The long anticipated meltdown in Chinese stocks has accelerated this week, although it took a break today. Whether or not it has implications for the broader economy in China and around the world is unclear, given how little China relies on its stock market for financing and growth.
It’s all about the “carry trade”, or ability to borrow money in a foreign currency (usually US Dollars) at low interest rates and invest it at home in the hope that the local currency (Renminbi, or “people’s currency”) will become more valuable relative to the foreign currency later. It’s a two-fer if you can invest it in something that appears to be gaining in value, such as local stocks, and Chinese investors went for it bigtime.
Yes, it was all another bubble waiting to pop, which it appears to be doing now. But can this hurt us? Speculation has centered on trade with Latin America, which has its own uneven growth and a growing reliance on China. But this is silly for a lot of reasons. It’s worth looking at Latin America as a unit and seeing what effects we can really expect.
The term “Latin America” is a catch-all for the undeveloped, developing, and developed nations of the Americas that are not the US or Canada. They don’t really function as a unit but share a lot of similarities. None are highly developed and all of them are relatively isolated, far away from global “hotspots” of development.
Latin America is also rich in raw materials for a hungry world and a relatively undeveloped labor force that might yet be able to add value to their natural riches.
There has been a lot of fretting about the growing Chinese appetite for products from the region for one simple reason – it appears to be as politically strategic as it is economic. All Chinese gains are seen through the perspective of a potential global rival with ambitions far beyond improving the lives of their people. Their greater share of the Latin American economy is no different.
There’s not much to worry about here, however.
Currently, Latin America has a total GDP of about $6.1T, or 7.8% of the planet. Given that they have 522M people or 7.4% of the population of the world they aren’t doing that badly overall. Of the $19T in world trade, Latin America has about $1T in both imports and exports, meaning that they make up about 5.2% of world trade. But that figure is what’s growing the fastest as their geographic isolation slowly ends – rising at over 5.3% per year versus the 3.5% growth in GDP that they experienced overall in 2013.
But again, it’s where they trade that makes all the difference. The Chinese share of Latin American exports has grown dramatically, increasing by a factor of 12 over the last 15 years. They are poised to overtake the EU as the second largest trading partner to Latin America in two years.
If that sounds shocking, it’s worth a little more perspective. 40.5% of Latin American exports go to the US, their largest trading partner by far. The EU is at 12.3%, and China is at 9.5%. 29.2% of their trade is between the nations of Latin America, and that is growing as rapidly as China’s share. For more perspective on the growing Chinese menace to the south, it still amounts to no more than 2% of the total GDP for these nations.
Is it worth worrying about? Veteran followers of Latin America know that these nations have always been on the cusp of developing, however slowly and unevenly. China’s rise in the region is nothing more than China’s rise worldwide.
But if China runs into trouble and stops importing, especially raw materials, what will happen to Latin America? A loss of 2% of their GDP would not be good, but it’s less than the annual growth that they were experiencing before this year. It’s a slowdown, yes, but not a huge one.
So is there a reason to worry about China’s net affect on the Latin American economy? In the grand scheme of everything it’s hard to see how this doesn’t come out in the laundry. The overall health of the US economy has an influence four times greater and the region itself three times. Given the trials of Europe it would make more sense to worry about their waning economies than anything else.
What will pull Latin America up more than anything else is a combination of improved trade with the US and improved trade among themselves. This hemisphere will grow together and it only makes sense for the US to do everything we can to support that effort. For their own part, the more the nations of Latin America can improve their manufacturing and add value to their plentiful raw materials with good jobs the better.
But China? It’s really not worth worrying about despite recent gains. Improved global trade with everyone will continue to boost Latin America as its geographic isolation is no longer the barrier it has been. It’s all a matter of how the development occurs and how it benefits the people of the region without destroying the ecology. The rest of the geopolitical analysis is just not that important.
I’d say the whole globe is in trouble.
Generally, yes. One region no more than the others, I’d guess.
It is going to be interesting to see the how the dominos fall. Who will take out whom?
I think the world economy is a lot stronger than it was in 2007-2008, so I don’t see anything bad happening. But … you never know.
You no longer have a sizable consumer group to stimulate the economies of the world. I don’t believe the stats that are put out there. It will be interesting to see how things unfold.
The developed world is aging, and as a result consuming less. The generations behind them are not as voracious and tend to be more interested in value rather than mass quantities. The same appears to be true of developing nations, where new wealth is being put into savings more than it is following the consumption patterns of the developed world. The net result is a drop in demand – part of the definition of a “Depression” which we have seen since 2000.
I believe that some of this will continue, but a new economy based more on software – that is non physical things that make our lives better.
Yes, I think that technology will be a big saviour. There are limits to growth and we’ve probably reached that.
I always feel like I’m going back to school when I read your work. I always find so much that I don’t know about…😃
Thanks! (I think …) 🙂
It’s a good thing…lol! I’m always learning, which I love to do…that’s why I’m always coming back 😃
Latin America seems to be doing fine except of course Venezuela. They have a long way to go in terms of reform but I can’t see that they depend on China anymore than anyone else.
I didn’t say much about Venezuela, but they are the ones holding down the region at this point. It would be good to see some resolution out of there soon.
China will ruin everything if you give them enough time. It’s still a communist nation.
Yes, it is.
Good blog, I learned a lot.
Why can’t you talk about simple things like stereoisomers. ; )
There’s enough talk about cis and trans in the nooze these daze. 🙂
What is in your pipe, dude, Gangja or sinsemilla? : )
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