However, China consumes substantially more than its natural share of the global supply of steel, cement, aluminium, iron ore and copper — between 40 and 50 percent. China is using these commodities to build roads, railways, airports, dams, bridges, factories, cities, shopping malls, skyscrapers and apartment blocks.
The portion of Chinese GDP spent on fixed capital formation is close to 50 percent — this is unsustainably high. It is hard to see how Chinese demand for these commodities can continue to grow from these levels, and there is some risk that it may even contract.
South Africa's current account has generally been in deficit over the last decade.
The deficit has been funded by foreign investors buying mainly South African shares and bonds — there has been limited foreign investment into new productive capacity.
For most of South Africa's democratic history, foreigners have willingly funded our current account deficit. But they have wavered on two occasions: in the early 2000s the net inflows dried up and, around the time of the global financial crisis in the second half of 2008, the net inflows reversed and became net outflows. On both occasions, the value of the rand came under considerable pressure.
When looking at a long-term picture of the rand/US dollar exchange rate, one needs to adjust for the different CPI inflation rates in each currency to see a true picture. For example, an exchange rate of R8.50 to the dollar today is not as competitive as it was in 2001, because rand costs have increased at a much faster rate than dollar costs since then.
We believe that there is limited potential for the rand to appreciate over the long term, and substantial potential for it to depreciate. If either dollar commodity prices were to fall or foreign inflows were to dry up (or both), the value of the rand and South African consumer spending could come under considerable pressure.
Investors should be mindful of this vulnerability in the South African economy.
Ian Liddle is Allan Gray's chief investment officer, with overall responsibility for the investment team and portfolio management. He joined Allan Gray in 2001 after several years as a management consultant.