What Does the Ripple in the Chinese Economy Mean for Global Business?

The fluctuation of the Chinese currency and shifts in the country’s stock markets sent a shock through global markets at the end of August. Global Network Perspectives spoke with experts across the Global Network for Advanced Management to ask how a sudden shift in the world’s second-largest economy impacts other nations. What are the short-term and long-term implications? What industries will likely be affected?

Brazil

Alexandra Strommer Godoi, Economics Professor, FGV Escola de Administração de Empresas de São Paulo

The Chinese crisis feels like another dark cloud in Brazil’s perfect storm. The economy has decelerated sharply after the exhaustion of a business cycle based on domestic consumption (fueled by the expansion of credit and a buoyant job’s market), expansionary fiscal policy, and very favorable terms of trade. Consensus is that GDP will probably decline by approximately 2% this year, while inflation stays above 9%, as the economy copes with supply shocks related to a severe drought and the government adjusts tariffs that were kept artificially low in the past for political reasons.

Private investments are on hold, as a huge corruption scandal involving state-owned oil giant Petrobras and the main domestic construction companies unfolds, which could have important political implications including, in the most extreme scenario, the impeachment of president Dilma Rousseff. Public investments have also declined, as the government struggles to balance its books after a long period of expansionary policies.

It is clear that Brazil has to search for a new model of economic development, and the most promising alternative is to boost its exports. A “hard landing” in China makes the adjustment even more difficult, in particular because the Asian country is the main market for Brazilian agricultural and mineral commodities. The financial markets recognize that, and the Brazilian real has been one of the currencies to suffer the most recently, having devalued more than 35% year-to-date.

Despite the rightful worriers, however, it is important to highlight the differences between the Brazilian situation now and that of the financial crisis that castigated Asia and Latin America in the late 1990s. The currency is not pegged anymore, but floats freely. The country sits on US$370 billion of foreign reserves (vs US$43 billion at the end of 1998), while the total external debt is at US$343 billion. Net public debt/GDP has declined to 34.5% of GDP, from 53% in 1998, and even though the recent fiscal trend is clearly negative, the figures are still far from calamitous. Finally, the banking sector is solid and should be able to cope with the volatility reasonably well.

To recover in the medium term, however, Brazil should enact productivity-enhancing reforms and improve its regulatory framework in order to promote the much needed upgrading of its infrastructure. It could then even benefit from the excessive savings that might look for new destinations as China decelerates. In a sense, Brazil is an inverted mirror of China, with consumption representing 65% of GDP while investments accounting for meager 18%, which fade compared to almost 50% seen in the Asian country. Both countries would therefore benefit, in the long run, from a more balanced growth model.

​Chile

Claudia Labarca, Professor at MBA UC and School of Communications, Pontificia Universidad Católica

In 2005 Chile and China signed a Free Trade Agreement. This implied not only Chile becoming the first western country that ever signed a commercial agreement of this kind with the PRC, but also that China would became Chile´s first commercial partner in the coming years. In fact, commercial exchange has grown up at a 22% rate since 2005. However, as ECLAC has warned in its last reports, almost 90% of the total Chilean exports are related to mineral products (mostly copper) which may concur in a reprimarization of Chilean exports, as well as a dangerous dependence of Chinese economic swings. As an example, the recent RMB devaluation and economic figures have already hit the Chilean copper price in the international market, and local media is already warning about the economic effects that this will have in the next year´s budget.

However, there is also a growing room for agricultural and agroindustry products—wine, pork meat, salmon and fruit, among others—that despite the recent ripple in the Chinese economy, it is expected to continue growing in the long term scenario. This is due to the emergent Chinese middle class, which every day is calling for high-quality imported food with safety standards and a clear traceability of processes. However, in order to successfully market Chilean products in the competitive Chinese market, a better effort is required from Chile—effort that lies in both public and private corporations—to brand both the country and its products.

Nigeria

Bongo Adi, Economist, Lagos Business School

The massive losses in the international commodities and financial markets seems to have registered an almost immediate impact in the Nigerian capital market. At the opening of business in the week, the Nigerian Stock Exchange, NSE, benchmark index, the All Share Index, ASI, declined 2.2% to 29,214.13 points bringing the year-to-date loss to 15.7%—the greatest loss in six months.

Investors lost N227.7 billion on Tuesday to peg market capitalization at N10 trillion at the close of market. Likewise, market activity declined as value and volume traded shed 43.9% and 25.5%. The Nigerian burse closed in the red on four consecutive trading days of the preceding week, extending weekly losses for the third consecutive week.

China is currently Nigeria’s largest source of imports and the third largest trading partner. It is therefore not surprising that the shock waves from the Chinese ripple seem to have hit the Nigerian economy almost immediately. This obviously deepens the woes of an already fragile economic base which the country was flung into by the recent international collapse of the oil market.

In the short to medium term, it is expected that Nigeria’s economy would continue to remain attractive to Chinese investors especially, given low oil price, weak currency, and enormous infrastructure deficit that Chinese companies have found to be a niche opportunity. But for indigenous firms, the Chinese ripple represents a real threat to survival and profitability.