China is no longer the same. What has changed and how it affects Brazil

Chinese growth is no longer the same. Once synonymous with strong and uninterrupted expansion, the second largest economy in the world is going through a moment of transition. The annual rate of increase in Gross Domestic Product (GDP), which this century peaked at 14.2% in 2007, was limited to 3% in 2022, according to the World Bank. The outlook for this year is better, but declining: this month, the Organization for Economic Cooperation and Development (OECD) lowered its projection for China’s GDP from 5.1% to 4.6%.

With the exception of “hiccups” here and there, the tendency is for more moderate advances from now on. “China’s economic growth is slowing cyclically and structurally. We will have to get used to lower growth rates”, says analyst Sophie Altermatt, from Swiss bank Julius Baer.

Estimates made by Itaú indicate that this decade Chinese GDP should have an average growth of 3.8%. Between 2031 and 2040 it should fall to 3.3% per year and, in the following period, to 1.9%. Which, of course, will affect the entire world, especially countries that have become accustomed to growing in the wake of China – such as Brazil, which sells large quantities of iron ore, oil, soybeans and meat to the Chinese.

Annual growth of the Chinese economy, in % (source: World Bank)

Without aid to families, China’s post-Covid recovery was more fragile

The impacts of the reopening on the Chinese economy, after the Covid-19 pandemic, differed in relation to other countries, according to a report from Itaú. The main reason was the lack of fiscal stimulus for families.

“The strongest recovery processes in the United States, Europe and emerging countries – including Latin America – resulted in part from substantial government transfers to families, which boosted consumption in the post-Covid reopening”, says the text.

Itaú recalls that, in the Asian country, the lack of incentives for families can have a greater structural impact. The country’s social safety net is limited, and Chinese families may have to maintain a higher level of precautionary savings for longer – which means less consumption in the present.

Other problems are the dissociation of the Chinese economic cycle in relation to the rest of the world and the launch of “common prosperity” policies, whose objective is to prioritize the reduction of income inequality.

During the pandemic, in 2020, China managed to keep factories open and exports advanced, maintaining the strength of growth. In 2021, stimuli began to be withdrawn, while other countries maintained them. And in 2022, the cycles reversed again, with the Chinese stimulating the economy and the rest of the world taking them away.

The political implementation of “common prosperity” was challenging, Itaí points out, possibly negatively affecting the potential product, confidence and dynamism of the private sector.

Geopolitical relations between the US and China have also been deteriorating since the 2018-19 trade war and, since then, Covid and the war in Ukraine have added to the themes of disagreement. Foreign direct investment in China has declined significantly. In the last two years, they were lower than those received by India and Brazil.

Profile of the Chinese economy has been changing

One of the structural changes underway, at least since 2015, is in the profile of the economy. Previously, it was aimed at investment, mainly in infrastructure and real estate; Now, the focus is on consumption, which represents only 38% of GDP there, according to data from the World Bank. In Brazil, this percentage is 63% and in the United States, 68%.

“The Chinese market is becoming more sophisticated and the local middle class has plenty of access to the international market”, highlights the lead partner of the China desk for Brazil and South America at KPMG, David Lau.

Another change is in the foreign trade scenario. Economists Jinyue Dong and Le Xia, from the Spanish bank BBVA, state that the Chinese are no longer importing high-value-added goods and have chosen to carry out production in the country to seek technological self-sufficiency.

“The country is going through a moment of transformation: from exporting low-value-added manufactures to those with high [valor]”, the economists write in a report.

According to experts interviewed by People’s Gazette, this scenario should have impacts on Brazil, especially on the export agenda. Products such as iron ore and oil are expected to lose space. On the other hand, commodities such as soybeans and refrigerated meat should continue to perform well.

Iron ore and oil are the most threatened segments

Changes in the Chinese economy will have impacts on Brazil, points out Nenad Dinic, equity strategist at Julius Baer. One of the most evident is in foreign trade. Which, for now, is going very well.

In the first eight months of the year, according to the Foreign Trade Secretariat (Secex), exports from Brazil to China reached US$67.9 billion, 8% more than in the same period in 2022. It is the highest value for the period in historical series started in 1997.

One of the activities that may feel the slowdown in China’s pace most strongly is iron mining, essential for investments in infrastructure, especially real estate.

Revenues from the export of Brazilian ore to the second largest global economy were US$11.7 billion between January and August. The drop was 6% compared to the same months of the previous year. The fall in the average price was to blame, because in the same period the physical volume shipped grew 8.5%.

Although current Brazilian ore sales figures do not give cause for alarm, experts warn that the outlook is not favorable. Altermatt points out that demand for real estate has been falling not only cyclically, but also structurally: “Fewer apartments will be needed as the Chinese population decreases and population growth slows down.”

Another impact on iron ore imports comes from the Chinese authorities’ decision to reduce the country’s dependence on real estate activities. They represent up to 30% of local GDP.

On the supply side, the Chinese government announced, in 2021, restrictions on the debt of developers. On the demand side, barriers to purchasing homes were reinforced. The measures were a reaction to decades of uncontrolled growth in the sector, which has accumulated tens of millions of empty properties and has developers struggling with gigantic and probably unpayable debts.

The easing of these restrictions last year was not enough to encourage the sector. Until July, construction activity fell by 25.7% and the volume of property sales fell by 12.8% compared to the same period in 2022.

Even though it had little effect, the flexibility itself is an indication of the Chinese government’s difficulties in dealing with this new phase of its economy. At one point, it seeks to contain distortions that were responsible for part of the accelerated growth in the past; then, worried about the economic slowdown, he relaxes the controls again.

Another product that could be impacted is oil. Which, for now, is still on the rise. This year, until August, sales of Brazilian oil to China increased by 18.6% in value (to US$ 12.1 billion) and 56.1% in volume.

Livio Ribeiro, associate researcher at the Brazilian Institute of Economics at Fundação Getulio Vargas (Ibre/FGV) and partner at BRCG Consultoria, says that Brazilian oil could lose space in the Chinese market for strategic reasons.

Russia, which is one of the world’s largest producers, is moving its stocks to Asia, due to the Western blockade caused by the war in Ukraine. “It’s a kind of displacement effect,” says the researcher.

Demand for grains and animal protein should remain high

Ribeiro assesses that the demand for grains and animal protein should remain high. Amid a super Brazilian soybean harvest – almost 155 million tons, 23% more than in 2022, according to the National Supply Company (Conab) – Chinese purchases continue to grow.

In eight months of 2023, oilseed sales to the second largest global economy grew 26.8% and revenues grew 12.7%, to US$29.7 billion – the discrepancy is due to the fall in the price of the commodity.

Meat exports are also affected by the fall in commodity prices on the international scene. Chinese demand for Brazilian protein grew 5.3% in tonnage, but generated 19.6% lower revenue, at US$5.5 billion.

Internal factors will weigh more than external ones on Brazilian growth

Among the economies of Latin America, Brazil is the second most sensitive to Chinese growth, points out Julius Baer. From January to August this year, 30% of our exports went to China. Only Chile is more dependent: around 40% of its export revenues come from the Asian giant.

Despite this, Dinic, from Julius Baer, ​​highlights that the expansion of activity in Brazil should find some support in the slightly more moderate inflation and the interest rate reduction cycle. “Incentives for infrastructure and ecological transition in Brazil can favor its growth in the medium and long term”, believes the analyst.

The Organization for Economic Cooperation and Development (OECD) raised its projections for the expansion of Brazilian GDP in 2023 and 2024. They increased, respectively, from 1.7% to 3.2% and from 1.2% to 1.7 %.