China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Re-considered: The Competition between Brazil and Mexico – and China’s Role in this Competition

November 7, 2012

Summary in English

Competition between the two Latin American giants, Brazil and Mexico, has been fierce for many years. Joining the North American Free Trade Area (NAFTA) in 1994 gave Mexico a couple of very successful years. In 2000, expectations of more fundamental economic reforms were high when president Vincente Fox took over after 70 years of leadership by the Institutional Revolutionary Party (PRI). However, reform expectations were not met since Fox did not have a political majority in parliament – a situation which his successor Felipe Calderón from PRI is confronted with as well. Ironically, the new Mexican leaders now support the reforms that they critically rejected during the 12-year presidency of Fox.

Contrary to Mexico, Brazil entered the new century with a lot of doubts and question marks. In 2001, Brazil was hit by the Argentinian crisis. The South American free trade area Mercosur moved on very slowly. The business climate worsened further when the former leftist union leader Lula Da Silva won the presidential elections in 2002. But Lula changed style in time and went visibly for economic stability and reforms, well supported by parliament – contrary to Vincente Fox in Mexico. Lula was even re-elected in 2006.

Statistics give an obvious answer on the results of Mexican/Brazilian economic competition (GDP growth 2000-2009, average: Mexico 1.7 percent and Brazil 3.3 percent). Apart from domestic political conditions, one external factor contributed a lot to the different performance of Mexico and Brazil: the rapid rise of “manufacturing China” which very sharply turned out to be a main competitor to the “manufacturing Mexico”, particularly what concerns exports to the U.S. During only one decade, China more than doubled its exports to the U.S., much at the expense of Mexico. At the same time, Brazil was very much favored by China’s commodity import boom. Last year, China absorbed 17 percent of all Brazilian exports which means that China has advanced to number one of all Brazilian export markets.

During this ongoing decade, growth perspectives may again change pattern. Chinese total import growth may weaken somewhat on trend in the forthcoming years. Mexican competitiveness may be supported by the peso depreciation in the past years. So far, the GDP growth numbers of Mexico and Brazil are quite similar since 2010, around 4 per cent, with Mexico a little bit in the lead.

The relatively dampened or weak global growth outlook should lead to the conclusion that domestic demand in Mexico and Brazil may play a somewhat larger role for economic growth in the forthcoming years than in the past. In this context, Mexico may have a little better cards because of its substantially lower public debt in relation to GDP, slightly above one third compared to more visibly above 50 per cent in Brazil.

Read the whole analysis (in German)

 

 

 

 

 

Mauro Toldo
Head of Emerging Markets / Country Risk Analysis, Deka Bank

 

 

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Global Financial Reform and Cross-Border Integration: Is Asian Leadership Needed?

Before 2007–08, most global financial reform initiatives were based on a near-consensus about the benefits from the free circulation of capital across jurisdictions and from free cross-border competition among financial services firms. As a consequence of the financial crisis in the United States and Europe, however, this near-consensus can no longer be taken for granted. One implication is the increasing possibility of a fragmentation of the global financial system.

Such a trend could take many forms. Rating agencies were unregulated in most of the world outside the US before the crisis (South Korea being one exception). But the G-20 recommended that they be regulated and supervised by all major jurisdictions. Implementing that recommendation raises the risk of incompatible or inconsistent regulatory frameworks and supervisory practices among different countries. Rating methodologies could vary even within the same rating agency. Another example of fragmentation could arise for over-the-counter (OTC) derivatives. Trading has until now been cleared bilaterally among market participants. The G-20 has mandated central clearing in regulated clearing houses starting in 2013, however. Many investors fear a division of corresponding markets along the borders of country or currency areas. A third new development would flow from the new standards at international financial institutions, particularly the International Monetary Fund (IMF), governing the adequacy of capital control measures under certain conditions. But these new standards could potentially run counter to the previously received wisdom of the so-called Washington consensus.

Across the globe, supervisors have nudged banks to separate and protect assets and maximize lending in their respective jurisdictions, in some cases pushing for subsidiarization of activities previously conducted through branches. In countries that have run into fiscal difficulties, domestically headquartered banks have been pressed to increase their purchases of national sovereign debt. “Financial repression,” an expression long reserved to economic historians, has reentered the mainstream financial vocabulary to describe the possibility of such pressure. These developments have been striking in the euro area, where countries are in principle committed to total openness to capital flows but where an abrupt U-turn from financial integration to financial fragmentation has been identified by policy authorities, including the European Central Bank (ECB). They are by no means unique to Europe, though, and variations of the same themes have been observed in most if not all main economic regions.

