If the real estate case turns out to be just the tip of the iceberg, Latin America could face a drop in raw material exports to China
Taken from El País
Doubts about the financial stability of one of China's largest construction companies are being interpreted as a warning sign for some Latin American countries whose economies are closely tied to China's. The heavily indebted developer, Evergrande, faces a massive interest payment, prompting investors to speculate about potential Chinese government intervention or a default. As a result, stock markets plummeted on Monday and, in some countries, continued to fall on Tuesday.
In Latin America, the worst of the violent market reaction appears to be over. Stock markets in Mexico, Chile, and Brazil fell on Monday, but recovered most of their losses on Tuesday. However, the situation has sparked debate about China's strength as an economic power, driving trade with partners like Chile, Brazil, Peru, and even Colombia. If Evergrande is just the tip of the iceberg, China may be facing a real estate crisis, which would have serious consequences for the Latin American region.
Evergrande shares fell as much as 7% on the Hong Kong Stock Exchange on Tuesday, while its bonds dropped 10%, hitting their lowest level in a decade. Analysts are talking about a potential domino effect, as the finances of several smaller Chinese real estate companies are also heavily indebted. Goldman Sachs strategists estimate that an Evergrande collapse could reduce China's GDP by $350 billion over the next year, The New York Times .
“This is definitely a warning sign,” says Luciano Rostagno, market strategist at Banco Mizuho do Brasil, speaking by phone. “China has become one of the main trading partners of Latin American economies, and if the Chinese economy stagnates, slows its growth rate, or faces a crisis, then this will impact Latin America,” he added.
Chile exports copper to China; Brazil, iron ore; and Colombia, oil. Peruvian mineral exports to the Asian giant increased by 62% in the first months of the year, compared to the same period last year. This makes them dependent on an economy that could face difficulties.
“If China faces a crisis, economic growth will be lower and, therefore, demand for raw materials will weaken. This affects many Latin American economies in terms of trade,” Rostagno pointed out.
