what are the effects on the economy of Brazil

With the restrictions to combat the Covid-19 pandemic lifted, which led China to two years of weak growth (2020 and 2022), expectations are for a resumption of economic expansion. After a 3% increase in GDP last year, the intention is to grow around 5% this year. Analysts point out that these expectations may be modest: the International Monetary Fund (IMF), for example, projects a slightly higher expansion, of 5.2%.

For Brazil, the characteristics of the Chinese economy at the moment seem to point to a promising year for agribusiness, which is already the main export sector for the Asian country, and more uncertain for mineral and energy commodities, given the loss of traction in the real estate sector. Chinese.

Li Keqiang, the outgoing prime minister, on Friday sent a report to the National People’s Congress, the Chinese parliament controlled by the Communist Party, signaling conservative growth targets. In the last 40 years, the country grew, on average, 9.2% per year, according to the IMF.

According to Richard Tang, an analyst at the Swiss bank Julius Baer for Asia, the targets set imply that there will be no strong monetary or fiscal stimuli, which was already expected. “Compared to the previous report, this one appears to be more focused on the achievements of the last five years and has less policy-oriented content going forward. We believe that more detailed policies will be announced after the new government is formed,” he says.

He points out that Keqiang’s report is in line with the Central Work Conference on the Economy, held in December, in which it was defined that emphasis will be placed on domestic consumption.

Jacqueline Rong, China economist at BNP Paribas, told Bloomberg that the positive knock-on effects, compared to the country’s previous recovery cycles, are expected to ease slightly, given consumers’ reliance on fueling the economy and a reluctance to spur growth. through commodity-intensive sectors such as infrastructure and real estate.

Zhang Zhiwei, chief economist at Pinpoint Asset Management, also told Bloomberg that the GDP target should be seen as a floor, which could cause growth to be higher than the target.

How the performance of China’s economy in 2023 may affect Brazil

Even with the loss of pace in the growth of the second largest global economy in 2022, Brazilian exports to China reached record levels: US$ 89.7 billion were sold, according to the Foreign Trade Secretariat (Secex). It is an expansion of 2.1% in relation to the previous year and the highest level of the historical series, started in 1997.

In the first two months of 2023, however, there was a 4.9% drop in Chinese imports of Brazilian products and goods. According to the Foreign Trade Secretariat, deals totaled US$ 10.2 billion. The reduction reflects a slowdown in Chinese foreign trade, reflecting, according to XP Investimentos, lower global demand amid tighter financial conditions and lower commodity prices.

The fall in Chinese imports from all countries was stronger in the period, 10.2%. Economist Sophie Altermatt, from Julius Baer, ​​says that this general retraction is related to a still sluggish internal demand in the Asian country, since the recovery started a little while ago and for now it is more oriented towards the internal consumption of services.

Nova Futura’s director of investment management, Pedro Paulo Silveira, says that the market has been a little more cautious in relation to the effects of the Chinese recovery after the easing of sanitary measures.

“We can see this in the prices of raw materials, which interrupted the high they had been doing for a few weeks. In any case, international commodity prices are still at attractive levels and allow us to be optimistic about the year. The new crop and mineral exports will benefit from prices and this should boost these sectors”, he assesses.

Silveira believes that the relationship between Brazil and China should remain strong. According to him, on the side of our imports, growth should depend on the rate of expansion of the Brazilian GDP. “There is no sign that the Brazil-China trade chain suffers any restriction due to geopolitical events”, he says. President Luiz Inácio Lula da Silva (PT) is scheduled to travel to China at the end of the month.

Brazil may also be impacted by the change in the profile of Chinese growth, highlights Heitor Paiva, analyst at hEDGEpoint Global Markets. China’s expansion is more oriented towards the service sector than civil construction, which accounts for 30% of the Asian giant’s GDP. In the fourth quarter, activities related to services saw strong growth. The GDP of the financial sector grew 5.9% compared to the same period of the previous year and that of software and technology services, 10%.

The real estate sector, in turn, shrank by 7.2% in the comparison between the last quarters of 2021 and 2022, which may have implications for the Brazilian economy. “It may imply a lower demand for mineral and energy commodities, such as iron ore and oil, two important products in the Brazilian export basket”, says Paiva.

