{
  "title": "Mind the Dragon: Latin America’s Exposure to China",
  "publication": "IMF Blog, November 11, 2014",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2014/11/11/mind-the-dragon-latin-americas-exposure-to-china",
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  "summary": "Authors: Bertrand Gruss, Fabiano Rodrigues Bastos",
  "sections": [
    {
      "heading": "Overview and context",
      "content": "- Authors: Bertrand Gruss, Fabiano Rodrigues Bastos\n- Date: November 11, 2014\n- Key premise: The share of exports from Latin America going to China is now ten times larger than in 2000, tying the region’s economic fate more closely to China’s economic performance."
    },
    {
      "heading": "Evidence from financial markets: growth surprises and FX reactions",
      "content": "- Method: Analyze the immediate response of foreign exchange (FX) markets to surprises in key Chinese economic indicators (reaction of currencies to deviations between actual outcomes and expected values).\n- Main findings:\n  - The response of exchange rates to a surprise on the growth rate of China’s industrial value added is large and significant for commodity exporters in Latin America, such as Brazil, Chile, and Colombia.\n  - The change in JP Morgan’s Latin America currency index is significant and relatively large (noted as larger than the change in the analogous Asian currency index).\n  - Peru exhibits a surprisingly low and insignificant FX response, potentially reflecting more frequent exchange rate interventions.\n  - Commodity exporters from other regions, such as Norway, also experience a significant exchange rate response to Chinese growth surprises.\n  - Other emerging markets—Mexico, Poland, and Turkey—show strong FX responses; interpreted as positive news in China lifting global confidence and risk appetite, benefiting liquid currencies that act as proxies for emerging market assets."
    },
    {
      "heading": "Transmission channel: commodities",
      "content": "- Rationale: Many Latin American countries are highly dependent on commodities and China is the largest world buyer of these products; therefore commodity prices are a key transmission channel.\n- Empirical evidence:\n  - China’s growth surprises have a significant and large effect on the price of many commodities that are very relevant for Latin America.\n  - Investment behavior is consistent with this channel: capital expenditure by the world’s top mining companies started slowing in the prior year amid revisions to long-term growth in China and declining metal prices.\n  - Mining companies are reportedly focused on improving operational efficiency and investment selectiveness in response to structural challenges."
    },
    {
      "heading": "Historical macroeconomic context",
      "content": "- Commodity-driven growth uplift: Output growth in Latin America rose from an average of 2.5 percent in 1982-2002 to 4.5 percent in 2003-11, largely fueled by China’s double-digit growth in the 2000s.\n- Recent reassessments: China’s long-term projected growth has been cut by 2¼ percentage points since mid-2010."
    },
    {
      "heading": "Risks and scenarios",
      "content": "- A sharper slowdown in China represents one of the key risks for Latin America and warrants preparation.\n- Even a gradual slowdown with rebalancing toward consumption could weaken demand for commodity-intensive goods (notably metals) by more than currently projected and priced in, implying downside risks to commodity exporters."
    },
    {
      "heading": "Policy recommendations to increase resilience",
      "content": "- Macro policy:\n  - Ensure prudent fiscal policy.\n  - Maintain low inflation.\n  - Preserve flexible exchange rates.\n- Structural policy:\n  - Pursue a credible and bold agenda of structural reforms focused on improving education, infrastructure, and the business environment.\n  - Boost productivity and the ability to move up the value chain to raise potential growth and reduce vulnerability to external confidence shocks.\n\nSource: Mind the Dragon: Latin America’s Exposure to China, Bertrand Gruss and Fabiano Rodrigues Bastos, November 11, 2014.\n\n---\n\n Content in this bundle\n\n- De Olho no Dragão: A América Latina e Sua Exposição à China; 10 de novembro de 2014\n  - De Olho no Dragão: A América Latina e Sua Exposição à China; 10 de novembro de 2014 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - De Olho no Dragão: A América Latina e Sua Exposição à China; 10 de novembro de 2014 (PDF){rel=\"external\" type=\"application/pdf\"}\n- Regional Economic Outlook: Western Hemisphere - Rising Challenges; April 2014\n  - Regional Economic Outlook: Western Hemisphere - Rising Challenges; April 2014 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Regional Economic Outlook: Western Hemisphere - Rising Challenges; April 2014 (PDF){rel=\"external\" type=\"application/pdf\"}\n- wp14154\n  - wp14154 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp14154 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- expanding its ties\n- https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-1.jpg\n- https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-2.jpg\n- https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-3.jpg\n\nSource: https://www.imf.org/en/blogs/articles/2014/11/11/mind-the-dragon-latin-americas-exposure-to-china"
    }
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    "Authors: Bertrand Gruss, Fabiano Rodrigues Bastos",
    "Published: November 11, 2014",
    "Authors: Bertrand Gruss, Fabiano Rodrigues Bastos",
    "Date: November 11, 2014",
    "Key premise: The share of exports from Latin America going to China is now ten times larger than in 2000, tying the region’s economic fate more closely to China’s economic performance.",
    "Method: Analyze the immediate response of foreign exchange (FX) markets to surprises in key Chinese economic indicators (reaction of currencies to deviations between actual outcomes and expected values).",
    "Main findings:",
    "Rationale: Many Latin American countries are highly dependent on commodities and China is the largest world buyer of these products; therefore commodity prices are a key transmission channel.",
    "Empirical evidence:",
    "Commodity-driven growth uplift: Output growth in Latin America rose from an average of 2.5 percent in 1982-2002 to 4.5 percent in 2003-11, largely fueled by China’s double-digit growth in the 2000s.",
    "Recent reassessments: China’s long-term projected growth has been cut by 2¼ percentage points since mid-2010.",
    "A sharper slowdown in China represents one of the key risks for Latin America and warrants preparation.",
    "Even a gradual slowdown with rebalancing toward consumption could weaken demand for commodity-intensive goods (notably metals) by more than currently projected and priced in, implying downside risks to commodity exporters.",
    "Macro policy:",
    "Structural policy:",
    "**De Olho no Dragão: A América Latina e Sua Exposição à China; 10 de novembro de 2014**",
    "**Regional Economic Outlook: Western Hemisphere - Rising Challenges; April 2014**",
    "**wp14154**",
    "[expanding its ties](http://www.imf.org/external/pubs/ft/fandd/2014/12/elson.htm)",
    "[https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-1.jpg](https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-1.jpg)",
    "[https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-2.jpg](https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-2.jpg)",
    "[https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-3.jpg](https://www.imf.org/wp-content/uploads/2014/11/whd-reo-latam-and-china-charts-3.jpg)"
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