China’s Economic Downfall Spells Trouble for Latin America, Opportunity for US

As Beijing's economic woes deepen, Latin American nations are starting to feel a hit on commodities, with harsher investment terms likely to be next.
China’s Economic Downfall Spells Trouble for Latin America, Opportunity for US
Chinese-chartered merchant ship Cosco Shipping Panama crosses the new Agua Clara Locks during the inauguration of the expansion of the Panama Canal in this file photo. China is continuing its push to displace U.S. influence in the region and has already put parts of the Panama Canal under its control. (Rodrigo Arangua/AFP/Getty Images)
Autumn Spredemann
News Analysis

Deepening economic woes in China are something the communist regime can no longer dismiss and dependent countries can't afford to ignore.

Since China's decision to end its "zero-COVID" policy was announced last December, the subsequent economic downturn has hit multiple sectors. Import and export markets have slumped this year, coupled with the country's soaring debt, underperforming industrial output, and a tanking real estate market.

July data showed a significant year-on-year drop in foreign trade, with exports shrinking by 14.5 percent and imports falling by 12.4 percent.
This is complicated by a shrinking labor force and high youth unemployment. The number of young people unable to find jobs hit a record high of 20.4 percent in April among the 16- to 24-year-old age group—spiking to 21.3 percent in June.

China's National Bureau of Statistics originally released the data, but the state-run agency has since blocked additional unemployment statistics after widespread media reports.

A spokesperson for the bureau, Fu Linghui, told reporters during an August news conference that the "age-specific urban unemployment rate for young people" would be suspended for that month. Given the increased pressure that the Chinese Communist Party (CCP) faces over the faltering economy, state-level attempts to control the narrative aren't surprising.

Some say China's economic slowdown was "inevitable."

"Moving hundreds of millions of people from inefficient rural agriculture to higher-productivity factory work in cities can only be carried out once," an August report by the New York-based Council on Foreign Relations noted.
 A view of a complex of unfinished apartment buildings in Xinzheng City in Zhengzhou, central Henan Province, China, on June 20, 2023. (Pedro Pardo/AFP via Getty Images)
A view of a complex of unfinished apartment buildings in Xinzheng City in Zhengzhou, central Henan Province, China, on June 20, 2023. (Pedro Pardo/AFP via Getty Images)

But the ripples of Beijing's economic downturn will reach far beyond its borders. Many experts are predicting that China's partners in the developing world, particularly Latin America, will bear the brunt of its domestic troubles.

Beijing's interests in Latin America are sizeable. From 2000 to 2020, Chinese companies invested roughly $160 billion in the region.

The past 20 years of Latin America's engagement with China have been based on "perceptions and hopes" rather than practicalities, said Evan Ellis, a regional analyst and professor at the U.S. Army War College Strategic Studies Institute.

That's evident in Latin America's dubious infrastructure projects and grandiose loans given to local governments with a history of defaulting on their debts.

In a recent example, Argentina's embattled leftist regime used a $7.5 billion line of credit from the International Monetary Fund to partly repay a Chinese loan in August. Argentina has a decades-long history of foreign debt defaults and, as of 2019, owed Beijing nearly $17 billion from loans issued as far back as 2007, according to the think tank Inter-American Dialogue.

China's infrastructure projects in Latin America are famously riddled with problems, some of which significantly affect local populations. They include the $2.7 billion Coca Codo Sinclair hydroelectric dam in Ecuador, which opened in 2016 and has local engineers voicing concerns over cracks and structural issues.

Latin American governments hungry for investment and trade deals have historically turned a blind eye to these realities because of the size of China's checkbook. However, given Beijing's current domestic troubles, those checks could start getting smaller and come with more conditions, Mr. Ellis told The Epoch Times.

Commodities Impact

One of the near-term effects the region faces is cooling commodity prices due to falling demand from China, the region's biggest trade partner, aside from Mexico.
In countries such as Brazil, Chile, and Peru, commodities represent 72 percent of total exports, according to the Institute of International Finance. By comparison, Africa's commodities exports total 62 percent, the Middle East's total 51 percent, and Asia's total 25 percent.

This is especially problematic for countries with strong mineral and agricultural sectors, which rely heavily on Chinese demand.

