The Impact of China's Economic Slowdown on Latin America


 Xi's government has set an economic growth target of around 5% this year, which many economists, including those at UBS, Morgan Stanley and Nomura, say is out of reach. UBS, for example, cut its 2024 GDP forecast to 4.6% from 4.9%, a figure that probably stretches the definition of "around" too far. The impact is already being felt in Latin America.

In the fourth quarter, Beijing's concerns about growth will become more pronounced and we are likely to see more stimulus at a time when a complication is emerging, and that is that the fiscal situation is also deteriorating. Tax revenues and land sales revenues have declined and the pace of government bond issuance in the first seven months of the year has been slower than normal, meaning that fiscal policy has been a drag on growth rather than a stimulus.

Further fiscal easing will be needed to achieve the growth target of around 5%. Against this backdrop, Bank of America economists see a "small chance" of another mid-year deficit hike at next week's National People's Congress Standing Committee meeting. Further monetary easing plays a "small but necessary role" and calls for more experimentation to deal with the huge glut of unsold homes.

Even if Beijing does its best and comes close to its 5% target, the figure will be more favorable than what happens in practice. This is because the so-called nominal growth figure (what companies and the government operate on) is raised to a higher "real" growth figure to account for deflation. With prices falling and the latest PMI reading showing more weakness to come, this time it will act as an inflator, which may make it "roughly" achievable after all.

Evolution of Social Protests in China

Chinese policymakers have been slow to do much to reverse recent problems, but there are signs that the population is unhappy. Cases of dissent rose 18% in the second quarter from a year earlier. Most of the incidents were related to economic issues. While there are few signs that the unrest poses a threat to the leadership in Beijing, the ruling Communist Party could soon face major problems leading the nation of 1.4 billion people if things do not change.



What matters to Latin America

Latin America is watching the Chinese dynamic with concern, from oil to food consumption. Although not yet strongly felt, it is a variable that will affect Latin America's external sector. China is asking domestic traders to buy less foreign grain as abundant supplies and weaker-than-expected demand weigh on prices and threaten its long-standing policy of supporting local producers. China is the world's biggest buyer of barley and sorghum, and any sustained curbs on imports would deal a blow to farmers in the United States and Australia, as well as Brazil and Argentina. Authorities have already asked traders to limit overseas purchases of corn.

The reality may be very harsh and will depend on some Eurasian geopolitical fractures and the evolution of the Thucydides trap. Most likely, we will simply see a slowdown, but do not rule out some shocks.



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