China’s economic decline poses risks for Latin America, but opens doors for the US.
China’s Economic Woes: A Wake-Up Call for the World
Deepening economic woes in China are something the communist regime can no longer dismiss, and dependent countries can’t afford to ignore.
Since China’s decision to end its “zero COVID” policy was announced last December, the subsequent economic downturn has hit multiple sectors. Import and export markets have slumped this year, coupled with the country’s soaring debt, underperforming industrial output, and a tanking real estate market.
July data showed a significant year-on-year drop in foreign trade, with exports shrinking 14.5 percent and imports falling 12.4 percent.
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This is complicated by a shrinking labor force and high youth unemployment. The number of young people unable to find jobs hit a record high of 20.4 percent in April among the 16- to 24-year-old age group—spiking to 21.3 percent in June.
China’s National Bureau of Statistics originally released the data, but the state-run agency has since blocked additional unemployment statistics after widespread media reports.
A spokesperson for the Bureau of Statistics, Fu Linghui, told reporters during an August press conference that “age-specific urban unemployment rate for young people” would be suspended for that month. Given the increased pressure the Chinese Communist Party (CCP) faces over the faltering economy, state-level attempts to control the narrative aren’t surprising.
Some say China’s economic slowdown was “inevitable.”
An August report by New York-based Council on Foreign Relations noted, “Moving hundreds of millions of people from inefficient rural agriculture to higher-productivity factory work in cities can only be carried out once.”
But the ripples of Beijing’s economic downturn will reach far beyond its borders. Many experts are predicting China’s partners in the developing world, particularly Latin America, will bear the brunt of its domestic troubles.
Beijing’s interests in Latin America are sizeable. Between 2000 and 2020, Chinese companies invested roughly $160 billion in the region.
The past 20 years of Latin America’s engagement with China have been based on “perceptions and hopes” rather than practicalities, said Evan Ellis, a regional analyst and professor at the U.S. Army War College Strategic Studies Institute.
Reflections of this are evident in Latin America’s dubious infrastructure projects and grandiose loans given to local governments with a history of defaulting on their debts.
In a recent example, Argentina’s embattled leftist regime used a $7.5 billion line of credit from the International Monetary Fund to partly repay a Chinese loan in August. Argentina has a decades-long history of foreign debt defaults and, as of 2019, owed Beijing nearly $17 billion from loans issued as far back as 2007, according to the Inter-American Dialogue.
China’s infrastructure projects in Latin America are famously riddled with problems, some of which significantly impact local populations. This is true of the $2.7 billion Coca Codo Sinclair hydroelectric dam in Ecuador, which opened in 2016 and already local engineers are voicing concerns over cracks and structural issues.
Latin American governments hungry for investment and trade deals have historically turned a blind eye to these realities because of the size of China’s checkbook. However, given Beijing’s current domestic troubles, those checks could start getting smaller and come with more conditions, Mr. Ellis told The Epoch Times.
Commodities Impact
One of the near-term effects the region faces is cooling commodity prices due to falling demand from China, the region’s biggest trade partner, aside from Mexico.
In countries such as Brazil, Chile, and Peru, commodities represent 72 percent of total exports, according to the Institute of International Finance. By comparison, Africa’s commodities exports total 62 percent, the Middle East’s total 51 percent, and Asia’s total 25 percent.
This is especially problematic for the countries with strong mineral and agricultural sectors, which rely heavily on Chinese demand.
The Inter-American Development Bank has reported price drops between January and April on key Latin American commodities, including oil, coffee, iron ore, copper, and soybeans.
Mr. Ellis predicts a “protracted period of lower commodity prices” that will hit Latin American countries hard since China will likely be buying less and trying to sell more. He said the CCP likely won’t have “quite as much money to throw into the region as it once did.”
Consequently, this could dim some of the reputational luster China has spent years building. “Across the board, China is not going to look quite as glamorous to Latin America as it used to,” Mr. Ellis said.
Senior emerging markets economist Robert Gilhooly noted, “Commodity exporters, such as Chile, Peru, South Africa, and Australia, could see less demand from China,” which he said would lead to a cooling trend in global prices and “knock-on effects impacting investment, tax revenues, and broader business sentiment.”
Other analysts say cooling commodity prices are just the beginning.
“One of the main reasons these [Latin American] regimes gravitated towards China is because of the immediate practical benefits of that relationship … appealing loans, investments, military and security opportunities, and assorted forms of support,” regional security analyst and president of Scarab Rising, Irina Tsukerman, told The Epoch Times.
“Should they [Latin American governments] come to see China as an unreliable ally … without delivering on its promises, they will immediately turn away in search of another suitor.”
