How Xi’s leadership in China affects investments in Brazil

As Brazil enters the last week of a presidential race uncertain as to the outcome of the polls and the damage that electoral MMA will leave on public accounts, a more accurate and potentially promising scenario for the Brazilian economy is drawn 17 thousand kilometers from Brasília. .

In Beijing, the conclusion this Saturday (22) of the 20th Congress of the Communist Party paves the way for Xi Jinping for his third five-year term as president of the People’s Republic of China.

Xi buys more time to consolidate his plan to transition the Asian giant’s economic model, prioritizing growth based on increasing household consumption, to the detriment of investments in infrastructure and real estate.

There are risks and opportunities in this change for investors in the Brazilian stock and private markets.

It is the search for the so-called “common prosperity” that guides the Chinese leader, a term often applied by the president to address the less unequal distribution of wealth and the promotion of social well-being.

“The third term of Xi Jinping consolidates ideas attributed to this administration in the last ten years, one of them is to confront quantity with quality, therefore seeking sustainable economic growth from an environmental and social point of view”, says Larissa Wachholz, partner from Vallya and special advisor to the Ministry of Agriculture for China-related matters from 2019 to 2021.

On the side of concerns, the retraction of Chinese civil construction reduces demand for steel and, consequently, for iron ore. Exporters of these goods, such as Vale, are among the heavyweights of the Brazilian Stock Exchange.

Favorable winds, however, are blowing in the direction of the agribusiness production chain, responsible for about 25% of the Brazilian GDP estimated for 2022 by Cepea (Esalq-USP’s study center).

This sector could benefit greatly from Xi’s stay, according to Roberto Dumas, chief strategist at Voiter and professor of Chinese economics at Insper.

“What they want is for growth to be about household consumption and, on a scale of needs, food comes first,” says Dumas.

The meatpacking sector is among the most promising and it is not only because of the need to guarantee food security for 1.4 billion Chinese, but also because of the change in the taste of these consumers.

“The Chinese are getting richer, wages are rising, and they are increasingly appreciating beef,” says Dumas.

Pork and chicken should also have their markets expanded, but to a lesser extent. Wachholz points out that China aspires to be self-sufficient in the production of these proteins.

On the other hand, the expansion of herds in the Asian country will demand more animal feed. In addition to soybeans, purchases of corn, sorghum, barley and wheat should grow.

It is a need that has been advancing since the end of the last decade, when swine fever forced the professionalization and industrialization of Chinese livestock, and that is gaining even more strength now that the country faces the most severe drought in 40 years.

Without enough arable land for agricultural production to meet its demand, the Chinese will inevitably increase purchases abroad.

Another essential point to understand how Xi’s permanence will influence the market is the commitment of the Chinese leadership to the fight against climate change. The risk that global warming poses to agricultural production is the source of this concern.

“They are very committed to tackling climate change because they know that, among the major economies, they will be among the most affected by the food security issue,” says Wachholz.

This does not mean that China will stop buying Brazilian beef due to problems related to deforestation, although this is a concern that is advancing among consumer groups with greater purchasing power.

The country’s priority in the face of the climate crisis is the gradual replacement of energy sources with high emissions of greenhouse gases, such as carbon dioxide generated by the combustion of coal and oil.

Among the main bets for changing the energy matrix is ​​green hydrogen, with great potential for employment in the maritime transport of goods that depart from Chinese ports to everywhere.

Extracted from water from contact with electrified metal bars (electrolysis), hydrogen is only considered green if the high energy expenditure used in this process originates from sources that do not pollute.

It is at this point that the opportunity for growth arises for assets of companies in the Brazilian energy sector due to its potential for generating clean energy through hydroelectric plants, wind farms and solar farms.

“This is a very relevant agenda for China today and Brazil has a lot of capacity to absorb investments in this area, which is a priority for Chinese multinationals”, says the Vallya specialist.

War and crisis make it difficult to analyze stock prices

A specialist in the raw materials market, Ilan Arbetman, research analyst at Ativa Investimentos, assesses that the shares of the most important sectors of the Brazilian stock exchange, the oil and mining, are finding it difficult to reflect the changes underway in China, a country that more demand for this type of goods.

Even the price of these papers does not exactly reflect the real value of the exported commodities, according to Arbetman.

The challenges to invest with a focus on external demand at this time, says the analyst, are a portrait of the highly complex international scenario due to the War in Ukraine, the bottlenecks in the flow still caused by the control of Covid in China and the threat of recession with the interest rate hike promoted by central banks that try to curb global inflation.

To avoid significant drops in commodity prices in a scenario of contraction in demand, producer agents force prices to rise by delivering less to the market.

“There are a series of forces at work and today the price responds more to the adjustment of supply”, says Arbetman, highlighting the successive announcements of cuts in the daily production of barrels of oil by OPEC, cartel of countries that produce the raw material.