China’s GDP problems could endanger Latin American economies

At the end of September, when stock markets around the world entered into anxiety attacks following the news of the bankruptcy of Chinese real estate giant Evergrande, the shockwaves reached Latin America, little by little. near as far as possible from the mainland of China. In fact, South American markets have fallen even more than those in the United States, although Evergrande has had little or no contact with the region. This is because the economies of Latin America are not only deeply linked to China, but increasingly depend on its growth to support theirs.

The drama of Evergrande, with its debt of 300 billion dollars, larger than the economies of 3 out of 4 countries on Earth, is still far from over. But its struggles point to problems in the Chinese economy that could pose an even greater and longer-term danger to Latin America.

Beijing’s efforts to protect the impressive rates of economic growth it has achieved in recent decades now face strong headwinds. Premier Li Keqiang finally acknowledged this fact at a rally in Beijing a few weeks ago, admitting that “further downward pressure” has had a negative impact on growth. He listed the stubborn persistence of the coronavirus pandemic, supply chain disruptions, energy shortages, sharply rising commodity prices and climate-related disasters, including major flooding of these. weeks, as culprits.

As a result, China’s gross domestic product is expected to grow just over 6% this year, according to Liu Shijin, a member of the central bank’s monetary policy committee. It would be spectacular for almost any country and exceed the Chinese Communist Party’s target for this year, but is significantly lower than what had become the norm in China: an average GDP expansion of 9.23% per year since 1989.

And the economic woes may soon become even more complicated for Beijing. Liu further warned that what he called “near stagflation” could also emerge. Stagflation – high inflation coupled with sluggish growth – would create a serious dilemma for policymakers, as the tools typically used to suppress inflation, such as rising interest rates, tend to depress growth.

If the authorities nevertheless decide to fight inflation by raising interest rates, China’s growth rate could decline further. It would be a disaster for Latin America, where many countries that are already struggling to recover from the coronavirus pandemic have come to rely on strong Chinese growth to turn their economies around.

Beijing has firmly established itself in the Latin American markets. His most important involvement is in the commodity trade. While China has become the factory for the West and for much of the planet, South America has become one of its main suppliers of the materials that make this manufacturing possible.

Consider, for example, the Chilean economy. The world’s leading copper exporter, Chile relies on these exports to finance government operations and keep its economy moving. Copper mining has been responsible for an average of 10 percent of its GDP over the past two decades. In 2020, it represented 12.5% ​​of GDP, or one in eight dollars of economic activity.

Latin American economies are not only deeply linked to China, but increasingly depend on its growth to support theirs.

Now consider that almost half of Chile’s copper exports went to China. If the Chinese economy cools and its appetite for copper wanes, Chile will struggle to find new customers to take over. Copper prices would undoubtedly fall, exports would decline and the Chilean economy would almost certainly take a hard hit.

Chile is not alone in being vulnerable to the vicissitudes of Beijing’s fortune. Despite Brazilian President Jair Bolsonaro’s strong pro-American foreign policy, the country remains deeply and increasingly linked to Beijing on trade matters.

Over a decade ago, China became Brazil’s largest trading partner. Beijing is by far Brasilia’s biggest commodity customer, and in recent years it has also become a major investor in the country. The arrival of the coronavirus pandemic has only accelerated this trend, as economic activity has weakened around the world. China now buys around two-thirds of Brazil’s iron ore exports and more than a third of its soybean exports, as well as large amounts of petroleum, beef, cellulose and other products.

Chile and Brazil have the two highest export rates to China in the region (38.85% and 32.31%, respectively), but the entire continent depends on Beijing. Peru sends 28.29% of its exports to China, Uruguay 20.3% and Ecuador 15.79%, to name a few. All would feel the pain of a Chinese slowdown, let alone a recession, a development no one is predicting for China at the moment. But if China sneezes, Latin America could catch the flu. A Chinese slowdown could indeed trigger a recession in already struggling economies.

Beyond economic activity, the value of assets could also take a hit. China has invested heavily in the region. This added to concerns about the political implications of China’s growing influence there. After all, economic power inevitably translates into political influence. But China’s cash injections have also become such a big part of asset values ​​that if Beijing backs down, it’s not just commodity exporters that will miss it.

For example, the state-owned utility, State Grid Corporation of China, has made spectacular acquisitions in South America. State Grid has just agreed to buy an electricity grid in Chile valued at more than $ 5 billion. This happened just after the takeover of the Chilean assets of another company, Sempra Energy. In Mexico, the State Power Investment Corporation of China bought Zuma Energy, the country’s largest renewable energy company, while in Peru, the Three Gorges Corporation of China acquired the local assets of Sempra Energy for 3.6 billions of dollars. These numbers are huge by Latin American standards and quite high by any other measure as well.

As it dominates Latin American commodity export markets, Beijing is also gobbling up huge infrastructure. The potential diplomatic, political and strategic impact of the Chinese entanglement in Latin America is the subject of much debate. But when it comes to the economic implications, the risk couldn’t be clearer: if the Chinese economy stumbles, Latin America is going to be seriously damaged.

Frida Ghitis is a columnist for world affairs. A former producer and CNN correspondent, she is a regular contributor to CNN and the Washington Post. His WPR column appears every Thursday. Follow her on Twitter at @fridaghitis.

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