## Mind the Dragon: Latin America’s Exposure to China _IMF Blog, November 11, 2014_ ## Source details **Canonical URL:** [Mind the Dragon: Latin America’s Exposure to China](https://www.imf.org/en/blogs/articles/2014/11/11/mind-the-dragon-latin-americas-exposure-to-china) ## Other formats - [Markdown version](/en/blogs/articles/2014/11/11/mind-the-dragon-latin-americas-exposure-to-china/index.md) - [Structured JSON version](/en/blogs/articles/2014/11/11/mind-the-dragon-latin-americas-exposure-to-china/index.json) - [Bundle manifest](/en/blogs/articles/2014/11/11/mind-the-dragon-latin-americas-exposure-to-china/bundle-manifest.json) ## Bibliographic details - Authors: Bertrand Gruss, Fabiano Rodrigues Bastos - Published: November 11, 2014 --- ### Overview and context - 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. ### Evidence from financial markets: growth surprises and FX reactions - 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: - 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. - 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). - Peru exhibits a surprisingly low and insignificant FX response, potentially reflecting more frequent exchange rate interventions. - Commodity exporters from other regions, such as Norway, also experience a significant exchange rate response to Chinese growth surprises. - 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. ### Transmission channel: commodities - 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: - China’s growth surprises have a significant and large effect on the price of many commodities that are very relevant for Latin America. - 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. - Mining companies are reportedly focused on improving operational efficiency and investment selectiveness in response to structural challenges. ### Historical macroeconomic context - 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. ### Risks and scenarios - 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. ### Policy recommendations to increase resilience - Macro policy: - Ensure prudent fiscal policy. - Maintain low inflation. - Preserve flexible exchange rates. - Structural policy: - Pursue a credible and bold agenda of structural reforms focused on improving education, infrastructure, and the business environment. - Boost productivity and the ability to move up the value chain to raise potential growth and reduce vulnerability to external confidence shocks. *Source: Mind the Dragon: Latin America’s Exposure to China, Bertrand Gruss and Fabiano Rodrigues Bastos, November 11, 2014.* --- ## Content in this bundle - **De Olho no Dragão: A América Latina e Sua Exposição à China; 10 de novembro de 2014** - [De Olho no Dragão: A América Latina e Sua Exposição à China; 10 de novembro de 2014 (Markdown version)](/external/lang/portuguese/np/blog/2014/111014p.pdf.md){rel="alternate" type="text/markdown"} - [De Olho no Dragão: A América Latina e Sua Exposição à China; 10 de novembro de 2014 (PDF)](/external/lang/portuguese/np/blog/2014/111014p.pdf){rel="external" type="application/pdf"} - **Regional Economic Outlook: Western Hemisphere - Rising Challenges; April 2014** - [Regional Economic Outlook: Western Hemisphere - Rising Challenges; April 2014 (Markdown version)](/external/pubs/ft/reo/2014/whd/eng/pdf/wreo0414.pdf.md){rel="alternate" type="text/markdown"} - [Regional Economic Outlook: Western Hemisphere - Rising Challenges; April 2014 (PDF)](/external/pubs/ft/reo/2014/whd/eng/pdf/wreo0414.pdf){rel="external" type="application/pdf"} - **wp14154** - [wp14154 (Markdown version)](/external/pubs/ft/wp/2014/wp14154.pdf.md){rel="alternate" type="text/markdown"} - [wp14154 (PDF)](/external/pubs/ft/wp/2014/wp14154.pdf){rel="external" type="application/pdf"} --- ## References - [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) _Source: https://www.imf.org/en/blogs/articles/2014/11/11/mind-the-dragon-latin-americas-exposure-to-china_