A boring 2024 for the Chinese economy would be a relief for Latin America.

BY ALICIA GARCÍA HERRERO

The years of China’s high growth are past, as the world painfully learned in 2023. Notwithstanding the enormous tailwinds stemming from having exited Zero-Covid policies during 2022, the Chinese economy barely made to reach the underwhelming 5% GDP growth target cautiously set by Premier Li Qiang back in March 2022.

IMPACT ON LATIN AMERICA

The reasons for the very slow recovery of the Chinese economy in 2023 are both cyclical and structural and both are bound to have a relevant impact on Latin America, given China’s increasingly relevant role in the region, not only for trade but also foreign direct investment (FDI) as well as a source of funding for infrastructure. The reality is that on the cyclical front, China’s financial conditions have remained very tight in 2023 with very high real interest rates due to deflation. This has not helped China’s investment and lending overseas, which remains subdued, including in Latin America.  On the structural front, the main factor dragging down China’s growth is the plummeting return on investment, which pushes capital out to find better returns.

China’s low return of investment is related to the collapse of the real estate sector, which is pushing investment into manufacturing. The result, given the stagnant domestic investment and a more reluctant external demand, is increasing overcapacity with an immediate and important negative consequence for China persistent deflationary pressure. China’s overcapacity is a double-edged sword for the world and for Latin America. On the positive side China’s deflation has helped central banks globally in their fight against inflation, given China’s 20% share in global manufacturing exports and an even larger share of total imports in to Latin American economies. On the negative side, such huge overcapacity makes it nearly impossible to compete in the production of nearly any industrial good, which hampers the industrialization of Latin America.

ALTERNATIVES TO CHINA

All in all, both cyclical and structural headwinds are behind the very poor confidence in the Chinese economy both domestically as well as by foreign investors, which is well reflected in the extremely low stock market valuations. The question then is what to expect for 2024 and the most optimistic answer I can offer is a “muddling-through” of the Chinese economy, with growth decelerating only slightly compared to 2023, which means remaining in the 4.5-5% range. This goal, which in the past would have been underwhelming, will not be reached without fiscal and monetary support for which there is less room than in the past.

Against such a backdrop, reviewing our expectations of the Chinese economy is more important than ever, with “muddling-through” being now placed as the most positive outcome to be expected. For this new normal of structural – but slow – deceleration to be achieved, major risks need to be averted.  This means that Latin America will need to find other growth markets for its exports, with India being the most obvious candidate, but also Southeast Asia. Latin America will also find it harder to borrow from China as it finds it more and more necessary to keep its liquidity domestically so as to support the economy.

Alicia García Herrero is Chief Economist for Asia Pacific at Natixis. She wrote this article for Latinvex.

 

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