they did nothing in the long term to hold down its currency.

"It's a very difficult decision, and one they may not take," André Roux, co-head of global fixed income at Investec Asset Management in Cape Town, said of the government's plans. "A slowdown in China is more of a risk. There's a big risk there."

The rand's strength comes against a backdrop of persistently high unemployment and public-sector strikes over pay that could, if successful, push South Africa's inflation rate, already predicted to be above 5% by the end of this year, even higher.

Yet, with resource-hungry China, South Africa's economy has had a strong supporter in recent years. This year, China is the top destination for South Africa's overall exports of base metals, accounting for more than 10% of the total. It is the second-biggest destination for copper exports, after South Korea, at nearly 24%. Overall, China accounts for more than 11% of South Africa's total exports.

The Chinese economy is expanding fast, increasing at an annual rate of 10.3% in the second quarter. Though a rapid clip, that marks a slowdown from annual growth close to 12% in the first quarter.

The danger now, analysts said, is that signs of stress in the U.S. economy could slam the brakes on Chinese growth in coming months, sending shock waves as far as South Africa.

"People are thinking that they should go with the flow on the rand as long as metals prices remain above a certain level. If something hit those metals prices, like a slowdown in China, that would hurt," said Elisabeth Gruié, an emerging-markets currencies analyst at BNP Paribas in London.

Ms. Gruié said some or all of the strains on the South African economy will drag the rand down in coming months, but like other market watchers, she struggles to see what the trigger will be.

"For the rand to start weakening, we would have to see more than strikes or talk about capital controls, we would need real facts, a shocker," she said.

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