China: An economic panacea for Latin

America?Jorge BlázquezParis, 16-17 March 2006

2

China is already the sixth larger economy in US$ and current prices 2005 - GDP in US$ (% of world)

28.410.6

6.45.04.8

4.33.9

2.62.5

0 5 10 15 20 25 30

United StatesJapan

GermanyUnited Kingdom

FranceChina

ItalySpain

Canada

Source: IMF

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.

China GDP (% of world total)

0%

5%

10%

15%

20%

25%

30%

35%

1500 1600 1700 1820 1870 1900 1950 2001 2045

Source:Angus Maddison

?

4

The Chinese emergence and its impact on Latin America

CHINA EMERGENCE

TradeChannel

Commodity priceChannel

FinancialChannel

5

The Chinese emergence and its impact on Latin America

CHINA EMERGENCE

TradeChannel

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

China and Japan merchandise trade (% total)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1948 1953 1963 1973 1983 1993 2003 2004Source: WTO

Japan

China

7

China and Latin America do not compete, excluding Mexico

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.

Source: Intracen

Argentina Brazil Chile Colombia Mexico Peru Venezuela ChinaProcessed food 6.60 2.93 2.53 1.49 0.56 4.13 0.16 0.47Fresh food 5.50 4.13 4.54 4.14 0.80 2.52 0.11 0.68Leather products 1.98 2.88 0.93 3.34Minerals 1.75 1.05 1.67 3.63 1.06 2.56 7.54 0.28Wood products 0.60 2.26 4.10 0.78 0.26 0.58 0.43Basic manufactures 0.75 1.60 3.66 1.04 0.69 2.86 1.09 0.96Transport equipment 0.45 0.88 0.08 0.10 1.34 0.15 0.27Chemicals 0.68 0.62 0.62 0.86 0.34 0.35 0.29 0.42Non electric machinery 0.22 0.82 0.07 0.09 0.84 0.06 0.05 0.52Electronic components 0.05 0.20 0.12 1.53 1.04Miscel. manufacturing 0.20 0.27 0.11 0.44 1.07 0.35 0.05 1.48Textiles 0.20 0.60 0.17 0.71 0.49 0.68 2.39IT&Consumer electronics 0.26 1.75 2.43Clothing 0.12 1.48 1.29 2.81 3.46

Com

mod

ities

Indu

stria

l goo

ds

Revealed Comparative Advantage (Balassa)

8

China and Latin America do not compete, excluding Mexico

Export Specialization

0

1

2

3

4

5

6

7

8

9

0 1 2 3 4 5Commodities

Indu

stria

l goo

ds

Mex

Ven

Per

ColChi

Arg

Bra

IndustrialSpecialisation

CommoditySpecialisation

China

Source: Intracen

9

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.

Chinese trade competition with Latin America

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.0 0.1 0.2 0.3 0.4 0.5 0.6

Mexico

Brazil

Colombia

VenezuelaChile

ArgentinaPeru

Costa Rica

Chinese global trade competition

0.2

0.3

0.4

0.5

0.6

0.7

0.30 0.35 0.40 0.45 0.50 0.55 0.60

Mexico

ThailandHungary

USA Czech R.

Spain

Poland

Japan

Source: Blázquez, Rodríguez and Santiso, BBVA (2005)

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From the point of view of exports, Latin America benefits from ChinaIn 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.

Exports to China 2004-1992 (%)

China 1992 (% of total)

China 2004 (% of total)

Argentina 1950 1.0 7.7Brazil 1082 1.3 5.7Chile 1351 2.2 10.4Colombia 3820 0.1 0.8Mexico 904 0.1 0.3Peru 391 7.5 9.9Venezuela 13637 0.0 0.6

Imports from China 2004-1992

(%)

China 1992 (% of total)

China 2004 (% of total)

Argentina 722 1.1 4.3Brazil 6970 0.3 6.2Chile 1159 1.6 8.3Colombia 5677 0.4 7.3Mexico 3473 0.6 7.3Peru 3410 0.6 7.6Venezuela 7084 0.0 2.9

Trade: LatAm and China

11

The Chinese emergence and its impact on Latin America

CHINA EMERGENCE

TradeChannel

+

-

Most Latin American countries (export commodities)

Mexico (exports industrial goods) and has not penetrate Chinese markets

12

The Chinese emergence and its impact on Latin America

CHINA EMERGENCE

Commodity priceChannel

13

Are raw material prices facing a Chinese shock?

Source: University of Oxford

Commodities Prices in real terms

40

60

80

100

120

140

1900 1915 1930 1945 1960 1975 1990 2005

China?

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).

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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.

Source: Intracen

Commodities total goods % commoditiesg < 149% 38 161 24

149% < g < 200% 8 32 25200% < g < 300% 11 31 35300% < g < 400% 9 13 69 400% < g 18 21 86

Total items: 258Total commodities: 84% commodities: 33%

Chinese imports 2000-2004 (%)

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China is, already, the third largest raw material importerChina 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.

Commodity imports (excluding food) and GDP (% World)

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8

GDP (% World)

Com

mod

ity (w

ithou

t foo

d)

impo

rts (%

wor

ld)

GER

UK

FRAITASP

INDIA

CHINA

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.

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The Chinese emergence and its impact on Latin America

CHINA EMERGENCE

Commodity priceChannel

+ Most Latin American countries that export commodities

17

The Chinese emergence and its impact on Latin America

CHINA EMERGENCE

TradeChannel

Commodity priceChannel

+ +-

China could increase the dependence of Latin American economies on raw material . These positive shocks could deepen this Latin American

vulnerability

18

The Chinese emergence and its impact on Latin America

CHINA EMERGENCE

FinancialChannel

19

China is absorbing a significant share of emerging markets FDI

Most emerging economies feel that China is drying up financial markets. Is this perception correct?

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

FDI towards Emerging Economies in real terms

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 5 9 13Source: International Institute of Finance

SE Asia

China

SE Asia

LATAM

E Europe

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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.

FDI towards Emerging Economies in real terms

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

1 5 9 13Source: International Institute of Finance

SE Asia

China

SE Asia

LATAM

E Europe

China LatAm E. Europe SE. AsiaChina 1 -0.1 0.0 0.0LatAm 1 0.3 0.7E. Europe 1 0.4SE. Asia 1

Correlation of Equity Investment 1990-2005

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Commercial bank flows towards China are relative large

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.

China LatAm E. Europe SE. AsiaChina 1.0 0.2 0.5 0.7LatAm 1.0 0.1 0.1E. Europe 1.0 0.2SE. Asia 1.0

Correlation of capital flows, commercial banks (1st difference) 1990-2005

Commercial Flows to Emerging economies

Russia27%

China19%Turkey

10%

Korea12%

India10%

Rest22%

Source: International Institute of Finance, 47 countries

2005

22

International capital flows determinants are outside China

Current Account Balance (billions US$)

-800

-600

-400

-200

0

200

400

600

1990 1992 1994 1996 1998 2000 2002 2004Source:IMF

G7

Rest of the world

23

The Chinese emergence and its impact on Latin America

CHINA EMERGENCE

FinancialChannel

=

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

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Conclusions: An economic panacea for Latin America?1. 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.

2. China is also favouring –indirectly- Latin American countries because of the increase in commodity prices due to its raw materials appetite.

3. Caveat: The current situation favours the deepen of commodity-oriented export model.

4. 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.