Simultaneously, the pre-crisis momentum for harmonization of global financial standards has run into setbacks in crisis-affected countries. The United States has delayed any decision about the adoption of International Financial Reporting Standards (IFRS), which it had endorsed for US-listed foreign firms in 2007 and had seemed on the verge of extending to US-listed issuers in 2008. In another example, the European Union, after championing the global use of the Basel II Accord on capital standards during the 2000s, now seems set to adopt legislation that the Basel Committee has deemed materially non-compliant with the new Basel III Accord adopted in 2010. For all the G-20 talk about global solutions to global problems, financial reform often seems more driven by politics in the post-crisis context than in the previous period. And as the saying goes, all politics are local.

This new reality poses an unprecedented challenge for Asian policymakers. Asia has gained from dynamic financial development in the past two decades, and is entering a new phase in which cross-border financial openness could improve the allocation of capital and make financing mechanisms more efficient. Asians generally are likely to benefit from the continuation or even the acceleration of global financial integration. Until recently, Asians could take such integration for granted, counting on the commitments to financial openness of both the United States and Europe, which dominate the global financial order as embodied by such institutions as the IMF, the International Accounting Standards Board, or the Basel cluster around the Bank for International Settlements.

But the assumption that the West will continue to champion further cross-border openness of the global financial system can no longer be taken for granted. As a consequence, Asians may have to take more leadership in global financial reform discussions to make sure that global financial integration is not reversed. This would be a new situation. Some Asian policymakers may feel ill-prepared for such a trend, but they could find its implications difficult to escape.

Nicolas Véron
Senior fellow at Bruegel, Visiting fellow at the Peterson Institute for International Economics, Washington DC


Nicolas Veron gave us his kind permission to include this contribution in our blog chinaresearch.se  The article was initially published last week by Bruegel and Peterson Institute for International Economics.
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China’s Impact on the Global Commodity Markets

Today, China dominates the global commodity markets by its strong demand for oil, metals and agricultural commodities. China is not only consuming an increasing portion of ores, fuels and food, but is also an important supplier of a lot of commodities, e.g. rare metals, coal and some special metals.

We can illustrate China’s role by a closer look at the world steel market. The worldwide steel production has recovered more rapidly than initially expected. In 2011, production amounted to about 1.53 billion tons of crude steel worldwide. For 2012, we forecast a crude steel production of around 1.55 billion tons. We expect a further increase of up to 1.75 billion tons for 2015. This development enhances the demand for iron ore, blast furnace, coke and steel scrap. Important impetus continues to come from China and other Asian regions. China’s output will be up to 720 million tons in the current year and close to 800 million tons in 2015. This equals the global production level of the mid nineties!  In addition, we see rising production volumes in India, Vietnam and Indonesia.

On the other hand Western European steel production is still below pre-crisis level and will only stagnate in 2013  while some Eastern European countries will show a stronger growth during the next years. Within Europe Turkey could reach a new all-time high with a production volume of up to 38 million tons in the current year. For 2015, we expect a volume of more than 40 million tons.

To fulfill the needs of the output highs of the global steel industry new capacities for iron ore are necessary. About 70 per cent of the worldwide iron ore reserves are hold by three companies (Vale, BHP and Rio Tinto). Together with capacities of Anglo-American and the captive capacities of ArcelorMittal they control the worldwide supply of iron ore. Compared to our steel production forecast another 450 million tons of iron ore per year will be needed in 2015.

Today China influences the spot market price for iron via its tremendous demand. The leading iron ore producers invest mainly to fulfill Chinas needs, e.g. Vale ordered new vessels with higher capacities ever seen primarily for the transport of iron from Brazil to China. Beside steel China holds a nearly similar position  in the markets for aluminum, copper, nickel and zinc as well as the casting of these metals. In the long-run China will become the main consumer of oil instead of the United States.

The country is the leading producer of rare metals with a production share of 97 % in 2010, needed in high-tech applications worldwide. Restrictions for exports of these rare metals via tariffs or volume constraints are not unusual in China. And even in the medium-term countries outside of China are unable to substitute these raw materials or find other suppliers. This will result in a rising production of high-tech application within China. Therefore, Western companies discuss more and more joint ventures in China to secure their raw material supply.

During October 2012  China announced a further restriction for the export of copper scrap. Holding the scrap in the country improves Chinas resource base, because it is the leading copper user worldwide.  Outside of China the reduced scrap supply  induces higher prices for scrap and via higher input costs in a second step  higher prices for secondary and primary copper. In addition, there are high inventories of copper in the Chinese  warehouse of the SHFE and higher strategic reserves of copper.

These are only a few examples for the rising importance of China in the commodity markets. But does this behavior result in an optimal allocation of resources? In our opinion it does not. With a completely free trade of commodities the market would chose the best location for the production of goods via the price mechanism. Restrictions for free trade induce higher prices than necessary.

 

 

 

 

 

 

 

Heinz-Jürgen Büchner
Vice President Economics and Research, IKB Deutsche Industriebank

 

 

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