What can Lula’s trip to China yield – 04/10/2023 – Cecilia Machado

President Lula’s visit to China this week marks an important reorientation of Brazil’s foreign policy towards the Asian country, in contrast to the political tensions that dictated diplomacy in previous years.

In the economic sphere, the meeting between Lula and Xi promises to further deepen the business opportunities between the two countries, such as expanding the flow of trade, financial integration and collaborations on the sustainability agenda.

With regard to trade, China has become, over the last two decades, the main destination of our exports, going from just over 5% in 2002 to 26% in 2022, even surpassing the United States, which holds 11% of the volume exported by Brazil. These solid trade flows – which include soybeans, iron ore and beef among the top exports – are critical to China’s food industry, construction and infrastructure sector.

The prospect of expanding the flow of trade in the coming years depends on the growth of the Chinese economy, but is being favored by the effects of the reopening on the resumption of services and the expansion of domestic consumption.

This strong commercial relationship with China has relevant implications for the growth of the Brazilian economy, not only by the GDP metric but also by the income metric, through variations in the terms of trade (that is, in the relative prices of our exports and imports). Between 2006 and 2011, our real income grew above real GDP for six years in a row, due to China’s growth and the commodities supercycle. In 2023, despite the monetary tightening and the slowdown in activity, the economy should be driven by the agricultural sector, with a significant growth in the soybean crop and effects on income amplified by international prices, supported mainly by Chinese demand.

In addition to trade, profitable investment opportunities are placing the country in a privileged position for Chinese investments. Between 2005 and 2022, Brazil consolidated itself in the fourth position among countries that receive investments from China, behind only the United States, Australia and Great Britain (China Global Investment Tracker), accumulating US$ 66.1 billion in investments , with emphasis on the sectors of energy and electricity, information technology and the oil and gas industry.

Despite the growing importance of commercial and financial relations between the two countries, transactions carried out in real against renminbi (the Chinese currency) did not reach US$ 1 billion in 2021, behind currencies such as the Mexican peso, the Canadian dollar and the pound sterling, whose countries have a much less strong relationship with Brazil. The consolidation of a financial infrastructure that facilitates bilateral transactions denominated in Chinese currency, that reduces transaction costs and that allows the contracting of currency hedging derivatives is essential for the expansion of the volume of business between Brazil and China.

China has been making efforts to internationalize the renminbi, encouraging the use of the local currency in commercial and financial transactions with other countries, such as the creation of CIPS (Cross-Border Interbank Payment System) in 2015. This is a transaction settlement system denominated in renminbi controlled by the Central Bank of China (PboC), which already has the participation of more than a thousand financial institutions in more than a hundred countries, to which Brazil will now be added. It is expected, for example, that the simplification of financial operations will enhance the diversification of trade between the two countries, expanding access to the Chinese market and opening up space for Brazilian companies that do not yet export to China.

The rapprochement between the two countries also creates opportunities for exchange in the many agendas that China and Brazil share, ranging from strategies for the transition to a cleaner energy matrix, the reduction of carbon emissions and the development of new technologies, to policies aimed at eradicating poverty, reducing inequalities and investing in human capital.

This has everything to be a meeting that further enhances economic growth and sustainable development in both Brazil and China. A meeting where everyone can win.

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