Analysis: Latin America's love affair with China may sour

Wed Jul 11, 2012 4:34pm EDT
 
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By Krista Hughes and Anthony Esposito

MEXICO CITY/SANTIAGO (Reuters) - Latin America has developed a dangerous dependency on China as a voracious consumer of commodity exports and the region now faces a potential hit as the huge Asian economy cools.

Exports to China by some of Latin America's major economies - Brazil, Colombia, Chile and Peru - have grown 10-fold in value since 2001. China is now the top export destination for all of those counties, except Colombia.

The rise of the Asian powerhouse has helped redraw the region's economic map, spurring investment in soybean farms in Brazil's remote center-west, plans for a new rail link in Colombia to rival the Panama Canal and even the relocation of a Peruvian town in the Andes to accommodate Chinese miner Chinalco.

But $90 billion in direct exports to China are only part of the story. As countries in Latin America rushed to produce the fuels, ore and metals demanded by Chinese factories, dependence on the world's No. 2 economy increased in tandem.

"If China's economy decelerates, we are going to see a strong impact - first in prices and then in volumes," said Carlos Gonzalez, head of economic studies at Peru's export association, ADEX. "Ninety-seven percent of our sales to China are minerals. Because mining firms are the companies that pay the most taxes in Peru, even social programs would be affected."

Commodities make up more than 60 percent of exports in all major Latin American economies, apart from Mexico, and slowing Chinese growth has already hit raw material prices, potentially hurting countries such as Venezuela and Argentina, too.

Since 2001, when China joined the World Trade Organization and burst onto the global economic stage, the share of exports Chile sends to the country has quadrupled to 22.8 percent.

Brazil's exports to China have risen five-fold to 17.3 percent. In Peru - where Finance Minister Luis Castilla has said he lights a candle and prays every day for China to keep growing - the share of exports headed for China doubled to 15.3 percent.   Continued...