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China and Latin America

A New Normal?

FEB, 2013

By Bernard Lapointe

For most of the last decade Latin America had the good fortune that its economic performance has beenChina closely linked to that of the Chinese economy, the world’s main growth engine. The Asian giant’s contribution to global growth has risen from 0.25% in 1998 to almost 0.8% currently, while its nominal GDP quadrupled. The past decade has also seen the largest infrastructure construction program in world history, with the nation’s total length of highways increasing by 133%, installed power capacity tripling and some 4.9 billion square meters in residential floor space completed.

Source: HSBC

China’s insatiable demand for all sorts of commodities, from industrial metals to energy and soybeans, has benefited Latin America in at least 2 ways: rising prices and export volumes have resulted in large current account surplus; and foreign direct investment has risen in order to exploit the region’s vast natural resources.

It is not a surprise that the countries that posted the best performance throughout the last decade are also the ones with the closest commercial ties with China, namely Argentina, Brazil, Chile and Peru. On the other hand, Mexico has suffered from the Asian giant’s competition in the manufacturing sector.

But What Next for Latin America?

In the 12th five-year plan announced by the Chinese government in 2011, it was clearly emphasized that the country would be moving from an economy driven by ‘quantity’ to one driven by ‘quality.’ After 20 years of double-digit GDP growth, China has entered into a period of slower growth, say 7-8% per annum in real terms. The transition from investment-led growth to consumption-led growth implies that China’s demand for industrial metals and energy is unlikely to post significant gains from current levels, sapping demand for Brazil’s iron ore, Chile’s copper and Colombia’s oil.

Bilateral trade between China and Latin America grew at 30% annually between 2001 and 2011. In 2011 Latin America represented 14% of total Chinese exports. After surging more than 18-fold between 2003 and 2011, Brazil exports to China, however, have recently collapsed. As a result of the increase in China’s demand for commodities, Chile and Brazil exports to China now account for a bigger share of their GDP than their exports to the US.


Exports to

China/ GDP

In 2000

Exports to

China/ GDP

In 2011

Exports to


In 2011

Exports to


In 2011











Source: Thomson Reuters Datastream

China’s move away from commodity-dependent investment will dampen economic growth in Latin America unless countries in the region can either depreciate their currencies or raise productivity. Commodities exports account for half of the region’s exports. It is doubtful that Latin American countries can depreciate their currencies in a world where major central banks are on track to continue their expansionary monetary policies. If restoring competitiveness through exchange rate depreciation is not possible, then there is no choice but to raise productivity through reforms. The only realistic alternatives governments have are to boost reforms in labor markets, taxation, energy, infrastructure and education.

The good news for Latin America though is that China will continue to invest a large amount of capital in the region. China invested a total of nearly US$12 billion in Latin America in 2011, up from $7.3 billion in 2009. This can in part be attributed to the fast development of China-Latin America cooperation. The rise of China in Latin America, long considered the United States' "backyard," took many by surprise. Now, its economic influence in the region is only expected to grow. In fact, China replaced the United States as the top trading partner in Brazil and Chile and is on its way to doing the same in many others countries in Latin America.

The first massive wave of Chinese investment in the region, begun in the early 2000s, was to guarantee access to raw materials, like land for soybeans and iron ore plants. In this current second wave, Chinese companies are keen to explore the region’s consumer markets. Hence car makers Chery and JAC plan to build automobiles in South America destined for the local markets.

Closer economic links have made politics more fluid. Indeed, many leaders are keen on maintaining the status quo.  In 2012, China’s top 3 leaders, Hu Jintao, Wen Jiabao and Jia Qinlin, all visited the region. In the summer of 2012, China’s Foreign Minister Yang Jiechi held talks with his counterparts in Cuba, Venezuela and Chile to discuss the possible formation of a forum between China and Latin America, similar to the high-profile and highly successful China-Africa Forum.

Economic and political relations between China and Latin America are likely to continue expanding over the next decade, albeit at a slower pace than what we have become accustomed to in the past 10 years. China’s economy is heading towards a ‘new normal,’ which is very different from the ‘old normal’ boom years of 2003-2011.

Author Biography

Bernard Lapointe is a Portfolio Manager in the Overlay Strategies division at Caisse de dépôt et placement du Québec, a Canadian-based global fund manager. Mr. Lapointe has been a portfolio manager and trader of equities, currencies and commodities since 1994. He holds a Master degree in Economics and speaks French and Mandarin.

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