China’s Slowdown Casts a Shadow on Lula’s Big Bet on Beijing

Since taking office in January, Brazil President Luiz Inacio Lula da Silva has placed China at the center of his attempts to foster an industrial and economic renaissance in South America’s largest country.

(Bloomberg) — Since taking office in January, Brazil President Luiz Inacio Lula da Silva has placed China at the center of his attempts to foster an industrial and economic renaissance in South America’s largest country. 

But as leaders of the world’s major emerging market powers return home from their annual meeting in South Africa this week, the sudden struggles of the group’s most dominant member are starting to cloud Lula’s plans.

China’s economy is slowing, a development that has begun to threaten more than just its ambitions to turn the BRICS bloc — which also includes Brazil, Russia, India and South Africa — into a force that can counterbalance wealthy western countries on the world stage. It is also posing risks to the nations that have come to rely on China as a relentless motor of growth.

For Brazil, the stakes are massive. China is now by far its largest trading partner, accounting for nearly a third of all Brazilian exports. Trade between the two swelled to $173 billion in 2022, nearly double Brazil’s $94 billion total with the US, according to data compiled by Bloomberg. 

A deceleration in China could dampen demand for Brazilian products, which have driven its post-pandemic recovery and helped its economy outperform forecasts this year. Brazil’s status as Latin America’s largest economy, meanwhile, would likely amplify the effects of a China-driven slump across a region where many nations now depend heavily on the Asian giant.

Officials across Brazil are closely monitoring the situation, which has already hit the country’s extractive sector and caused local assets to suffer.

Privately, top economists have begun warning the central bank that a global downturn would intensify pressures on the country’s fiscal accounts, exacerbating existing concerns about Lula’s plans to balance budgets, according to four people familiar with the talks held behind closed doors.

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It would also increase the odds that Brazil’s currency depreciates to above 5-reais-per-dollar, the people, who requested anonymity to share details of private discussions, said. The real closed at 4.88 per dollar on Thursday.

“Obviously, we’re following it, but the size of the problem is not yet sufficiently clear,” Finance Minister Fernando Haddad said of China’s economic issues Wednesday in Johannesburg, South Africa, where leaders of the BRICS nations met.

Boom Fizzles

The end of China’s Covid Zero policy earlier this year was supposed to spur activity and help stave off a looming global recession. Instead, the world’s second-largest economy has become mired in a spiraling real estate crisis that’s reverberating across markets and worrying major trade partners.

The fizzling of a construction boom now threatens to leave China with its weakest stint of growth since the era of Mao Zedong, according to some projections. JPMorgan Chase & Co and other major financial institutions are forecasting economic expansions below 5% this year and next.

As a result, commodity prices are expected to ebb in second half of year. And a financial crisis surrounding Country Garden Holdings Co, China’s largest real estate developer, is perhaps even more worrying. The company has suffered hundreds of billions of dollars in losses, with the total fallout still yet to be determined.

Trade between Brazil and China remains elevated, with exports totaling $9.1 billion in July — an annual increase of more than 14%. But a slowdown could suppress the voracious Chinese appetite for raw materials that has fueled gains for resource-rich nations like Brazil since the turn of the century.

During Lula’s first presidency, from 2003 to 2010, China’s gobbling up of Brazilian soy, beef and iron ore fueled an economic boom. The leftist leader used the proceeds to fund signature social programs that helped catapult millions out of poverty. And much to Washington’s dismay, he also tapped Chinese financing for key infrastructure projects like transmission lines and offshore oil fields.

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Lula has sought to deepen those ties early in his third term, traveling to Beijing in April to boost agricultural trade and further attract Chinese firms, factories and investments to help deliver on his ambitious plan to reindustrialize Brazil’s economy.

“The risk of low growth, or even a recession in China is going to impact Brazil much more than a crisis in the European Union or the United States,” said Mauricio Santoro, who researches Brazil-China relations at the Center for Political and Strategic Studies of the Brazilian Navy, a think tank in Rio de Janeiro.

Clarity on Beijing’s ability to deal with a potential default of Country Garden or its other economic issues didn’t emerge during the summit in Johannesburg, where Lula and Chinese leader Xi Jinping were both in attendance. 

Xi skipped a BRICS Business Forum on Aug. 22, instead sending Commerce Minister Wang Wentao to read the president’s prepared speech. The economy, he declared, “has strong resilience, tremendous potential and great vitality.”

But the countries that export the world’s building blocks — from emerging markets like Brazil to wealthier nations like Australia — are already feeling tremors.

“There is a knock on effect,” said Bloomberg Intelligence analyst Grant Sporre. “The property sector is a key pillar of the Chinese economy, so weakness there could have a wider contagion effect.”

Mining giant Vale SA may be the most China-exposed of Brazil’s companies. The world’s second-largest producer of iron ore, it is a key supplier of construction material and has seen its share price slump amid the slowdown. Vale reported weaker-than-expected earnings last quarter, dragged down by drop in metal prices and sluggish sales.

Concern about China’s growth has also caused Brazil’s benchmark stock index, the Ibovespa, to slide more than 4% so far in August. Accumulated outflow from foreigners reached 10.8 billion reais ($2.2 billion) through Aug. 22.

The ordeal is leading some in Brasilia to rethink how the country does business with China, regardless of how strong officials claim ties to be, according to Santoro, the Brazil-China relations expert.

“There are still many people in Brazil who refuse to admit there’s a problem in the economic relationship,” he said. Now it’s “clear that China is entering a new, more unstable phase in its development, and that will have negative consequences for Brazil.”

–With assistance from Mariana Durao, Davison Santana, Simone Iglesias, Christopher Anstey and Jill Disis.

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