China’s economic slowdown is starting to bite in Latin America as the country’s once insatiable appetite for natural resources begins to ebb.
In early March, China lowered its official economic growth target for this year to 7%, down from 7.4% in 2014, itself the slowest rate of annual growth registered in Asia’s largest economy in a quarter of a century.
That is causing pain everywhere, but nowhere more than in Latin America, analysts told Emerging Markets.
“We are already seeing the effects of a slowing China on Latin America,” said Andrew Polk, senior economist at The Conference Board’s China Centre for Economics and Business in Beijing. “The region is bearing the biggest brunt of the Chinese slowdown.”
Latin America is experiencing all of its nightmares at once. China has proven a major and reliable financial and economic benefactor for the region.
Two-way trade, mostly involving the import of raw Latin American materials and the export of Chinese-made goods, boosted two-way trade to $241bn in 2013, from $10bn in 2000, according to data from the United Nations. Commodities accounted for 53.2% of regional export earnings in 2013, according to figures from the IADB.
In just a few years, however, that has all changed. China’s construction sector is slowing markedly, crimping demand for everything from Colombian iron ore to Chilean copper to Brazilian and Venezuelan oil. Even softer commodities such as beef and soybeans, key export earners for Argentina and Brazil, have been hit hard.
The price of soybeans is tipped by Australian commodities bureau Abares to hit an average of $390 a metric tonne in 2015, its lowest rate in nine years, and down from a high of $623 in August 2012. Chinese iron ore futures meanwhile slipped to $69 a metric tonne on Monday, down from $128 a year earlier and the lowest rate since October 2013.
Economic experts warn that Latin American states, already struggling to balance the books and having failed to diversify economically during the boom years, need to get used to leaner times.
“This slower rate of growth in China is now the ‘new normal’,” warned Li-gang Liu, chief China economist at ANZ in Hong Kong. “China’s demand for hard commodities is going to continue to taper down, as it looks to become more efficient, and to substitute cleaner energy — gas — for dirtier oil and coal.”
The medium term picture is likely to be mixed, with sovereign exporters of softer commodities — notably agricultural goods — likely to do better than exporters of harder commodities such as energy and minerals. “China’s got a lot of mouths to feed — that isn’t going to change,” said one Beijing-based commentator.
A precise picture of resource-based trade between Latin America and China is also likely to be muddied in the near-term as the country seeks to stockpile commodities while prices remain depressed.
Yet Latin America as a whole is facing a protracted period of turbulence. Mainland demand for raw materials is unlikely to accelerate again for several years, experts warn.
And having failed to push through reforms during the good years, Latin American states now face a race to diversify, in the hopes of boosting earnings from manufacturing or services. It is a race for which the region is poorly equipped and poorly prepared.