LatinFinance - September/October 2015 - 59

Chinese stock index
performance 2015
Slip and slide
6,000
5,000
4,000
3,000
2,000
1,000

Shenzhen
Composite
Index

Shanghai
Composite
Index

8/6/15

7/2/15

5/28/15

4/23/15

3/19/15

2/6/15

0

1/5/15

Tastes refined
China is now orienting itself away from
a low-cost, mass-manufacturing export
economy towards a more sustainable
model based on higher domestic demand
and more value-added manufacturing and
services industries, presenting both a challenge and opportunity to Latin America,
many experts say.
"For Latin America, the one to watch
over the next five years or so will be the
ones that can adapt to provide the sort of
products that China's emerging middle
classes really want," Innes-Ker says.
Winners from this trend towards higher
consumption and higher quality products
will be agricultural producers such as
soybean farmers in Argentina and Brazil
and the coffee, beef and grains producers
in those countries as well as in Uruguay and
Colombia.
Aside from food, however, which countries and sectors will emerge as victors from
the evolving trade relationship remains
to be seen. But opportunities will arise for
enterprises that can adapt.
"As we see the Chinese middle class
grow, you could see some real potential
gains in some of the services sectors,"
Kotschwar says. "You are starting to see
more Chinese tourists coming to Latin
America and the Caribbean. There is a
learning curve for both sides but it's a tremendous opportunity."
Certain service areas, such as computer
design and healthcare, where Latin America has some emerging innovators, will be
particularly attractive to China. "There are

some indigenous pharmaceutical developments that might be of interest to Chinese
companies," Kotschwar says.
Latin American manufacturer's ability to
move up the value scale, to produce more
sophisticated products as the tastes and incomes of the Chinese middle class expand,
will be a large part of what determines their
success in bids for Chinese business.
Few Latin American companies have
begun this ascent, however, Innes-Ker says.
"Latin America suffers from the perspective
that the most open markets in China tend
to be the ones for high-end luxury goods,
whereas if you are an emerging market
economy producing at a slightly lower
level of the value chain, you will probably

Closing Price (CNY)

Even if China avoids a crash, it is very
unlikely to return to the era of megaconstruction and investment that sucked
in commodities from Latin America. The
world's second largest economy is going
through both a cyclical and structural
downturn, Innes-Ker says.
"The housing market is beginning to pick
up and once we get a pick-up in house sales,
sooner or later that will put a floor under
investments," Innes-Ker says, adding that
for Latin America's commodity-dependent
economies, there would be some recovery
in the second half of the year particularly in
the final quarter.
There is no glossing over the greater
structural shifts for China, however. "Although there might be a short-term cyclical
rebound in the commodities, the long term
story is very much a shift away towards
services," Innes-Ker says.

Source: Yahoo! Finance

be competing with Chinese producers. In
which case, you will be facing more unofficial protectionism."
Talvi echoes the sentiment: "If you look
at the sophistication of the export production basket of Latin America, unfortunately
it is pretty unsophisticated."
Mexico is a notable exception. Companies there looked to diversify after finding
very little benefit from China's boom. "This
caused Mexican industries to retool themselves to move away from assuming that
its comparative advantage was in low-cost
labor and become competitive in a number
of sectors," Kotschwar says. "Mexico won
from losing out in the China boom."
As a result, Mexico is the only one of the
big trading economies to be doing well in

terms of Chinese trade. Trade between
China and Mexico went up almost 11% last
year, whereas almost all the others saw big
declines, Innes-Ker says.
Service centric
As China rejiggers its domestic growth, it
will look to leverage its spare industrial and
construction capacity through exports.
Latin America, with its massive menu of
infrastructure development programs, is
an ideal target for the exercise, Talvi says.
Chinese President Xi Jinping announced
a pledge, at the Community of Latin
America and Caribbean States in Beijing
in January, of $250 billion of infrastructure
investment in Latin America over the next
decade. "We are going to see increased
participation in the infrastructure sector in
Latin America accompanied by the finance
and resources that will back that up to
make it viable," Xi said at the organization's
first meeting in China.
This financial and physical investment,
would be the foundation of a new type of
relationship that would create wealth and
job opportunities in Latin America, Talvi
says. "We will have the possibility of accessing cheap finance on very concessional
terms to build infrastructure that will boost
our productive capacity at a time when we
need to promote domestic demand as an
engine of growth," Talvi says.
Recipient countries of Chinese investment benefited from capital, technical
experience and expertise brought in by Chinese managers, and cheaper inputs to the
production process than Latin American
companies could access otherwise, says
Vaughn Barber, head of China outbound at
KPMG.
"There is an increasing recognition that
Chinese companies can achieve success in
areas like infrastructure and agribusiness
by partnering with incumbent players in
key target markets," Barber says.
The passionate relationship between
Latin America and China is therefore likely
to evolve into a more traditional marriage
but will not end in divorce. Just as there was
excessive optimism about the relationship
during the boom, so now the worst fears
are overdone, says Glossop.
China may be less of an engine of growth
for the region but, due to its size, it has
become a huge trading partner for the
region and it will remain so. "China will
grow at less supersonic rates but it will not
sink under the sea and disappear from the
map," Talvi says. LF

September/October 2015 - L ATINFINA NCE.COM 59
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