The “butterfly effect” is a concept from chaos theory coined by the American meteorologist Edward Lorenz and postulates that small actions or events can have significant and far-reaching consequences. He came to this conclusion from his study of weather systems whereby he discovered that tiny changes in weather models could lead to vastly different weather patterns rendering long-term weather forecasting very challenging. The geopolitical butterfly effect describes how such small events can trigger significant global consequences. In a typical fashion, a butterfly flapping its wings in Washington in the USA set off a chain of events leading to a crash of the biggest stock in capitalization in China, Tencent, that in turn led to a crash of the biggest stock, Naspers, on the JSE.
The Geopolitical Nature of the Butterfly Effect
It all started with the US Defense Department adding Chinese tech giants including Tencent to a list of firms alleged to be working with China’s military on 6 January 2025. The designation per se does not involve sanctions but does affect the reputations of the listed companies. It is also a stark warning to US organizations about the risks of conducting business with the listed companies as well as adding pressure on the US Treasury Department to sanction them.
The designation immediately resulted in the Hong Kong-listed shares of Tencent falling by 7% in early trade and US-traded shares of the company falling by 8% in over-the-counter trading. Tencent denied that it was working with China’s military and is expected to fight the designation in US courts. It could be buoyed by the success of another Chinese company, Xiaomi, which in 2021 won its case in the US courts and was removed from the list.
To mitigate the market fallout, Tencent bought back 3.93 million of its Hong Kong-listed shares on the following day, 7 January 2025, according to Bloomberg data.
The South African Connection
South Africa’s broader stock market is fundamentally exposed to the health of China. Naspers and its Amsterdam-listed Prosus hold roughly a quarter ownership of Tencent and as such is the largest shareholder of Tencent. Prosus whose interests also include the payments group PayU and iFood in Brazil has a secondary listing on the JSE. When news broke out that Tencent had been listed as one of the firms that work with the Chinese military, both Naspers and Prosus slumped around 8%. Collectively this wiped out R209 billion worth of shareholder value, and this exceeds the value of JSE heavyweights including Absa and Shoprite. At the close of trading on 7 January 2025, Prosus and Naspers were valued at about R1.7 trillion and R684 billion on the JSE respectively.
Thus, the geopolitical “butterfly effect” emanating from Washington targeted at a Chinese firm had repercussions on South African firms.
Historical Cases of Geopolitical Butterfly Effects
There are several cases of geopolitical “butterfly effect” that have occurred in history. The oldest recorded event is the assassination of Archduke Franz Ferdinand of Austria on 28 June 1914 that occurred against a backdrop of rising tensions in the Balkans. The event is widely regarded as the catalyst for the outbreak of the World War I as it triggered a chain reaction of alliances and conflicts. Similarly, BREXIT precipitated a chain reaction in trade alignment between countries elevating the Anglosphere as a privileged inner circle of the US alliance system. Recently, the Russia- Ukraine war has disrupted global grain markets causing food security crises worldwide.
On the financial front, the 2008 Global Financial Crisis was triggered by events in the USA that started with the collapse of the financial institution, Bear Stearns, in March 2008 followed by the bankruptcy in September 2008 of Lehman Brothers, the fourth-largest investment company in the country. The crisis spread to other countries especially those in Europe and assumed a global nature.
How South Africa can mitigate geopolitical risks
In principle, South Africa needs to navigate the complexities of global geopolitical risks while protecting its national interests. The Tencent incident shows how business is intricately intertwined with geopolitics. As a rule, international relations policy and business should not operate in silos but should be addressed in a holistic manner. The country can mitigate geopolitical risks by adopting a multi-faceted approach that balances diplomatic, economic, and strategic initiatives. Below are some selected strategies that can be adopted.
- Strategic Diplomacy
South Africa should maintain neutrality in global disputes in a transparent manner. It should avoid alignment with major powers in ways that could isolate South Africa from other global players. The perceived lack of neutrality in the Russia-Ukraine war despite pronouncing neutrality is a case in point. The country should play an active role in international organizations such as the United Nations, the World Trade Organization and G20 to influence global decisions and protect national interests.
- Regional Cooperation
Through initiatives like the African Union (AU) and the Southern African Development Community (SADC) South Africa should play a leading role in addressing regional conflicts, poverty, and instability. In addition to promoting regional stability, it should similarly enhance regional trade agreements and infrastructure projects to build economic interdependence.
- Diversification of Trade and Economic Partners
The country should not put all its eggs in one basket in order to reduce reliance on any single country or economic bloc. It should expand trade partners beyond the traditional ones, namely, the EU, China and the US and should similarly diversify export markets and investment sources.
Going forward
South Africa should choose its allies carefully after conducting a strategic geopolitical due diligence. It should avoid making allies with groups classified as terrorists and sanctioned countries. By doing so it will avoid the spectre of suffering collateral damage.
