Opinion – Why? Economês in good Portuguese: What will be the impact of the Chinese economic reopening on Latin America?

In August of last year, we approach here why Chinese economic growth was slowing. After all, the Chinese GDP ended 2022 with an expansion of 3%, a rate not inferior, in the last 40 years, to that of the first year of the pandemic, 2020. In addition to the problems in the real estate sector, we highlight the severe confinement policy of Covid zero as one of the causes.

The reopening of the post-Covid zero Chinese economy this year has brought an improvement in its growth outlook. In the IMF’s annual report on China, released on beginning of this monththe institution projected a 5.2% growth in the country’s GDP in 2023, with this annual rate declining thereafter until 3.5% in 2028.

In addition to the inevitable uncertainty regarding the evolution of the pandemic, the report highlighted the contraction in the real estate sector and the financial fragility of developers as risks that hang over the baseline scenario. It is enough to remember the importance that the real estate sector had –as well as investments in infrastructure– in smoothing the drop in the pace of growth during the “rebalancing” –or rebalancing– of the Chinese economy in the aftermath of the global financial crisis.

The IMF report points to the decline in the workforce and a slower pace of productivity growth as explanatory factors for a “new normal” of slower Chinese growth after the pandemic. The easier growth gains via structural change in the employment of labor from agriculture to manufacturing, as in the decades of double-digit growth, are relatively exhausted, as well as the breath gained via excessive investment in infrastructure and housing in the second decade of the new millennium.

The IMF suggests reforms that reinforce the weight of domestic consumption in demand, by strengthening the social protection system – such as unemployment benefits and health insurance. It also notes that a gradual rise in the retirement age could increase the available workforce. Additionally, it mentions the productivity gains that would result from a reform in state-owned companies that lag behind their private counterparts in terms of productivity. This last point about the desirability of a “rebalancing” between the public and private sectors was made by former President Hu Jintao and heard by the latter who writes to you at december 2011…

What are the implications for the rest of the world? After all, the IMF estimates that one percentage point of expansion in the Chinese economy today has a 0.3 percentage point in other countries. The weight for a large portion of Latin America is even greater, given the significance acquired by the trade of countries in the region with China, both directly and indirectly, via the effects of Chinese growth on prices and traded quantities of commodities.

At the moment, China consumes more than 16% of the world’s oil, more than half of the copper and more than 60% of the iron ore. Of Chile’s copper exports, 67% go to China, while Brazil sends 70% of its soybean exports there as well.

O foreign trade between Latin America and China rose from US$12 billion in 2000 (0.6% of GDP in the former), to US$450 billion in 2021 (above 6% of GDP). This year, China was responsible for 18% of Latin American trade, against 5% in 2005. When you take Mexico out, the share in 2021 rises to 24%.

The United States remains the main trading partner for Mexico and Central America, while China has occupied this position in the case of South America. Brazil, Chile and Peru have trade surpluses with China, with the latter absorbing more than 30% of Brazilian exports and almost 40% of Chileans.

Commodity demand driven by Chinese industrialization and the corresponding commodity price supercycle boosted South America’s growth in the 2002-12 decade, with China remaining a major market for the region in the following years. Naturally, the question now arises: will economic reopening and Chinese growth be strong enough to repeat that contribution via exports of food, minerals and oil?

This time it will be gradually different. Not just in the slower pace of expansion, but in composition. The Chinese “rebalancing” will continue towards services and products higher up the technological scale of value chains, with an emphasis on electric vehicles and renewable energy. Imports and investment priorities abroad will accompany this evolution.

In relative terms, oil will fall and critical metals and minerals will rise: aluminum, lithium, copper, etc. As elsewhere, the energy transition China will reflect on the composition of its imports.

Just as we have been witnessing a reconfiguration of China’s financial operations and investments in Latin America and the Caribbean, the era of massive loans from official Chinese banks for the production of raw materials in the region – more than US$ 138 billion between 2005 and 2020– seems to be over. We witnessed what in 2019 we called a “metamorphosis” in these capital flows, with the official lending gap being filled in small part by other banks and private equity funds.

At the beginning, the extractive industry –oil and gas, copper and iron ore– received the bulk of the resources, while more than half passed to service sectors, from domestic supply in areas such as transport, finance, electricity generation and transmission, technologies of information and communication, as well as supply of alternative energy. With this new configuration, foreign direct investment flows to Latin America and the Caribbean have remained solid at levels above US$4.5 billion as an annual average since 2016, according to estimates by Larraín and Zhang (2023).

Hovering over this Chinese presence in local investments, there is what some have already called “new cold war” between the United States and China. The fact is that the changes in the post-invasion geopolitical framework of Ukraine and the intensification of the United States-China rivalry should have consequences on the relationship between China and Latin America. Meanwhile, the “new normal” in post-pandemic Chinese economic growth will have distinct impacts from the previous period.