Latin America-China Investment Guide - 56

FDI
Strategic investors are
widening their
targets in LatAm

LATIN
AMERICACHINA
INVESTMENT
GUIDE

PAGE 60

Bonds
The case for issuing
debt in RMB
PAGE 64

Evolving
partnership

AFPs & Afores
LatAm portfolio
investors look to China
PAGE 67

China and Latin America are revamping their trade relationship, as rough economic
conditions test their interdependence. By Phil Thornton
Latin America and China seemed to
make the perfect pair years ago. China's
economy was booming and it had a seemingly insatiable appetite for raw materials.
While the Latin American continent, well
endowed with natural resources and in
constant need of new sources of economic
growth, was an ideal match.
China's frenetic urbanization sucked in
Latin America's ample supplies of copper, iron ore and soybeans. The country
increased imports from Latin America
seven-fold between 1999 and 2004, according to IMF data.
The relationship also comprised a
fair amount of give-and-take. Goods and
services increasingly flowed from China
to Latin America, as Latin America's
emerging middle class became a target
demographic for Chinese manufacturers.
China's exports to the region more than
tripled in the honeymoon period.
"China has been going through an
investment-heavy stage of its development that accelerated after the global
financial crisis that aggravated the dependence of Latin America on China as
a growth driver," says Duncan Innes-Ker,
head of Asia research at the Economist
Intelligence Unit.
Roughly three-quarters of the continent's economic booms and busts over
the 10 years ending in 2014 could be ex-

56 L ATINFINA NCE.COM - September/October 2015

plained by external factors, says Ernesto
Talvi, director of the Brookings/CERES
Latin America Initiative. Around 60% of
these peaks and troughs could be attributed to China and 40% to the lower cost
of capital. "It was commodities plus very
low cost of capital," Talvi says. "Products
we exported became very expensive while
the capital and financial resources used to
produce them became very cheap."
The benefits to Latin America of the
Chinese-led boom came through trade,
primarily in commodities but increasingly
in a more diverse range of products, and
China's investment in related activities
such as mining.
"It is a region that has enjoyed a very
longstanding and positive ride as a result
of high commodity prices and as a result
of growth being driven by large economies
such as China," Christine Lagarde, the
managing director and head of the IMF,
said of Latin America at the end of July
during a briefing with selected journalists.
Commodity exporting countries had
benefited from China's demand for their
resources and the impact of that demand
on prices, says Barbara Kotschwar, a
research fellow with the Peterson Institute
for International Economics. "This has
enabled countries to grow and undertake
programs that have helped them bring
people out of poverty and participate

more in the economy and which were
made possible by the commodities boom
from China," she says.
Compound problems
Just as demand in China can largely be
credited for Latin America's booming
economies, higher commodity prices and
a prevalence of cheap financing, the Asian
giant has also played a significant role in
the reversal of those same factors.
"Clearly they have stopped reaping a
benefit of a decade of high commodity
prices which has been fueling Latin American growth for many years," Lagarde said.
Talvi said that commodity prices had
remained at favorable levels for exporters
in 2012 through 2013, but had ceased to
improve. "The mere fact that you lost that
renewed fuel that every year was giving
speed to the engine meant that the region
was bound to converge to its mediocre
average of 3%. That alone implied a tremendous deceleration," Talvi says.
In a double hit, Latin American economies' cost of capital has been increasing,
Talvi says. Measured by the JPMorgan's
Emerging Market Bond Index (EMBI), the
cost of capital rose two percentage points
following the so-called "taper tantrum"
that occurred in May 2013 when the US
Federal Reserve began to discuss withdrawing the extraordinary liquidity it was
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