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Business / Economy

Financial cooperation with China can buffer LatAm against external economic shocks

(Xinhua) Updated: 2016-01-12 17:09

New challenges

Still, the region is not a monolithic bloc, but a diverse collection of states. Each reacted differently to the four hikes of a quarter point the Fed has in store to gradually reach a one-percent hike in the interest rate.

"An increasingly stronger dollar could lead to a fall in international prices for raw materials and damage the current account surplus of some South American economies that had benefited from the supercycle in raw materials during the last decade," said Chai.

According to ECLAC, South American economies went from an average growth of 0.6 percent in 2014 to a 1.6 percent contraction in 2015, amid a sharp drop in raw material prices and slow growth in aggregate global demand.

Regional exports also shrank by about 14 percent, dragged down by Venezuela (41 percent), Bolivia (30 percent), Colombia (29 percent) and Ecuador (25 percent), among other countries.

South American economies are expected to shrink by 0.8 percent in 2016, mainly due to a 2 percent contraction in Brazil and 7 percent contraction in Venezuela, ECLAC estimates.

The political upheaval swirling around both Brazil and Venezuela is also expected to erode confidence in the regional market and further cause capital flight toward the United States.

Ecuador, according to Chai, could become another concern due to the dollarization of its currency, as a stronger dollar will make its exports less competitive and raise the cost of financing.

"2016 will be a difficult year for South American countries given the adverse situation, but at the same time, it will be a perfect opportunity to boost financial cooperation between China and the region," said Chai.

Internationalization of the yuan

Financial cooperation between China and Latin America has developed rapidly in recent years, thanks to Chinese President Xi Jinping's three-pronged initiative to use trade, investment and financial cooperation to bolster bilateral ties for mutual benefits.

In 2014, China lent Latin America $22.1 billion, more than the 20 billion provided by the World Bank and the Inter-American Development Bank together, according to a study by the Washington-based Inter-American Dialogue, a center for policy analysis.

Chai believes financial cooperation with China helps the region to diversify both its models and channels of financing, which not only brings greater stability and predictability, but also allows long-term planning.

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