Late in September, when stock markets around the world went into spasms of anxiety following news that Chinese real estate giant Evergrande might go bankrupt, the shockwaves reached all the way to Latin America, about as far from the Chinese mainland as one can get. In fact, South American markets dropped even more than those in the United States, even though Evergrande has had little, if any, contact with the region. That’s because Latin American economies are not just deeply entwined with China, but are increasingly dependent on its growth to sustain their own.
The drama of Evergrande, with its $300 billion in debt—larger than the economiesof 3 out of every 4 countries on Earth—is still far from over. But its struggles point to problems in the Chinese economy that could pose an even greater, longer-term danger to Latin America.
Beijing’s efforts to protect the impressive rates of economic growth it achieved in recent decades are now facing stiff headwinds. Premier Li Keqiang finally recognized this fact during a gathering in Beijing a few weeks ago, admitting that “new downward pressures” have taken a toll on growth. He listed the stubborn persistence of the coronavirus pandemic, supply chain disruptions, energy shortages, a steep climb in commodity prices and climate-related disasters—including major flooding in recent weeks—as culprits.
As a result, China’s gross domestic product is predicted to grow by just over 6 percent this year, according to Liu Shijin, a member of the central bank’s monetary policy committee. That would be spectacular for almost any country, and exceeds the Chinese Communist Party’s target for this year, but is significantly lower than what had become China’s norm: an average GDP expansion of 9.23 percentannually since 1989.
And the economic difficulties could soon become even more complicated for Beijing. Liu further warned that what he called “quasi-stagflation” could also emerge. Stagflation—high inflation alongside sluggish growth—would create a serious dilemma for policymakers, because the tools generally used to quell inflation, such as raising interest rates, tend to depress growth.
If authorities decide to nevertheless tackle inflation by raising interest rates, China’s growth rate could sink even lower. That would spell disaster for Latin America, where many countries already struggling to recover from the coronavirus pandemic have come to rely on strong Chinese growth to lift their economies.
Beijing has been steadily entrenching itself in Latin American markets. Its most significant involvement is in the trade of raw materials. As China became the factory floor for the West, and for much of the planet, South America became one of its main purveyors of the materials that make that manufacturing possible.
Consider, for example, the Chilean economy. The world’s biggest exporter of copper, Chile relies on those exports to finance government operations and keep its economy moving. For the past two decades, copper mining has been responsible for an average of 10 percent of its GDP. In 2020, it accounted for 12.5 percent of GDP, one of every eight dollars of economic activity.
Latin American economies are not just deeply entwined with China, but are increasingly dependent on its growth to sustain their own.
Now consider that nearly half of Chile’s copper exports went to China. If the Chinese economy does cool and its appetite for copper wanes, Chile will have a difficult time finding new clients to take up the slack. Copper prices would undoubtedly drop, exports would decline and the Chilean economy would almost certainly suffer a harsh blow.
Chile is hardly alone in its vulnerability to the vicissitudes of Beijing’s fortunes. Despite Brazilian President Jair Bolsonaro’s strong pro-U.S. foreign policy, the country remains profoundly and increasingly intertwined with Beijing when it comes to trade.
More than a decade ago, China became Brazil’s top trading partner. Beijing is by far Brasilia’s biggest customer for commodities, and in recent years, it has also become a major investor in the country. The arrival of the coronavirus pandemic only accelerated that trend, as economic activity faltered around the world. China now buys about two-thirds of Brazil’s iron ore exports and more than one-third of its soybean exports, along with large quantities of oil, beef, cellulose and other products.
Chile and Brazil have the two highest rates of exports to China in the region—38.85 percent and 32.31 percent, respectively—but the entire continent relies on Beijing. Peru sends 28.29 percent of its exports to China, Uruguay 20.3 percent and Ecuador 15.79 percent, to name a few. All would feel the pain of a Chinese slowdown, let alone a recession, a development no one predicts for China at this time. But if China sneezes, Latin America could catch the flu. A Chinese slowdown could, in fact, cause a recession in economies that are already struggling.
Beyond economic activity, asset values could also suffer a severe blow. China has been investing heavily in the region. That has added to concerns about the political implications of China’s growing influence there. After all, economic power inevitably translates into political influence. But China’s cash injections have also become such an important element of asset values that if Beijing retracts, it’s not only commodities exporters who will miss it.
For instance, the state-owned electric utility, State Grid Corporation of China, has been making eye-popping acquisitions in South America. State Grid just agreed to purchase a power network in Chile valued at more than $5 billion. That came just after it bought the Chilean assets of another company, Sempra Energy. In Mexico, meanwhile, China’s State Power Investment Corporation bought Zuma Energy, the country’s largest renewable energy firm, while in Peru, China’s Three Gorges Corporation acquired Sempra Energy’s local assets for $3.6 billion. These numbers are enormous by Latin American standards, and pretty hefty by any other measure, too.
As it dominates the markets for Latin American commodity exports, Beijing is also gobbling up huge pieces of infrastructure. The potential diplomatic, political and strategic impact of Chinese entanglement in Latin America is the subject of much debate. But when it comes to the economic implications, the risk could not be clearer: If China’s economy stumbles, Latin America is going to get badly bruised.
Frida Ghitis is a world affairs columnist. A former CNN producer and correspondent, she is a regular contributor to CNN and The Washington Post. Her WPR column appears every Thursday. Follow her on Twitter at @fridaghitis.