Other factors also weigh in on the more cautious stance, says the president of the Brazilian Foreign Trade Association (AEB), José Augusto de Castro. Among them are:

• problems arising from Covid, such as the emergence of new cases;
• tensions with the United States, which gained strength with the shooting down of a Chinese balloon on the North American east coast, in early February;
• review of global supply chains to reduce dependence on Chinese products.

Another issue to be monitored is unemployment among the young population, which remains high and may harm consumption growth in the coming months, according to Alef Dias, macroeconomics and grains analyst at hEDGEpoint Global Markets. “Some volatility in China’s economic data can be seen in the coming months and cannot be seen as a complete surprise, even though the overall picture remains very positive.”

Even so, the director of foreign trade at the Brazilian Chamber of Commerce, Industry and Services (Cisbra), Arno Gleisner, hopes that, with the recovery of the Chinese economy, there will be a greater participation of the Asian country in the Brazilian export basket. Last year, the share was 26.8% according to Secex data – the lowest level since 2017.

Agribusiness in Brazil may continue to shine with demand from China

Agribusiness may continue to have good opportunities in the Asian country, assesses Castro, from the AEB. And one of the main ones is in soybeans, whose businesses benefited last year from good prices. The volume sold was 11.3% lower, but revenue increased by 16.8%, compared to 2021, according to Secex data.

Data from the United States Department of Agriculture (USDA) indicate that China may import 96 million tons this year, 4.8% more than the previous year.

“China has been consolidating its pig herd at high levels, although recently the government has shown signs that it is not comfortable with the oversupply. However, feed consumption has remained strong”, add analysts Alef Dias and Pedro Schicchi, from hEDGEpoint.

The USDA points out that global soybean production in this season should be 1.3% lower, due to smaller harvests in Argentina, affected by climate problems and the reduction in planted area, and in Ukraine, because of the war.

“Global soy exports will remain stable, with less sales from Argentina offset by larger shipments from Paraguay and Brazil”, point out analysts from the North American department, in a report.

Good opportunities may also arise for corn. According to the Institute of Applied Economic Research (Ipea), an arm of the Ministry of Planning, the cereal may have a greater share in exports, as a result of the agreement signed with China and the prospect of the Chinese diversifying suppliers.

The cereal’s internal deficit in China is growing and due to the problems faced by its main suppliers, such as the United States and Ukraine, China has included Brazil in its list of importers. “This could displace around 4 to 6 million tons of maize from traditional origins in China”, point out Dias and Schicchi, in a report.

Purchases of Brazilian corn by China, which were insignificant in the first two months of 2022, have already reached US$ 293.1 million in the same period of 2023, points out Secex.

“With heated international demand, the expectation is for the maintenance of commodity prices and a greater participation of agribusiness in the country’s trade balance”, cite Ipea analysts in a report on agribusiness foreign trade.

Another product with favorable prospects is pork. The USDA estimates that Chinese production should remain stable and imports should grow 2.4% to 2.1 million tons this year. According to Itaú BBA, there are opportunities for Brazil to maintain the flow of shipments to China.

China’s economic challenges

Diego Cerdeiro, senior economist at the IMF’s Asia and Pacific Department, and Sonali Jain-Chandra, head of the IMF’s mission in China, point out that the Asian giant faces a series of challenges in the economic area: the retraction of the real estate sector remains a force against growth and there is still some uncertainty about the evolution of the virus. In the longer term, another obstacle is a declining population and slow productivity growth.

According to them, the economy needs adequate macroeconomic policies and structural reforms to ensure recovery and promote more balanced, inclusive and green growth.

“We recommend maintaining a neutral fiscal policy this year, with additional monetary policy accommodation, which will help the recovery despite inflationary pressures and below-potential growth. An organized restructuring of problematic developers will also help to reduce risks”, they write in an article on the institution’s website.

IMF economists add that, with the reduction in the workforce and lower returns for capital investments, China’s growth in the coming years will depend on boosting productivity, which is now in decline. “Without reforms, we estimate that growth will fall below 4% over the next five years.”