How Will China’s Slower Growth Affect Latin America?

The most recent international forecasts see China with stronger growth than last year in 2023, but there are also fears that growth expectations won’t be met

Photographer: Lam Yik/Bloomberg
August 09, 2023 | 10:50 AM

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Bloomberg Línea — Latin America is increasingly dependent on China, given the high demand for raw materials from the Asian giant, and any setback in the Asian economy’s economic growth has a knock-on effect in countries on the other side of the world.

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For the time being, projections for China’s GGP growth for 2023 are auspicious: the International Monetary Fund predicts a 5.2% expansion, much higher than growth in 2022, which was 3%. However, from time to time there are more sobering data that suggest that there may be a slowdown.

For example, on August 8, China’s trade balance for July was released and alarm bells went off: imports fell by 12.4% year-on-year in July and exports contracted by 14.5%. Also on August 9, the fall in inflation, both in consumption and production, was reported.

The fear that the locomotive that drives mining and Latin American agriculture is running out of fuel has generated pessimism among many business leaders.

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How does slower growth in China affect Latin America?

“The dynamics of China’s GDP growth has an impact on commodity prices and, therefore, on Latin America, so a slowdown in China would be detrimental to the region, although other factors also play a role in the dynamics of commodities, such as some supply problems that sustain high prices,” explained Martín Polo, head of strategy at the Argentine broker Cohen Aliados Financieros.

However, Polo recalled that China this year is going to grow more than last year.

“What is happening is that this recovery is a little slower. But, in general terms, it is still growing at a good pace,” he said.

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Jorge Angel Harker, international affairs advisor at Adcap Grupo Financiero, points out that a deep economic deterioration in China would have important repercussions on the Latin American economy.

“Not only because we are net exporters of raw materials, but also because in recent years China has become a supremely important trading partner of many large countries in the region, even surpassing traditional trade partners,” he added.

Harker explained that the relationship with China is based on trade in which Latin America exports raw materials, food, minerals and oil, while the Asian giant exports finished products. “So, obviously, a slowdown would directly impact the region,” he said.

“The general conclusion is that if there is a slowdown in China, which hits its domestic demand, Latin America will obviously suffer,” he said.

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Which sectors would be the most affected by a slowdown in China?

Harker said the sectors that would be most affected if China does not meet its expectations in terms of GDP growth would be “the oil companies. We saw a reaction of Petrobras falling a little bit”.

On the other hand, he added that some Brazilian mining companies would also be affected.

“Even Chilean mining companies, especially due to copper and coal consumption. Let us remember that China is a large coal consumer, so countries such as Colombia, with its Cerrejón project, may see demand affected,” he said.

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Chile’s dependency on China

“Higher or lower growth in China is very relevant for Chile, because China consumes about 50% of the world’s copper, therefore, a lower growth directly impacts Chile’s main export product, both in physical exports and in the price of the red metal,” Chilean analyst Guillermo Araya, from Renta4, said.

In 2022, the total amount of products exported by Chile totaled $98.54 billion, of which copper accounted for $44.66 billion, or 45% of Chilean exports.

It is estimated that for each cent per pound of higher average copper price, Chile’s exports increase by $128 million and tax revenues increase by $24 million.

China is also important for the agro-export profile of some Latin American countries.

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China is the world’s largest importer of soybeans, a key commodity for Argentina and Brazil, and accounts for more than 60% of international soybean trade.

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Good-priced commodities help Latin America

Leonardo Chialva, a partner at Delphos Investment consulting firm, says that, for now, Latin America is “being saved” because the slower Chinese growth is not yet felt in commodity prices, and that “commodities are at a much higher level than pre-pandemic, or even prior to the Russian invasion of Ukraine”.

“In fact, many of the post-pandemic geopolitical changes have played in Latin America’s favor, with financial and real investment capital leaving China and coming here,” Chialva said.

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