Is Latin America ready for a Chinese economic crisis?

[author: Marta Colomar Garcia]

The ongoing European debt crisis and the slow recovery in the United States are starting to impact China and Latin America’s economic growth.

An inevitable re-balancing of China’s economy will be accompanied by a collapse in commodity demand within five years, a leading China expert has warned via Emerging Markets Organization.

According to the Financial Times:

The Inter-American Development Bank said increasing dependence on commodity exports, less fiscal maneuvering, significant capital inflows and high exposure to Spanish banks were weak spots that could knock expected Latin American growth off it’s course this year.

Behind the scenes.

Latin America is now facing much more restrictive lending practices from European banks both located in that region and abroad. Less access to capital for Latin American purchasers results in less demand for products from China. Last week, China posted the biggest trade deficit in years and announced a cut in its economic growth target for 2012.

A decrease in the demand for products from the world’s largest exporter means that there is no need for China to produce as much as it has done during the previous years. That means that China’s need for raw materials will decrease.

A large percentage of the raw materials that China imports, come from Latin America.  More specifically, Brazil has become one of China’s biggest trading partners.  Brazil exports large quantities of iron ore, soybeans, and copper to China. A decrease on China’s needs for raw materials will definitely affect the economic growth of Brazil and other countries in the region.

According to Bank of America Merrill Lynch, a drop in Chinese growth to 7.5% would reduce commodity prices and Latin American exports to China by up to 10% and 3%, respectively. Raw materials, oil, iron ore, copper, would bear the brunt of this price correction rather than agricultural exports.

This situation presents a very dangerous scenario for Latin America. Fortunately, the region did not suffer the consequences of the 2008 economic crisis. However, Latin America should be taking steps to improve internal productivity to resist a new economic downturn that, unlike in 2008, will most likely affect the region directly.

Diaz Reus & Targ is a global law firm representing clients in China, Latin America, the U.S., Europe, and the Middle East. Our international attorneys, solicitors, and foreign legal consultants understand the local and global nuances of cross border transactions, and strategy and execution involved in commercial, governmental and other disputes requiring multi-jurisdictional representation. Please contact us for more information.

 

Published In: Finance & Banking Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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