After more than a decade of booming economic ties between China and Latin America, new headlines that China may be heading for a crisis are starting to draw anxiety in China-dependent countries in the region. And they should.
In recent days, there have been a barrage of alarming reports forecasting what we had suggested in this column on June 1 that Chinas explosive growth of the past three decades will come to an end. That could badly hurt Venezuela, Argentina, Chile, Peru and other countries that had thrived in recent years thanks to their commodity exports to the Asian giant.
The signs are now unmistakable: China is in big trouble, wrote Nobel Prize-winning economist Paul Krugman in The New York Times on July 18. Were not talking about some minor setback along the way, but something more fundamental...You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.
George Friedman, the founder of the influential geo-political newsletter Stratfor, published an article July 23 entitled The end of the Chinese economic miracle.
Referring to the sudden change in the mainstream media views about China, Friedman wrote that now the conversation is moving from forecasts of how quickly China will overtake the United States to considerations of what the consequences of a Chinese crash would be.
Chinas growth has fallen from 10 percent annual rates in recent decades to 9.2 percent in 2011, to 7.7 percent in 2012, to a projected 7.5 percent or less in 2013. And a recent joint study by the World Bank and Chinas Development Research Center predicted a further slowdown to 5 percent annual growth rates over the next decade.
On Wednesday, even the usually upbeat United Nations Economic Commission for Latin America and the Caribbean (ECLAC) downgraded its growth projections for Latin America in 2013 from 3.5 percent to 3 percent, to a large extend because of Chinas decreasing raw material purchases from the region.
Latin American exports to China mainly commodities had soared from nearly $4 billion in 2000 to $71 billion in 2012. Some economists had predicted that China would surpass the United States as Latin Americas top trading partner by 2015. But that seems increasingly unlikely.
The Chile-based ECLAC warned this week that we are witnessing the likely end of the boom in commodity export prices brought about by Chinas growth.
Among the Latin American countries that will be most affected are metal exporters such as Peru, Chile and Suriname, oil exporters such as Venezuela, Bolivia, Ecuador and Colombia, and food exporters such as Argentina, the U.N. agency said.
Mexico and Brazil will be less affected by Chinas slowdown because they have more diversified economies and are less China-dependent, it said.
My opinion: Chinas economic slowdown may mark the end of the commodity-based populist cycle in Latin America, in which Venezuela, Bolivia, Ecuador, Argentina and other countries squandered their raw material export booms in feel-good subsidies, instead of investing in infrastructure and education.
Granted, the forecasts of Chinas imminent collapse may be as exaggerated as the previous conventional wisdom that China would soon overtake the United States as the worlds leading economy. Most likely, China will not collapse, but rather grow at a slower pace.
As I noticed during a visit to China a few months ago, Chinas rising wages are driving growing numbers of multinational firms to move their factories elsewhere. China is no longer a cheap labor country, nor a cheap country to visit: I paid $10 for a cup of coffee at the Xian airport, and $4.50 for a coffee at a Starbucks in Bejing.
Also, Chinas new economic plan of switching from an export-led economy to domestic consumption-focused one may not work. As one woman in Beijing explained to me, she wont be able to afford to buy herself an expensive purse as long as she has to save for health services, or to pay for her childs college education, none of which are free in China.
In addition, there is a growing public anger over government corruption. A political crisis with economic consequences cannot be ruled out in the near future.
Summing up, Latin Americas China-dependent commodity exporters will have to do what they should have started doing from the start diversifying their exports. Chinas slowdown will not bring Latin Americas economy to a halt, but the fiesta is over.