Leap Across the Pacific: China’s impact on Latin America

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When a butterfly flaps its wings in China then…
You heard it before: small causes can have massive effects.
But what happens when an exports-spewing, oil-guzzling economic dragon beats its massive wings in agitation? Or even worse, what if markets worry that the juggernaut might face a hard landing? Expect quite a serious tremor worldwide.
The Economic Research team examined the impact of the Chinese slowdown on Latin America, with a focus on Brazil. We reasoned that we could come up with interesting insights because of three factors.
First, trade between Latin American countries and China has increased 20-fold (!) over the last 15 years. Second, China is a major investor and bankroller especially in countries that find it hard to obtain credit on global financial markets. Third, this is what we as economists set out to do: dig deep into complex realities. Come up with an explanation. Share it with other people.
So here is what the analysis suggests.

Following a 24% increase in bankruptcies in 2015, Chinese insolvencies could increase 20% in 2016. This has implications far beyond the Red Dragon’s borders. China’s slowdown is a drag on some of the emerging markets. How? Via a powerful and direct impact on the supply chains of Chinese manufacturing companies.
The China effect is felt first and foremsot in neighboring countries such as Hong Kong, Singapore and Taiwan, but alsoas weel in South Korea. And – here comes the butterfly effect part – also on Argentina, Brazil, Ecuador, Venezuela, and to some extent Chile.
Surprising? Maybe at first glance. But China is one of Latin America’s biggest trading partners. It aims to double the current figures and achieve a bilateral trade of around USD 500 billion in 2019.
The region’s primary industry - the sector of an economy making direct use of natural resources – is the focus of 90% of all Chinese investment. Infrastructure and logistic projects such as a railway to the Brazilian and Peruvian coasts are also high on the agenda. The massive influx of finance is to ensure the smooth transport of agricultural, energy and mining products inland, and then ship them to China.
Trade tremors
China is Brazil’s single most important trading partner: 20% of Brazilian exports go to Asian economic powerhouse and 17% of its imports originate there. If China’s growth weakens further, the knock-on effects will be felt from Rio through Sao Paolo, and all the way to the seat of power in Brasilia.
Granted, many of Brazil’s problems are of its own making. The country is in the throes of a recession and it will not abate in 2016. But the current internal political problems are being exacerbated by the global economic situation and slower growth in China. This is also clear from the bankruptcy trend: in 2015 bankruptcies were already up by a quarter, as they were in China, and in 2016 the insolvency rates in China (+ 20%) and Brazil (+ 22%) should be strikingly similar.
It doesn’t stop there for Brazil however - as a Mercosur country, Brazil is an important hub for trade in South America and thus subject to a knock-on effect from other countries.
Shock waves
Chile, Peru, and Venezuela are clear examples of countries with high export dependency on China.
The situation is exacerbated by the risk of price fluctuations, as exports are primarily concentrated in only a few products: soya in Argentina, metals in Peru and copper in Chile. Prices have already fallen sharply in recent years on the back of weaker Chinese growth.
Adding insult to injury Argentina, Ecuador and Venezuela suffer a triple shock: exports to China fall, commodity and particularly oil prices tumble, and the countries are heavily dependent on China for financing.
As it happens, China’s selective financial policy puts foreign financing to these countries on limited supply. Now their problems intensify disproportionately and the risks increase.
Even if the red dragon cannot be expected to take off again anytime soon, let us all hope it settles down.

Ludovic Subran
Chief Economist
Euler Hermes
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