The Inter-American Development Bank has reported price drops from January to April on key Latin American commodities, including oil, coffee, iron ore, copper, and soybeans.

Mr. Ellis predicts a “protracted period of lower commodity prices" that will hit Latin American countries hard since China will likely be buying less and trying to sell more. He said the CCP likely won't have “quite as much money to throw into the region as it once did.”

Consequently, that could dim some of the reputational luster that China has spent years building.

“Across the board, China is not going to look quite as glamorous to Latin America as it used to," Mr. Ellis said.

"Commodity exporters, such as Chile, Peru, South Africa, and Australia, could see less demand from China," said Robert Gilhooly, senior emerging markets economist at Abrdn. He said that would lead to a cooling trend in global prices and create "knock-on effects impacting investment, tax revenues, and broader business sentiment.”

Other analysts say cooling commodity prices are just the beginning.

"One of the main reasons these [Latin American] regimes gravitated toward China is because of the immediate practical benefits of that relationship ... appealing loans, investments, military and security opportunities, and assorted forms of support," Irina Tsukerman, regional security analyst and president of Scarab Rising, told The Epoch Times.

 Brazilian President Luiz Inácio Lula da Silva (L) talks to Chinese Ambassador to Brazil Zhu Qingqiao at the Palácio do Planalto in Brazil on Feb. 3, 2023. (Sergio Lima/AFP via Getty Images)
Brazilian President Luiz Inácio Lula da Silva (L) talks to Chinese Ambassador to Brazil Zhu Qingqiao at the Palácio do Planalto in Brazil on Feb. 3, 2023. (Sergio Lima/AFP via Getty Images)

"Should [Latin American governments] come to see China as an unreliable ally ... without delivering on its promises, they will immediately turn away in search of another suitor."

Ms. Tsukerman believes that image factors heavily into China's approach to engagement with Latin America, and isn't convinced that the CCP will scale back its regional investments, even at the cost of its own economic crisis. She believes that the regime cares more about "projecting power" than having what she called a "prudent and sober balance of expenditures."

"In reality, there's a perception in the ruling class that, so long as Beijing's long arm reaches far and wide around the world, rumors of its economic collapse will not be fully believed by Western countries," she said.

However, Beijing's continued investment in Latin America will likely come with what Mr. Ellis called a "hardening of China's diplomatic line." He expects this to materialize with China's loan terms, noting that the CCP is "very adept" at getting paid.

"Like in Africa, the Chinese are not letting anyone walk away from their debts," he said.

He said that the CCP will probably sharpen its approach as a trade and investment partner while setting stricter terms and deepening its "politicization" in Latin America.

He also said that China will likely become a more difficult international partner and bring less cash to the table.

Opportunity Knocks

If more stringent trade and investment deals between China and Latin America come to pass, it may also hamper CCP efforts to expand the RMB yuan as a reserve currency in the region. Earlier this year, the governments of Brazil and Argentina announced that they would begin using the yuan as a trade currency. On June 29, Argentina's government took it a step further when its central bank announced that residents and businesses would be able to open accounts in yuan.

China hasn't been coy in its desire to push the yuan as an alternative to the U.S. dollar for reserves and trade, which many have called a "de-dollarization" campaign.

Yet with Beijing's economic retraction and more complicated or less access to funding, it may be an opportune time for the United States to step into the limelight in its own backyard. Ms. Tsukerman says that the reality of China's changing economic status could ignite a change in attitude.

"Despite leftist ideologies of Latin American regimes such as Argentina and Brazil, their leaders are pragmatic and self-interested. They may use populist rhetoric and extreme ideologies to get to power and control, but when it comes to guarding foreign policy and their own pockets, their eyes are wide open," she said.

Meanwhile, the United States may have lost ground to China as a top trading partner in recent years, but U.S. foreign direct investment in the region is still massive, last year representing 38 percent of the nearly $225 billion economic infusion in Latin America and the Caribbean.

Mr. Ellis says it's up to Washington to differentiate itself as a trade partner in Latin America and capitalize on any economic fumbling on China's part. If not, he remarked, it wouldn't be the first time that U.S. officials missed a golden opportunity.

"I’ve never been disappointed in our government's ability to shoot itself in the foot."