What can Latin America expect from China after the pandemic?

• China has been hit first by the pandemic and it has also exited first, but certainly not without scars (Chart 1). In light of the coronavirus shock, Chinese leadership has opted not to announce a GDP growth target for 2020 during the Two Sessions, which indicate that flexibility has been prioritized and that economic activity this year and probably next year is expected to be poor. Meanwhile, Premier Li Keqiang has finally announced a big stimulus during the Two Sessions, including laxer monetary support and announced 40% increase in local government bonds quota as well as an additional RMB 1 trillion in Special Treasury Bonds.
• The combination of a large stimulus without a growth target points to the worrisome fact that China’s recovery is far from complete, two months after Covid-19 was brought under control. This is especially true for the demand side. External demand remains extremely weak as virtually the whole world has been hit by the pandemic but, even more worryingly, also domestic demand as the meagre retail sales clearly indicate together with the looming deflationary pleasures. This is clearly bad news for commodity exporters and, in the case of infrastructure, particularly worrisome for those exporting metals.
• The need for more stimulus is thus, a no-brainer so that Premier Li’s announcement should be welcome. The problem, though, is that the mirror of additional stimulus is more leverage. Our estimates of China’s consolidated fiscal deficit have hovered around 8% during the last few years, which implies public debt has been piling up even before Covid-19 hit the Chinese economy and that China’s fiscal space is not as large as it used to be. The good news, though, is that China has enough domestic savings to hold this debt domestically and the size of the debt can be reduced once the negative economic consequences of the pandemic are fully under control.
• In this regard, one should expect financial repression to remain even more pervasive – supported by capital controls and China will put more effort to attract foreign capital to finance its growing debt. This is, again, not very positive for Latin America, a region in need of external financing as China may divert a lot of the inflows into emerging economies in its direction. All in all, Latin America should not be expecting a remake of 2008 this time around. In other words, China is not going to come to the rescue this time. The silver lining, though, is that interest rates in China will be trending downwards, making it relatively less attractive. In the same vein, the US increased push for financial decoupling from China may divert fund away from China into Latin America.
• In terms of specific countries, three countries in particular will be negatively impacted among the six major Latin American economies but one economy could benefit. Brazil, Chile and Peru will take the brunt of the economic slowdown in China based on their large trade exposure to Chinese demand. However, Mexico, which is a manufacturing-export lead economy, could potentially benefit if US companies reallocate out of China and into Mexico.

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