China: An economic panacea for Latin America?

1. China: An economic panacea for Latin America? Jorge Blázquez Paris, 16-17 March 2006

2. China is already the sixth larger economy in US$ and current prices But Chinese economy could be even larger. According to IMF estimates for 2005, Chinese gross domestic product based on purchasing-power-parity (PPP) amounts to 13.6% of world GDP (20.7% in the case of USA).

3. China: extraordinary or back to normal? If recent average rates of growth (1996-2005) hold –and real exchange rates hold constant- China could recover its “historical weight” in around 40 years. According to economic historian Maddison, what was extraordinary was its performance in 19th and 20th century.

4. The Chinese emergence and its impact on Latin America CHINA EMERGENCE Trade Channel Commodity price Channel Financial Channel

5. The Chinese emergence and its impact on Latin America CHINA EMERGENCE Trade Channel

6. China becomes a global player in merchandise trade Chinese impact on commercial relations is double. On the one hand, China offers to Latin American an opportunity to export, but, on the other, China can be hard competitor. In Asia, China has surpassed Japan from the point of view of trade

7. China and Latin America do not compete, excluding Mexico Source: Intracen Latin American countries are specialised in raw material, while China exports industrial goods. Like China, Mexico is specialised in industrial goods. Generally speaking, China is a commercial opportunity.

8. China and Latin America do not compete, excluding Mexico Source: Intracen

9. Source: Blázquez, Rodríguez and Santiso, BBVA (2005) China competes intensively with Mexico on a global level Panel data in 3D: 35 countries, 620 products and 6 years (1998-2003). The Chinese exporting and importing structures have been compared with the one of 15 Latin American countries (plus 16 other emerging countries non LatAm and Spain, Japan and USA). We have used the UNCTAD database.

10. From the point of view of exports, Latin America benefits from China In the last 10 years, China becomes an important trade partner of some Latin American countries. On the contrary, Mexico has been incapable of penetrating the Chinese market.

11. The Chinese emergence and its impact on Latin America CHINA EMERGENCE Trade Channel Mexico (exports industrial goods) and has not penetrate Chinese markets - + Most Latin American countries (export commodities)

12. The Chinese emergence and its impact on Latin America CHINA EMERGENCE Commodity price Channel

13. Source: University of Oxford Are raw material prices facing a Chinese shock? Many economist are putting the blame on China and -to a lesser extent- on other emerging economies (India) of the current increase in raw material (70% in real terms).

14. Source: Intracen Chinese growth is demanding –intensively- raw materials In average, Chinese imports of goods has grown 149% in the period 2000-2004. However, this growth hasn’t been homogeneous among products. Generally speaking, imports of raw materials have grown much faster.

15. China is, already, the third largest raw material importer China amounts to 7.3% of world imports of commodities in 2004 (18.3%, USA and 8.8%, Japan). China uses raw materials much more intensively than other economies. Technical explanation: we have built this picture in the following way: 1-we have identified and, then, summed all the raw materials (excluding foods) imports up in 2004 -that are included in the WTO database-. 2- The figure for each country is our relevant variable.

16. The Chinese emergence and its impact on Latin America CHINA EMERGENCE Commodity price Channel + Most Latin American countries that export commodities

17. The Chinese emergence and its impact on Latin America CHINA EMERGENCE China could increase the dependence of Latin American economies on raw material . These positive shocks could deepen this Latin American vulnerability Trade Channel Commodity price Channel + + -

18. The Chinese emergence and its impact on Latin America CHINA EMERGENCE Financial Channel

19. China is absorbing a significant share of emerging markets FDI LATAM: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, and Venezuela. South-Eastern Asia: Indonesia, Korea, Malaysia, Philippines and Thailand. Easten Europe: Czech Rep. Slovakia, Hungary, Croatia, Slovenia, Poland and Romania Most emerging economies feel that China is drying up financial markets. Is this perception correct?

20. China is absorbing a significant share of emerging markets FDI In levels, FDI flows towards China and to other emerging markets are positively correlated. However, if we study the first difference of those time series we find no significant correlation with China. These results suggest that China doesn’t crowd out other countries from the point of view of FDI.

21. Commercial bank flows towards China are relative large 2005 Commercial bank flows towards China and Latin America does not show any significant correlation. There is no evidence of a crowding out in this kind of financial flows.

22. International capital flows determinants are outside China

23. The Chinese emergence and its impact on Latin America CHINA EMERGENCE China is absorbing a significant share of FDI since 1994… ..but, the decrease in financial flows towards Latin American economies does not have to do with China Financial Channel =

24. Conclusions: An economic panacea for Latin America? • China is favouring –directly- Latin American countries by means of an increase in their exports of raw material. The exception is México, that is suffering from Chinese trade competence. • China is also favouring –indirectly- Latin American countries because of the increase in commodity prices due to its raw materials appetite. • Caveat: The current situation favours the deepen of commodity-oriented export model. • From the point of view of financial movements China seems to have little (or no) effect on Latin America despite the fact that China is absorbing a significant share of FDI flows to emerging economies.