China (re) appears on the international scene
China underwent a process of successive structural changes and continuous acceleration of its growth rate from the late 1970s onwards. Until the early 1990s, the process was oriented “inward” and had no major repercussions on the global economy. From then on, however, the trajectory was reoriented “outwards”, involving a strong increase in domestic savings and investment, FDI and exports, which also promoted the internal migration of the workforce towards the large cities of the East. The change of course had, now, a great impact on the international economy, transforming China into its main engine of growth.
The composition of China’s foreign trade consequently underwent a drastic change, increasingly oriented towards the export of manufactured goods and the import of commodities. Something similar happened with the countries that participate together with China in global value chains (what is known as “Asia factory”). This change in the external profile of China and its regional partners had a strong impact on international prices in favor of raw materials. In order of magnitude, hydrocarbons experienced the most notable increases, followed secondly by minerals and thirdly by agricultural goods.
Towards the beginning of the present decade, China’s “outward” strategy found its own limits, both due to the appearance of a strong excess of aggregate demand and rapid increases in real wages in the labor market domestically, as well as the drop in world demand originated in the American mortgage crisis abroad. The result was a significant slowdown in China’s growth rate.
Faced with the new scenario, the Asian country decided to modify its strategy, now giving primacy to the expansion of domestic consumption. This supposes a structural modification, not only of economic and social order, but also political. A crucial question in the short term is whether its leadership will succeed in culminating the ongoing “rebalancing” with a “softlanding” or if, instead, the country will have to bear the consequences of a “crashlanding”. In any case, it is a fact that the astronomical growth rates of the recent past will not be repeated.
The slowdown in Chinese growth, added to the appreciation of the dollar, the lower global growth and the change in the structure of supply of certain commodities, operated so that the real prices of goods associated with natural resources fell severely, ending the boom. in the commodity markets . As in the previous boom, the fall was led by the collapse of the price of hydrocarbons, it was somewhat less but very significant in minerals and somewhat more moderate in agricultural commodities . According to the World Trade Monitor published by the Dutch Economic Policy Office (CPB), in effect, the price of oil deflated by the manufacturing index fell by 37% between June 2014 and June 2015, while the rest of the commodities did so by 12% .
The role of South America
The commercial specialization of the countries of South America concentrated on the export of commodities meant that during the boom that lasted between 2003 and 2013 the region benefited from a significant improvement in its terms of trade, an improvement that surpassed even those of the first decade of the twentieth century and that of the seventies of the same century. This improvement was combined with a rapid increase in the quantities exported. The importance of China in this process was manifested in the constitution of that market as the main destination of the region’s exports. Conversely, South America became China’s main extra-regional supplier of primary goods.
Consequently, during this period, growth rates in South America accelerated significantly and their performance was only temporarily affected by the global crisis of 2008. Given the evolution of the prices of the different classes of commodities , naturally the countries exporters of hydrocarbons and minerals benefited more than exporters of agricultural products.
As the economic cycle American countries of the South was closely synchronized with the trajectory of the Chinese economy during its period of rapid growth and openness, also it seems to be so now that China’s growth has slowed and the last Supercycle of commodities it is finished. Although the impact manifested itself throughout the region, its effects were different depending on the pattern of specialization of its exports depending on whether they focus on fuels, minerals or agriculture. [one] On the other hand, most of the countries of the region will most likely have to face increasing pressure from the Chinese exportable supply, which will have to be channeled to third markets while the process of internal rebalancing lasts.
What can we expect in the future
Going forward, the evolution in each country in the region will depend, on the one hand, on the characteristics of the convergence of the Chinese economy to its new long-term growth rate ( soft vs. hard landing ). On the other, how each one has managed the past boom and, consequently, the policy space that they can count on to reverse the previous process of currency appreciation and manage the shortage of foreign exchange, to diversify their pattern of exports and to maintain fiscal sustainability in a context of lower income from natural resources.
In any case, it can be expected that in the medium term a larger Chinese economy, even with a lower but stabilized growth rate, will continue to be a very important factor in the demand for raw materials in world markets, given the enormous size of its domestic market, the urbanization process still underway and the foreseeable growth of aggregate consumption resulting from the increase in per capita income and the expected improvement in distribution.
It should also be borne in mind that, possibly, raw materials will have a new source of demand in the future in other Asian countries (India, Vietnam, etc.) and African countries that, incipiently, seem to be moving towards the group of “middle-income” countries.
Although this may define a price “floor” higher than the one before the supercycle that has just concluded, it is necessary to keep in mind that price fluctuations will persist and may last a long time, so create and / or consolidate countercyclical rules and instruments Fiscal and external policy, as well as efforts to modify the pattern of specialization and reduce dependence on natural resources, will continue to be inalienable objectives of any sustainable development strategy in all the countries of South America.