The fluctuation of the Chinese currency and shifts in the country’s stock markets sent a shock through global markets at the end of August. Global Network Perspectives spoke with experts across the Global Network for Advanced Management to ask how a sudden shift in the world’s second-largest economy impacts other nations. What are the short-term and long-term implications? What industries will likely be affected?

Updated September 14

 

Brazil

ALEXANDRA STROMMER GODOI, ECONOMICS Professor, FGV Escola de Administração de Empresas de São Paulo

The Chinese crisis feels like another dark cloud in Brazil’s perfect storm. The economy has decelerated sharply after the exhaustion of a business cycle based on domestic consumption (fueled by the expansion of credit and a buoyant job’s market), expansionary fiscal policy, and very favorable terms of trade. Consensus is that GDP will probably decline by approximately 2% this year, while inflation stays above 9%, as the economy copes with supply shocks related to a severe drought and the government adjusts tariffs that were kept artificially low in the past for political reasons.

Private investments are on hold, as a huge corruption scandal involving state-owned oil giant Petrobras and the main domestic construction companies unfolds, which could  have important political implications including, in the most extreme scenario, the impeachment of president Dilma Rousseff. Public investments have also declined, as the government struggles to balance its books after a long period of expansionary policies.

It is clear that Brazil has to search for a new model of economic development, and the most promising alternative is to boost its exports. A “hard landing” in China makes the adjustment even more difficult, in particular because the Asian country is the main market for Brazilian agricultural and mineral commodities. The financial markets recognize that, and the Brazilian real has been one of the currencies to suffer the most recently, having devalued more than 35% year-to-date. 

Despite the rightful worriers, however, it is important to highlight the differences between the Brazilian situation now and that of the financial crisis that castigated Asia and Latin America in the late 1990s. The currency is not pegged anymore, but floats freely. The country sits on US$370 billion of foreign reserves (vs US$43 billion at the end of 1998), while the total external debt is at US$343 billion. Net public debt/GDP has declined to 34.5% of GDP, from 53% in 1998, and even though the recent fiscal trend is clearly negative, the figures are still far from calamitous. Finally, the banking sector is solid and should be able to cope with the volatility reasonably well.

To recover in the medium term, however, Brazil should enact productivity-enhancing reforms and improve its regulatory framework in order to promote the much needed upgrading of its infrastructure. It could then even benefit from the excessive savings that might look for new destinations as China decelerates. In a sense, Brazil is an inverted mirror of China, with consumption representing 65% of GDP while investments accounting for meager 18%, which fade compared to almost 50% seen in the Asian country. Both countries would therefore benefit, in the long run, from a more balanced growth model.

Chile

Claudia Labarca, Professor at MBA UC and School of Communications, Pontificia Universidad Católica

In 2005 Chile and China signed a Free Trade Agreement. This implied not only Chile becoming the first western country that ever signed a commercial agreement of this kind with the PRC, but also that China would became Chile´s first commercial partner in the coming years. In fact, commercial exchange has grown up at a 22% rate since 2005. However, as ECLAC has warned in its last reports, almost 90% of the total Chilean exports are related to mineral products (mostly copper) which may concur in a reprimarization of Chilean exports, as well as a dangerous dependence of Chinese economic swings.  As an example, the recent RMB devaluation and economic figures have already hit the Chilean copper price in the international market, and local media is already warning about the economic effects that this will have in the next year´s budget. 

However, there is also a growing room for agricultural and agroindustry products—wine, pork meat, salmon and fruit, among others—that despite the recent ripple in the Chinese economy, it is expected to continue growing in the long term scenario. This is due to the emergent Chinese middle class, which every day is calling for high-quality imported food with safety standards and a clear traceability of processes. However, in order to successfully market Chilean products in the competitive Chinese market, a better effort is required from Chile—effort that lies in both public and private corporations—to brand both the country and its products.

Nigeria

Bongo Adi, Economist, Lagos Business School

The massive losses in the international commodities and financial markets seems to have registered an almost immediate impact in the Nigerian capital market. At the opening of business in the week, the Nigerian Stock Exchange, NSE, benchmark index, the All Share Index, ASI, declined 2.2% to 29.214.13 points bringing the year-to-date loss to 15.7%—the greatest loss in six months.  

Investors lost N227.7 billion on Tuesday to peg market capitalization at N10 trillion at the close of market.  Likewise, market activity declined as value and volume traded shed 43.9% and 25.5%. The Nigerian burse closed in the red on four consecutive trading days of the preceding week, extending weekly losses for the third consecutive week. 

China is currently Nigeria’s largest source of imports and the third largest trading partner. It is therefore not surprising that the shock waves from the Chinese ripple seem to have hit the Nigerian economy almost immediately. This obviously deepens the woes of an already fragile economic base which the country was flung into by the recent international collapse of the oil market. 

In the short to medium term, it is expected that Nigeria’s economy would continue to remain attractive to Chinese investors especially, given low oil price, weak currency, and enormous infrastructure deficit that Chinese companies have found to be a niche opportunity.  But for indigenous firms, the Chinese ripple represents a real threat to survival and profitability.

The Chinese subpar performance has created global volatility which in Mexico has been reflected in sharp movements of commodity prices, exchange rates, future contracts and stock market prices. This volatility is likely to persist in the short-term until markets have a better sense of how the ongoing structural changes in the Chinese economy will determine its long-term performance. Among the more notable developments are a rise in consumption and a reduction in investment as share of GDP, which have been accompanied by a rise in services and a reduction in manufacturing production.

Mexico

Alberto Ortiz Bolaños, Professor of Finance at EGADE Business School

Igor P. Rivera, Director of the Master in Finance in EGADE Business School Santa Fe

The long-term effects for Mexico will be heavily dominated by the evolution of trade and finance with the US and China.

In the trade front, during the past two decades, as China became the world’s largest exporter of manufactures and a large importer of commodities, the balance for Mexico was negative as the displacement in manufacturing both at home and in the US, was not offset by the positive effect in commodities. Erhan Artuç, Daniel Lederman and Diego Rojas (2015) conclude that this emergence of China had negative long-term consequences for employment in Mexico. However, the ongoing structural shift in China away from manufacturing and towards labor-intensive services could create opportunities for Mexican producers to recover presence in the US as production costs increase in the Asian country.

In the finance front, the outlook is dominated by the potential effects that a rise in US interests rates could cause for capital flows. However, the developments with the Chinese debt load (which surpasses 280% of GDP), its net foreign asset position and its reserve management strategy (as of June 2015 China holds 1,271 out of 6,175 billions of dollars of available US Treasury securities) would also have consequences for the worldwide financial performance. Mexico’s ongoing reforms, especially in the energy sector should be attracting large amounts of foreign direct investment, however with current oil prices this inflow won’t be realized soon. Mexican monetary and fiscal authorities are keeping close track of financial market developments, but the recent exchange rate depreciation shows the challenges imposed by the volume and speed created with the increasing financial markets integrations. A word of caution is related to the active participation that Mexican companies had in international financial markets when credit conditions in advanced economies relaxed with the low levels of interest rates, since both risk and term-premiums were set low as well; as credit markets may come back to regular conditions, floating rate debt might become more than a headache. Other than exchange-traded firms, we lack of precise and timely information to provide us with a comprehensive picture of the degree of currency mismatch that these companies have. Without this data it is difficult to design prudential policies to limit negative externalities from the financial system to the economy.