Experts point out that the price of commodities won’t rise as much, and the growth pace of Chinese investments may be smaller
The growth pace of the Chinese economy, the second largest in the world, is losing momentum. In 2013, the world’s second-largest economy saw its GDP expand by 7.8 percent. This year, according to the International Monetary Fund (IMF), it’s expected to grow by 6.2 percent. “China is making a soft landing,” says Álvaro Bandeira, head economist at Modalmais.
The impact of this cooling down in that country’s growth will be felt by Brazil, points out Lia Valls, a senior researcher at the Getúlio Vargas Foundation’s Brazilian Economy Institute (IBRE/FGV). This impact may come in two different ways: the price of commodities won’t rise as sharply as it happened in previous years, and the pace of the expansion of Chinese investments in Brazil may rise less vigorously.
And there’s no way Brazil may compensate this contention in the price of raw material. “Our sales to them are not very diversified,” says Lia. The export agenda for China, the main customer of Brazilian products, is extremely concentrated. Five products – soy, oil, iron ore, cellulose, and beef – are responsible for 90 percent of our business with the Eastern partners, according to the Brazilian Foreign Trade Agency (SECEX).
Another impact of the reduction in Chinese growth may come in the investments companies from that country are making in Brazil. Many are prioritizing the Chinese domestic market, given the focus given by that country to the infrastructure and real estate sectors.
“Maybe the pace of the growth will be slower, but Brazil is still a really attractive partner for China,” points out PwC’s Michela Chin. In 2017 alone, according to the last available data, China’s direct investment in Brazil was US$ 11.7 billion, according to a study done by the Central Bank.
Other reasons for the retraction in growth
The retraction in Chinese growth is being caused by that country’s economic policy reorientation. Sílvio Campos Neto, an economist at Tendências Consultoria, points out that China is at a transition movement. Their intention is increasing the share of private consumption in their GDP which, according to The Economist, is 39 percent. As a comparison, the weight of private consumption in Brazil’s GDP is 64 percent.
According to the economist, the growth model based on investments has been exhausted, and that is why China is prioritizing consumption.
In view of this situation, Chinese CEOs have been rethinking their growth ambitions. The world’s second-largest economy has been adopting a series of strategies to encourage consumption. One of them involves a less restrictive monetary policy, with a reduction of compulsory deposits and credit stimuli. Another weapon is increasing expenses on infrastructure and the real estate sector.
The country has also been recently through a tax reform, and one of its fundamental aspects, according to Michela, has been the reduction of corporate income taxes to 25 percent.
Soy: smaller business expansion
For producers of soy, the main product exported from Brazil to China, the cooling down in China’s GDP growth means a smaller possibility of business expansion. “There is a smaller increase in the demand for the product,” says Márcio Bonesi, president of the Paraná Soy Producers Association (Aprosoja-PR).
Last year, US$ 27.34 billion were traded, 34.6 percent more than in 2017, according to data provided by SECEX. The oleaginous seed was responsible for 42.6 percent of Brazilian transactions with the world’s second-largest economy.
Prices may also suffer an impact. With the commercial war between the United States and China, the Asians began buying more from Brazil. “Part of the American crop ended up being stocked,” says the rural officer. US stocks answer for 9.5 percent of the local production, according to the United States Department of Agriculture (USDA).
According to him, the Chinese are in an extremely comfortable situation at the present moment. On one hand, they have the American crops at their will. On the other, the Brazilian crops, which are just starting to be harvested. “They’re sitting in the catbird seat,” points out the president of Aprosoja-PR.
Lucilio Alves, a professor at Esalq/USP and researcher at the Applied Economics Research Center (CEPEA), says that prices are still attractive, but they are lower than they were a year ago, when the ton cost US$ 400. The FOB values for export through the port of Paranaguá are pointing towards prices between US$ 355 per ton, shipped in February, to US$ 370, to be shipped in July.
One issue regarding the oleaginous seed lies in the negotiations between the United States and China, to put an end to the trade war between both countries. The deadline expires on March 1, and US president Donald Trump admits the possibility of extending these negotiations.
Making a deal may result in smaller quantities of exported soy. Modalmais’ Bandeira sees a good possibility of that happening, since China has a large trade surplus with the United States, which in the 12 months between the fourth trimester of 2017 and the third of 2018 was US$ 363.8 billion, according to the US Department of Commerce.
But in the medium term, expectations may be favorable. The Asian country is quickly getting urbanized, and will demand soy, used in local cuisine and in animal rations. According to the World Bank, currently 58 percent of Chinese live in cities, and Xi Jinping’s government plans to increase urbanization rates to 80 percent by 2040.
“The influx will depend on commercial agreements between both parties, but also on Brazil’s ability to increase its domestic transportation infrastructure, such as highways, railways, and ports,” says Alves.
Iron ore: affected expectations
China’s lower growth rate is also affecting expectations regarding their future demand for iron ore, one of Brazil’s main exports. Last year, US$ 10.93 billion have been commercialized, 5.2 percent more than 2017, according to SECEX.
“It will affect us if their deceleration is bigger than what had been predicted. Then we would have to look for new markets,” says Glauco Legat, head analyst at Necton Investimentos.
Until the Brumadinho tragedy, in late January, which killed at least 134 people, the market’s position is that this would be a year of equilibrium. Vale would not use its available capacity. According to him, the current short-term scenario for iron ore is better.
Except that, for a whole week, there will be no reference of how China will react, on account of the long Lunar New Year holiday. “We must way for that period to pass.”
Meat: the search for more volume
A strategy being adopted by the meat industry regarding China is trying to win more space with more volume. “We have been prospecting more clients in China, a market that usually pays well,” says Péricles Salazar, president of the Brazilian Meatpacking Industry Association (Abrafrigo).
Last year several missions were made in that country, enabling more opening and the authorization of more Brazilian meatpacking plans to ship their products. The weight of China and Hong Kong among the product’s biggest buyers has been growing. In 2017, they answered for 37.6 percent of the amount exported. In 2018, 43.7 percent.
According to SECEX, last year US$ 1.49 billion were exported, 60 percent more than 2017. These exports have also been more profitable: the average price of the kilo of exported meat reached US$ 4.61,5 percent more than in the previous year.
Thiago Bernardino de Carvalho, a researcher in CEPEA’s cattle breeding sector, considers that the high export trend will probably continue, due to the Asian country’s need for meat, and its bigger commercial opening to Brazilian meatpacking plants.
“The Chinese economy has been growing less than it had been growing throughout the previous years, but it is a sustainable growth, with no oscillation. The Chinese population has been growing, and the country has a GDP growth rate of around 6 percent, which tends to keep up the consumption of meat, including beef. Brazil will probably continue to be important for the Chinese market, due to the extremely competitive quality of its meat. Brazil has the offer, and the kind of meat the Chinese demand. Therefore, their market will remain favorable to our country.”
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Especialistas apontam que o preço das commodities não deve crescer com tanta força e ritmo do crescimento dos investimentos chineses pode ser menor