The People’s Republic of China’s (PRC) rapid recovery from the coronavirus disease (COVID-19) shock has helped the Brazilian economy. The PRC is Brazil's main trading partner, purchasing 34% of Brazilian exports and generating a bilateral trade surplus for Brazil of approximately $33 billion in 2020. As the Chinese economy bounced back from the crisis, its demand for Brazilian products grew substantially—especially for soybean and iron ore, which together represent more than 65% of Brazilian exports to that country.

But a series of recent news casts doubts on the strength of Brazilian exports to the PRC in the coming months. First, partly owing to the PRC’s draconian response of locking down areas to stamp out continued small outbreaks and the resulting disruptions to supply chains, the Chinese economy may grow less than previously expected in the last quarter of the year. It is worth remembering that this was how the COVID-19 crisis first materialized in Brazil in the first quarter of 2020—when Brazilian companies began to experience problems in their supply chains due to production curbs in the PRC, which was facing its first lockdown.

An additional threat to the PRC’s recovery comes from the debt problems currently afflicting its real estate market, starting with the top-selling developer Evergrande. If the property sector woes were to intensify or even result in a fully-fledged crisis, the impact on growth could be substantial.

A slower-growing economy will likely be reflected in lower imports in the PRC. For instance, demand for beef can be expected to fall, with negative repercussions on imports—which account for 25% of Chinese beef consumption and come primarily from countries like Brazil, Argentina, and Uruguay. Swings in the PRC’s pork meat market also pose risks for Brazil’s exports. A collapse in the sector’s profitability, possible new outbreaks of African swine fever, and a sharp rise in wheat feed use suggest the PRC's soybean imports are set to fall sharply in late 2021, after strong growth in the first half of the year.

Even more worrying for the outlook of Brazilian exports is the PRC's resolute move towards cutting carbon emissions, through measures that include reducing steel production—a trend which became apparent as early as March this year. Between its peak in May and the end of August, crude steel output in the PRC dropped by more than 16%. In addition, power shortages in September forced several smelters to cut production. All of this is putting downward pressure on iron ore prices, which have already plunged by 46% since July.

These developments indicate that Chinese demand for the main exports from Brazil may be subject to mounting headwinds in the coming months. This represents an additional challenge for 2022, on top of several domestic factors likely to hamper growth. These include the recent hikes in the Selic rate by the Central Bank, aimed at containing the persistent increase in inflation, and possible political instability associated with the 2022 general elections. Market expectations are currently not very positive. For instance, the Central Bank´s FOCUS report forecasts indicate that Brazil’s GDP growth will decelerate to around 1.6% in 2022, after recovering to around 5% this year. Against this backdrop, a scenario in which the PRC no longer supports the Brazilian external sector becomes particularly worrisome.

Looking beyond the short term, it is worth starting an assessment of how the Brazilian foreign sector can adjust to the changing nature of economic activity in the PRC. For instance, irrespective of how the Evergrande crisis is resolved, property construction in the PRC is entering a period of structural decline: this bodes ill for the long-term prospects of Brazil’s iron ore exports. More generally, the PRC’s shift toward increasingly cleaner growth will weaken its appetite for commodities. The potential effects on the Brazilian productive structure, the long-term equilibrium of the balance of payments, and the exchange rate itself cannot be ignored.

Author

  • Lanzafame, Matteo
    Senior Economist, Economic Research and Regional Cooperation Department
  • Nogueira, Reginaldo
    General Director, Ibmec São Paulo and Brasília
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