Evergrande: which are the Latin American economies most exposed to the possible collapse of the Chinese real estate market

Their businesses range from the manufacture of electric vehicles, food and beverages to wealth management. It even owns one of the most important soccer teams in the Asian giant: Guangzhou FC.

Lately the group has struggled to meet its debts, which currently amount to more than $ 300 billion.

Some analysts warn that the bankruptcy of a property developer as large and in debt as Evergrande could not only have a major impact on the Chinese economy, but could cause a domino effect on the global financial system and unleash a crisis similar to that of 2008 after the collapse of the investment bank Lehman Brothers.

Other analysts, however, deny the comparison with the fall of the US bank.

But if Evergrande finally fell, Latin America would not emerge unscathed.

In fact, the news of a possible bankruptcy of the company affected the markets for raw materials, on which the vast majority of Latin American economies depend.

Copper prices tumbled earlier in the week as investors worried that demand for copper metal used in construction be affected if Evergrande’s projects come to a halt.

Crude oil prices and some of the major stock markets in Latin America also suffered.

The most exposed

Martina Ogaz, Euroamerica analyst, estimates that countries like Chile, Peru and Brazil they would be the hardest hit after the eventual collapse of China’s second-largest real estate company.

“Chile is a large exporter of copper and iron, Peru also exports copper, and Brazil is one of the largest iron producers Worldwide. These are undoubtedly the economies that would be most exposed since both materials are used in construction ”, he tells BBC Mundo.

Brazilian analyst Luciano Rostagno, from Banco Mizuho do Brasil, agrees with his Chilean counterpart and recalls that Chile and Peru are also “large exporters” of copper to China.

On Monday, rumors of a possible default by the Chinese real estate giant caused a 3.07% drop in the price of copper on the London Metal Exchange.

For their part, both Brent crude and West Texas Intermediate fell about 2%, also driven by the strengthening of the US dollar.

The weight of export diversification

“In Brazil it is worrying because we export a lot of iron to China. In fact, China is the main buyer of Brazilian iron, ”analyst Rostagno tells BBC Mundo.

For this reason, the expert in raw materials assures that the Chinese construction sector is of great importance for the Brazilian economy. But it highlights that for Brazil the risk is lower than in other Latin American nations.

“Brazilian exports are more diversified. Besides iron, soybeans and crude oil also play an important role in exports ”, he explains.

“In Chile and Peru, copper represents the majority of their exports.”

Another factor is that, according to him, the Brazilian is a “relatively closed” economy.

“Total exports represent only 14% of GDP, while in Chile and Peru they add up to more than 30%,” he says.

An important business partner

However, in 2020 China was the destination of approximately 32.5% of all Brazilian exports.

And according to a recent report by the US bank Wells Fargo, both the stock market and the Brazilian currency are highly vulnerable to an economic slowdown in China.

Analyst Martina Ogaz warns that if the impact of the possible fall of Evergrande spreads to more sectors of the Chinese economy, apart from real estate, other Latin American countries would be affected.

“This would cause the deceleration of the second world economy, which has become one of the main business partners and one of the largest investors in some countries in the region ”, says the Chilean expert.

Faced with a scenario of lower demand for raw materials in China, the economies of countries such as Colombia and Venezuela – which is highly dependent on its oil exports to Beijing – would also take a hard hit.

China’s response to the crisis

To the relief of many, this Wednesday the chances of Evergrande falling and becoming the Lehman Brothers Chinese.

“The Bank of China injected liquidity into the market, which was what worried the international markets the most, and an agreement was also reached to pay a bond in yuan due this Thursday,” says Ogaz.

This made the markets and the prices of some minerals will recover. The copper price rose 3% after Evergrande announced that it would pay interest on the national bond.

The announcement of said payment, which is estimated at US $ 35.9 million, was a relief for investors worried about the company’s debt.

Nevertheless, Evergrande must also pay this Thursday interest for US $ 83.5 million on a foreign bond.

The consequences of the Chinese slowdown

Whatever happens to Evergrande, some analysts are not so optimistic about the future of commodity prices.

“We are already seeing a slowdown in the prices of some raw materials in response to the slowdown in growth that was expected in China,” Jennifer James, an analyst at the British asset management group Janus Henderson, tells BBC World.

“Iron, a key component of steel, which in itself is a key raw material in construction and infrastructures, it has seen its prices deflate ”, he adds.

It is clear to James that other raw materials used in home construction will also see a gradual slowdown in the coming year due to lower demand.

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