The analysis is primarily empirical. The degree of business cycle synchronisation between China and South Africa is firstly investigated, followed by an investigation into the benefits/losses for South Africa in terms of bilateral trade, and finally the degree to which inflation (deflation) is being exported to South Africa. Both correlation coefficient and concordance indices were used to investigate the extent of business cycle co-movement. To this extent, real GDP data and growth rate cycle chronologies obtained from The Economic Cycle Research Institute (ECRI) were used. With respect to China’s impact on South African trade, indices developed by Blazques-Lidoy et. al. (2006) (measuring the short-term costs and benefits of trade with China) as well as those of Stevens and Kennan (2006) (measuring trade gains (losses)) were constructed. Product level data (6-digit HS classification) were used in these calculations. A number of econometric techniques similar to those applied by Feyzioglu and Willard (2006) were used to assess the extent of the link between China’s inflation and domestic inflation. A bivariate Granger causality test was firstly performed to measure the impact at the aggregate price level, followed by more detailed models that allow for more structural economic interpretations or for the relationships to change over time. Quarterly inflation data were used. Instead of consumer price inflation, China’s retail price inflation data that reflect the prices of the tradable sector were used as it is likely to be a better indicator of the effect of international price linkages. Finally, a simple accounting framework described by the OECD was used to measure the impact of the increasing importance of cheap imports from China on South African inflation.

The results indicate that there is no strong co-movement between the South African and Chinese business cycles. Although trading relations between South Africa and China have strengthened over the last couple of years, there appears to be limited short-term costs arising from trade competition. In fact, on the aggregate level, there seems to be a net trading gain for South Africa, as South Africa’s import gain exceeds the loss in terms of exports. The paper does not find convincing empirical evidence at the aggregate level for inflation in China leading to domestic price changes. This result is robust across a variety of model specifications. At the disaggregate level, however, there appears to be stronger sector-specific linkages between prices in China and South Africa. The paper found some support for the hypothesis that sub-components of inflation are cancelling each other out so that at the aggregate level the evidence weakens or breaks down.