Ms. Tsukerman believes image factors heavily into China’s approach to engagement with Latin America. She’s not convinced the CCP will scale back its regional investments, even at the cost of its own economic crisis. Ms. Tsukerman believes Beijing cares more about “projecting power” than having what she called a “prudent and sober balance of expenditures.”
“In reality, there’s a perception in the ruling class that, so long as Beijing’s long arm reaches far and wide around the world, rumors of its economic collapse will not be fully believed by Western countries,” she said.
However, Beijing’s continued investment in Latin America will likely come with what Mr. Ellis called a “hardening of China’s diplomatic line.” He expects this to materialize with China’s loan terms, adding that the CCP is “very adept” at getting paid.
“Like in Africa, the Chinese are not letting anyone walk away from their debts,” Mr. Ellis said.
He added the CCP will probably sharpen its approach as a trade and investment partner while setting stricter terms and deepening its “politicization” in Latin America.
Mr. Ellis said China will likely become a more difficult international partner, and bring less cash to the table.
Opportunity Knocks
If more stringent trade and investment deals between China and Latin America come to pass, it may also hamper CCP efforts to expand the RMB yuan as a reserve currency in the region. Earlier this year, the governments of Brazil and Argentina announced they would begin using the yuan as a trade currency. On June 29, Argentina’s government took it a step further when its central bank announced residents and businesses would be able to open accounts in yuan.
China hasn’t been coy in its desire to push the yuan as an alternative to the U.S. dollar for reserves and trade, which many have called a “de-dollarization” campaign.
Yet, with Beijing’s economic retraction and more complicated or less access to funding, it may be an opportune time for the United States to step into the limelight in its own backyard. Ms. Tsukerman says the reality of China’s changing economic status could ignite a change in attitude.
“Despite leftist ideologies of Latin American regimes such as Argentina and Brazil, their leaders are pragmatic and self-interested. They may use populist rhetoric and extreme ideologies to get to power and control, but when it comes to guarding foreign policy and their own pockets, their eyes are wide open,” she said.
The United States may have lost ground to China as a top trading partner in recent years, but U.S. foreign direct investment in the region is still massive; last year representing 38 percent of the nearly $225 billion economic infusion in Latin America and the Caribbean.
Mr. Ellis says it’s up to Washington to differentiate itself as a trade partner in Latin America and capitalize on any economic fumbling on China’s part. If not, he remarked, it wouldn’t be the first time U.S. officials missed a golden opportunity.
“I’ve never been disappointed in our government’s ability to shoot itself in the foot.”
How will the economic downturn in China affect ongoing infrastructure projects in Latin America and the region’s economy as a whole?
The local communities and environment. For example, the construction of the Nicaraguan Canal, a $50 billion project financed by China, has been met with protests due to concerns about displacement of local communities and negative environmental impacts. Similarly, Chinese-built dams in Ecuador have caused significant damage to the Amazon rainforest and indigenous communities.
The economic downturn in China will exacerbate these issues in Latin America. As China’s economy weakens, it will have less capacity to continue investing in the region. This could lead to the suspension or cancellation of ongoing projects, leaving many Latin American countries with unfinished infrastructure and a lack of funds to complete them. Additionally, the economic slowdown in China will negatively impact the demand for Latin American commodities, such as soybeans, copper, and oil, further worsening their economic situation.
The interdependence between China and the rest of the world means that the repercussions of China’s economic woes will be felt globally. The world cannot afford to ignore the warning signs coming from China. It is crucial that countries, especially those heavily reliant on Chinese investments and trade, diversify their economic partnerships and reduce their dependence on China. This will require governments to implement policy reforms that promote innovation, investment in new industries, and the development of domestic markets.
Moreover, the international community must closely monitor China’s economic policies and practices. China’s approach to lending and investment in developing countries has often been criticized for its lack of transparency and accountability. There have been instances where Chinese loans have resulted in debt traps for vulnerable countries, leading to China exerting undue influence and control over their economies. By holding China accountable and promoting responsible lending practices, the international community can prevent further economic instability and safeguard the interests of developing countries.
China’s economic woes should serve as a wake-up call for the world. It is a reminder that economic growth cannot be sustained indefinitely, and that overreliance on a single country or sector can have far-reaching consequences. By diversifying their economies and forging new partnerships, countries can mitigate the risks posed by China’s economic instability. At the same time, policymakers and international organizations must work together to ensure that China’s economic practices align with global standards, promoting transparency, fairness, and long-term sustainability. Only through collective action can the world navigate the challenges presented by China’s economic downturn and build a more resilient and balanced global economy.
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