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Could an Economic Slowdown Affect One of China’s Trading Partners?

Sep 10 , 2013

How could a possible slowdown in economic growth in China affect other countries is a topic very much in the news.  Here we take a look at one of China’s trading partners:  Chile.

Chile is an exporting nation whose main trading partner is China.  Below we talk with Rodrigo Aravena Gonzalez, who is the Chief Economist in Chile for the Brazilian Bank Itaú, about the economic relationship between Chile and China.  But first some background on Chile.

Chile is an export-driven economy whose principal export is copper mined in giant open pits and underground mines in the desert and in the high reaches of the Andes.  Chile has by far the world’s largest reserves of copper. A heavy tax on copper mining funds the government.  Many foreign mining companies operate in Chile, but the biggest mining concern is Codelco, which is government owned.  For example, in 2010 on revenues of $16USD billion Codelco paid $6USD billion in royalties to the Chilean governments.

Chile is a net creditor nation.  When copper prices are high, it banks the surplus, which it can tap into when copper prices are low or government spending exceeds receipts.  Chile has some of the safest banks in the world. Debtor nations around the world would be envious. 

Chile manufactures almost nothing. Its economy is based on exporting fruit, farm-raised salmon, copper, lithium, molybdenum, some gold and silver, and wine.  The country has almost no petroleum or coal resources.  (Its neighbors Bolivia, Argentina, and Peru have both, but there are border disputes with Bolivia and Peru that impede trade.  Argentina, of course, is a highly-volatile source of anything because of its populist government.)

Chile is in the Southern Hemisphere, so its winter is summer in the supermarkets of the north.  Consequently, it is able to export apples, grapes, kiwi, cherries, oranges, and lemons while New York is under a blanket of snow and California growers are waiting for Spring. 

Here is what Mr. Gonzalez says about Chile’s dependence on China:

The Chilean economy is the most open economy within the Latin American countries.  Our trade volume is almost 60% of total GDP.  Exports itself represents almost 35% of the GDP.

Nearly 50% of total exports from Chile are concentrated in Asia countries.  China itself represents 25% of total exports.  China is our main trading partner, while Asia is our most important economic growth as a whole for exports. So obviously the most important trading partners for us are in Asia.

Our real business cycle is more dependant on Asia than the developed economies.  For example, the United States last year represented less than 16% of our total exports.  Europe represented 20% of exports, while the Asian countries represented 50%.  So obviously our business cycle is more dependant on Asia than the American economy or European economies. 

Mr. Gonzalez and his number crunchers at Itaú bank are busy poring over spreadsheets.  He says:

If China has a great slowdown in the future, our activity will be slower than we are thinking now.  We are working with a scenario where the Chilean economy will grow 4.2% in 2015 and we are also expecting that our economy will grow near 4.4% in 2014.     Our baseline scenario is economic growth higher than 7% for the Chinese economy next year.  If the Chinese economy grows less than 7% we will have a lower economic growth rate, probably lower than 4% next year.   Our main risk in our scenario is the Chinese growth rate in the next coming years.

Regarding the price of copper, he says mining exports are increasing but at a slower rate:

The higher copper prices have been offsetting the lower economic growth rate in the mining sector.  We have seen a deficit in our current account because the total imports have grown at a faster pace than exports. 

As we mentioned early the government banks its windfall profits from copper.  Mr. Gonzalez continues:

When copper price was $3.5 dollars [per pound] but the government thinks the long-term copper price is $3, the different between the spot and long term prices are saved in sovereign world funds. Chile does not take this additional revenue to increase fiscal spending.

Asked whether the country has any debt, he says:

The total debt for the government has been negative.  The Chilean government has been a net creditor.  Chile is one of the few countries in the world which have a negative, a very strong fiscal position. 

He also notes that debt is not the same as deficit:

Chile in the last three years has posted a deficit in fiscal terms, but we have more savings than the deficit.

One can see that the Chinese-Chilean relation is important.  As a slowdown in the Chinese economy will slow growth in Chile.

Walker Rowe is Publisher at Southern Pacific Review. He lives in Santiago, Chile.




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