The influence of China on Latin America, how does it affect us?

Since the early years of the 21st century, China’s increasing influence over Latin America has been a constant, and much has been written about the economic implications of this phenomenon. But how does it impact us in our daily lives? Can our personal finances be affected by what is happening in China?

Chinese influence data

The value of commercial exchange multiplied by 15 between 2003 and 2021

The first thing we should point out in this regard is that the economic ties between Latin America and China are a growing phenomenon. Let us remember that, in 2003, the total value of goods and services exchanged barely exceeded 29,221 million dollars. In 2019, that figure had climbed to 307,939 million. A growth that not even the pandemic has been able to stop: according to some estimates, in 2021 the total value already reached 451,591 million.

In terms of investments there has also been a very important growth, although at a slower rate. In this way, throughout the first two decades of the 21st century, many infrastructure projects have been carried out with Chinese capital, especially in Venezuela, Brazil, Argentina and Ecuador. Investors from the Asian country have also reached other sectors such as energy and food.

The importance of China as a customer

More Chinese production means more consumption of raw materials and, therefore, greater demand for regional exports

At first glance, China’s most obvious form of influence is its status as the second largest buyer of goods exported from the region. Let us bear in mind that, with more than 1,400 million inhabitants and the most powerful industrial fabric in the world, the Chinese economy needs to import huge quantities of raw materials every year. For this reason, the companies of the Asian country have shown a special interest in strengthening their commercial ties with the Latin American economies, generally rich in minerals, fuels and food.

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Therefore, if Chinese domestic markets grow, the impact on our region could be decisive. More Chinese production means more consumption of raw materials, and therefore greater demand for regional exports. This increase in demand tends to push up sales prices abroad, which increases the inflow of foreign currency and stimulates production and employment in exporting countries.

Consequently, we can say that for the inhabitants of Hispanic America, a clear improvement is usually noted when the Chinese economy works well. In the 2008-2015 period, in fact, the strength of China made it possible to maintain international demand for raw materials and reverse the collapse in prices. Thanks to this, until 2015 in some countries of the region it seemed that the crisis of 2008 had not even arrived, while Europe and the United States had not yet been able to recover from it.

Towards a new dependency?

In economies of great weight in the region such as Brazil or Chile, approximately one third of exports go to China

However, China’s growth as a trading partner has not only brought economic growth. In a continent where traditionally the main destination for exports was the United States, the appearance of a new client helps cushion the impact of the US economy on neighboring countries.

In other words, if the US economy slows down or its government imposes protectionist measures, Hispanic American exporters can redirect their products to the Chinese market. In principle, this diversification should help reduce the volatility of the foreign sector in the region. Thus helping its inhabitants to enjoy more stable economic cycles, and less subject to abrupt changes in international markets.

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In fact, that is what has happened during the COVID crisis, according to an ECLAC report in 2021. According to the data provided, while in 2020 exports to the United States fell by 11%, those to China grew by 1%. In 2021, North American importers resumed their purchases (growing 19%), but again below the dynamism of the Chinese (35%).

The figures of the export sector

In Chile, the boom in mining production is explained, in large part, by the growing Chinese demand

All this has been possible thanks to the fact that, as we can see on the map, China is already the second destination for Latin American exports. With more than 16% market share, it is still far from the United States globally, but in some countries it is already in first place. And we are not just talking about Cuba or Venezuela, but about economies of great weight in the region such as Brazil or Chile.

For Brazil, exports to China are a key driver for sectors such as soybeans, mining and oil extraction. In Chile, the boom in mining production is explained, in large part, by the growing Chinese demand. The Argentines, for their part, follow the news about the export of soybeans to China as something fundamental for foreign currency to enter the country and to mitigate the constant devaluation of the peso.

In fact, it is a phenomenon that has changed the regional economic landscape so rapidly that some analysts have expressed concern about it. According to his point of view, there is a risk that in some countries a dependency on the Chinese economy could be generated. In this way, instead of diversifying trade partners, the dependency on the United States would simply be replaced by another on the Asian country.

This could be the case of Chile, Brazil, Peru or Venezuela, but it cannot be generalized to the entire region. As we can see on the map, in Central America, Mexico and the Caribbean area, China’s position as a buyer continues to be a minority.

The predominance of “Made in China”

An increase in imports from China can help us buy products with more variety, better quality or lower prices.

On the other hand, it would be a mistake to limit China’s influence to a mere buyer of our exports. In fact, the first Asian economy plays a fundamental role as a provider of all kinds of goods, from electronic devices to industrial machines.

Therefore, an increase in Chinese production aimed at exports can benefit us, to the extent that this generates more competition in international markets. Translated into our personal economy, it can help us buy imported products of greater variety, better quality or lower price.

On the contrary, if Chinese production stagnates, we may notice that imported products become more difficult to obtain or go up in price.

The checkbook of the Asian giant

The region’s markets are an investment opportunity for an economy like China’s, which generates large surpluses of capital to place abroad

Another of the most important areas of economic relations between Latin America and China is investment. Let us remember that, as it is a country that exports much more each year than it imports, the Chinese economy accumulates enormous balances in foreign currency. This capital, which is partly reinvested in China, is also invested in other countries, especially in Asia, Africa, Central and South America.

For recipient countries, the arrival of foreign capital is usually an opportunity to maintain the levels of investment that the economy needs. Let us remember that for real wages and employment to grow steadily, productivity must increase. And for this to happen, investment is usually needed.

The problem is that when there is no saving capacity in an economy, there is no capital to invest and, therefore, it cannot grow. Therefore, the arrival of foreign investment can break this vicious circle and boost growth.

On a personal level, we can see some economic improvements achieved thanks to Chinese investments in the region. As we mentioned before, most of them are related to infrastructure projects. However, unlike commercial exchanges, the volume of invested capital is still too low to see large-scale economic changes.

The role of monetary policy

For people living in Argentina, Brazil and Chile, the swaps have put a brake on the devaluation that they could have suffered in the absence of these agreements

Where we can see a very direct impact on our personal finances is in monetary policy. The most paradigmatic cases are those of Argentina, Brazil and Chile, whose central banks have signed currency swap agreements with Chinese banks. With the idea, in principle, of strengthening its international reserves and stabilizing its currencies.

Here the impact on our day to day is more visible, because it affects the price of the currency. For people living in Argentina, Brazil and Chile, the swaps have put a brake on the devaluation that they might have suffered in the absence of these agreements. Effects such as the loss of the value of savings or the increase in the cost of imported goods have thus been mitigated.

Obviously, the scope of these agreements has not been sufficient to prevent the devaluation of the Argentine peso or the Chilean peso. But it has managed to cushion it, at least if we compare the current scenario with one where a currency swap would not have been signed.

Mutual benefit or dependency?

From products “made in China” to new train lines, the Chinese influence on our economy is increasingly visible

In conclusion, we can say that the ties between China and the Latin American economies have not stopped strengthening throughout the 21st century. Every year the flow of exchanged goods and services grows, and Chinese investments keep coming. And through currency swap agreements, even central banks are not immune to this process.

Naturally, these economic relations are having an impact on our personal economy that we can observe every day. From products “made in China” to the creation of jobs thanks to the export boom, passing through new train lines or hydroelectric dams.

However, we must not forget that there are also critical voices towards this process. As we have mentioned, there is a concern that in some countries the foreign sector is not diversifying. Instead, dependence on the United States would only be replaced by dependence on China.

In any case, we can say that what happens in Asia’s largest economy is having a greater impact on the rest of the world, and especially in our region. For this reason, at Economipedia we are committed to continuing to inform our readers about what is happening in the world and its impact on our personal finances.

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