Bring on the Chinese

by Hongwei Shang on March 7, 2008

in News

Bring on the Chinese

Chinese firms are heard well advanced with schemes to take a larger slice of Latin America, the origin of much of the natural resource fuel feeding the Asian tiger’s sustained expansion. Building on existing joint ventures, China should become a more dominant outright acquirer, particularly in energy and commodities. This will likely be followed by M&A in the financial sector as China tightens its grip on the region.

LatAm should not fear the invasion. The competition is positive, not just as an added source of investment. The benefits of trade work both ways, particularly as LatAm emerges as a significant player in global business, propelled by a rising number of free trade agreements.

Asia is a low cost producer of manufactured items like electronics, textiles, and clothing – for which there is a growing LatAm market. Diminished vulnerabilities owing to floating currencies, reserve accumulation, trade/current account surpluses, and reduced fiscal deficits in the bigger countries make the region a much more attractive trading partner for Asia.

Standard Chartered cites WTO data showing the value of LatAm exports hitting $355 billion in 2005, rising 25% year-on-year and growing at an annual average rate of 13% for 2000–2005. This is mostly agricultural and fuel/mining products, with a third destined for the US. The share of LatAm’s exports to Asia rose to 13.4% in 2005 from 9.7% in 2000, and exports to China in particular grew at an annual average pace of 20% for 2000-2005, says Standard. The trend continues.

In 2006, China was one of the top five export destinations by value for Argentina, Brazil, Chile, and Peru, buying almost $20 billion from those countries. But surprisingly, imports from China to LatAm are even more significant, says Standard Chartered. In 2006, China was one of the top five trading partners for those four LatAm nations, plus Mexico and Colombia, who collectively shipped in a total of $37.2 billion.

Recent Chinese government data show trade with LatAm exceeding $100 billion in 2007, more than the target the Asian nation had penciled in for 2010. And it is not all about China. South Korea is a major trade partner, especially for Chile and Mexico. This is quite a leap from just a few years back, when trade would have been dominated firstly by neighboring countries in the region, then by the US and Europe.

In exchange for its soybeans, copper and crude – all of which look set to hold firm for the foreseeable future – LatAm has a lot to gain from stronger ties to Asia. As the US falters, it makes sense for the region to bolster links to its fellow fast-expanding emerging markets to the east, not just China. Diversification and vigorous trade work to the benefit of the entire region.

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