A concerted crackdown by Chinese authorities on grey market finance providers like trust companies would be a “double whammy” for Latin America’s resource-rich nations, believes Andrew Polk, resident economist in Beijing at The Conference Board’s China Center for Economics and Business.
Shadow lenders use high density ores like iron and copper as collateral to obtain loans in China, with the capital rebundled and lent to speculative, higher yielding deals. As grey market products are gradually sidelined or shut down, “the demand from individuals using those loans as collateral will disappear”, Polk notes. “People sitting on vast stores of ore would then flood the market with it, depressing demand for Latin American minerals.”
The other hit would come from efforts to marginalise shadow lenders. Between 2008 and 2013, IMF data shows, total outstanding financing by mainland financial services providers jumped by $13tr, two-thirds of which was provided by non-bank financing outfits – shadow lenders of various hues. Rip away that cheap source of funding for speculators and, noted Polk, “you are going to deepen China’s slowdown, which will further slow demand for Latin American commodities.” So without realizing it, Latin America’s commodities story, and the growth outlook in key resource exporting nations like Brazil, Peru and Chile, has become dependent on a vast system of speculative lending 10,000 miles away.
Ratings firm Standard & Poor’s this week added to the chorus of concerns surrounding China, noting in a quarterly Asia credit report that China would need to move “sooner than expected” to deal with the threat posed to the economy by shadow banking. Goldman Sachs has since cut its forecast for first-quarter GDP to 5% year-on-year, from 6.7%, the slowest quarterly growth rate in 23 years.
None of which bodes well for Latin America. China’s problems, believes Miguel Kuguel, director of EconViews, a pan-regional economic consultancy based in Buenos Aires, “will affect all of us. A large part of the region’s boom has been due to high growth China’s impact on commodity prices.”
Take that demand impetus out of the equation, as grey market lending and mainland growth falter, and most regional nations will be hit, barring perhaps diversified, US-focused economies such as Mexico and Colombia. China’s attempt to pivot toward a more consumption-led model will, notes Craig Botham, emerging markets economist at Schroders, be “quite negative for Brazil’s export sector”. Chile, which generates fully 7% of its GDP through exports to China, is yet more exposed to a slowdown. Last week, Julio Velardo, chairman of the Central Bank of Peru, warned investors that a sharp slowdown in “our principal trading partner” is one of the “more important risks” facing the Peruvian economy.
HSBC Stuart Gulliver, speaking yesterday in Hong Kong, warned that it was “inevitable that there will be pain for borrowers in the shadow banking sector”, but downplayed the existential threat to the world’s second-largest economy, insisting that any default in the opaque industry should be “manageable”.