A March 26th report from Deutsche Bank Research argues that the ongoing structural changes in the economy of China have significant ramifications throughout Latin America. DB analyst Magdalena Forster points out that Latin American countries are among the top suppliers of commodities to China. She notes that Venezuela, Cuba, Peru, Brazil, Uruguay and Chile all sell between 15% and 25% of their exports to China.
Forster explains the impact of Chinese rebalancing. “China is undergoing a rebalancing of its growth model. In the process, real GDP growth has started to decline and the economy is gearing for a higher share of domestic consumption and services and a lower share of investment. As a consequence, the composition of Chinese commodity imports is likely to change, with a slowdown in the demand for base metals and oil for instance, and an increase in the demand for foodstuffs and natural gas.”
China has become major export market for Latin America
China’s industrial powerhouse has been built on the back of natural resources imports. China is the world’s largest consumer of iron ore, copper and soya beans. Commodity producing nations (including those in Latin America) have seen major benefit from Chinese commodity demand and related high prices.
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Latin American exports to China rose from $11 billion (U.S) in 2003 to nearly 106 billion in 2013. This boosted China’s share of Latin American exports 1000%, while U.S. share dropped.
Forster notes that China is No. 1 export market for Chile, Uruguay and Brazil. China is also the second most important market after the U.S. for Latin America, representing 10% of the region’s exports. Chile, Uruguay, Brazil, Peru, Cuba and Venezuela are all highly dependent on China, and others such as Colombia are catching up fast.
Rebalancing means change in commodity demand
China’s growth has dropped off over the last few years, from 12% in the first quarter of 2010 to 7.3% in the fourth quarter of 2014. Related to this, the Chinese leadership has refocused its economic growth model away commodity-intensive production and towards services and greater domestic consumption.
The DB report highlights that this new growth model will trigger a change in the composition of the country’s commodity imports. The consumption of commodities will keep moving up, given how much room for catching up to developed economies still remains, but the current demand for commodities will change. Forster projects that demand for base metals such as copper or iron ore, basic staple foods such as rice, crude oil and coal will increase more slowly. The other side of the coin, however, is that demand for metals such as aluminum and zinc, some agricultural products and natural gas will almost certainly grow rapidly.