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Elliott Morss | October 25, 2014

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China and Brazil: What The Future Holds

China and Brazil: What The Future Holds

by Elliott R. Morss, Ph.D.

Introduction

I have been commenting favorably on Brazil and China in my recent writings. Here, I will look more closely at the two countries and ask what the future holds for them. There are some similarities between the two countries:

  • both are large with growing middle classes;
  • their banks did not fail during the Western banking implosion;
  • both have weathered the global recession and are growing again, and
  • they are both concerned about a weaker US$ and the impact it will have on their exports.

But there are differences, and those differences will affect their future growth paths.

Size

Both countries are large. As Table 1 indicates, China is slightly larger than Brazil in geographic area (only Russia, Canada, and the US in that order are larger than China). China’s population of 1.3 billion is more than 6 times Brazil’s and is the largest in the world. At 140 per square kilometer, China’s population density is high, but not excessively so by international standards. India’s population density is 359 per sq. km. and The Netherlands density is 489 per sq. km.

Table 1. – Size

Item Brazil China
Geographic Area (sq. km.) 8,514,215 9,596,961
Population 198,739,269 1,338,612,968
Population Density 23.3 139.5
GDP (PPP in US$ bil.) 2,025 8,789
GDP per capita 10,200 6,600

Source: CIA World Factbook

China’s GDP of US$8.8 trillion is third largest in the world behind the European Union and the US. Brazil’s per capita income is much higher than China’s. But with the highest 10% of income earners in Brazil earning 43% of the income, income inequality is higher there than in China where the top 10% of income earners only earned 15% of the income. These income inequality differences are also reflected in poverty data: 26% of Brazil’s population is below the poverty line while the figure is just under 3% in China.

Financial Stability

I have written about the debt problems in the Western nations and Japan. These are not problems for Brazil or China, as Table 2 indicates.

Table 2. – External Debt Ratios

  External  Debt External Debt to
Country (bil. US$) Export Ratio
US, Europe & Japan 51,408 9.1
US 13,450 13.5
Brazil 216 1.4
China (incl. HK) 978 0.6

Source: CIA World Factbook

International reserves are also not a problem for either country. China’s reserves, (at US$2.6 trillion, the largest of any nation in the world) are equivalent to 2.39 years of imports. Brazil’s reserves are 1.75 years of imports. In contrast, US international reserves are the equivalent of about 20 days of imports and the UK’s reserves would pay for 41 days of imports.

Recovery from Global Credit Freeze/Recession

No banks in either Brazil or China failed as the result of the Western banking collapse. However, the stock markets in both countries did fall sharply. The Brazilian stock market fell 60% while the stock markets in China (their capitalization now ranks 3rd in the world) fell 72%. Since hitting their lows, the Brazil market has recovered all but 4% of its losses. In contrast the composite index of the Shenzhen and Shanghai markets are still down 42%.

The global recession in both countries was felt primarily though a decline in exports. As Table 3 indicates, exports fell off in both 2008 (primarily in 4th quarter) and in 2009.

Table 3. – Export Growth Rates, Brazil and China

Export Growth (%) 2007 2008 2009  2010 (est.)  2011 (est.) 
Brazil 3.5 -0.8 -10.9 7.3 6.7
China 19.8 8.4 -14.3 7.0 9.2

Source: World Bank

As Table 4 indicates, the fall in exports reduced the overall growth rates of Brazil and China.

Table 4. – GDP Growth Rates, Brazil and China

GDP Growth (%) 2007  2008  2009  2010 (est.)  2011 (est.) 
Brazil 5.7 5.1 0.1 3.6 3.9
China 13.0 9.0 8.4 9.0 9.0

Source: World Bank

Brazil’s growth rate fell from just over 5% to 0.1% in 2009, while China’s growth rate fell from 13% in 2007 to 9% in 2008 and further to 8.4% in 2009. But in 2009, China’s growth rate was still 8.4%! This is even more remarkable when one considers exports are a very important component of China’s GDP (35%) versus Brazil (14%). Part of the reason for China’s performance during the recession was the government stimulus package of US$1.1 trillion (13% percent of GDP) launched early in 2009.

Achilles Heels  

In contrast to Brazil, China is a natural resource poor country. As Table 5 indicates, it needs food, iron ore, energy, and high-tech products to support its exports.

 Table 5. – China Imports, 2006

Primary 23.6%
  Food 1.3%
  Raw Materials 10.5%
  Fuels 11.2%
Manufactured 76.4%
  Chemicals 11.0%
  Industrial Products 11.0%
  Misc. 9.6%
Total 100.0%

 

A major item in China’s food imports are soy products. It happens that Brazil is the world’s largest exporter of beef, iron ore, sugarcane ethanol, and the second largest exporter of soy products. China has become a major client of Brazil for its soy and iron ore. In both Argentina (also a large soy producer) and Brazil, China is financing infrastructure to get products out of the country more rapidly and at lower cost.

 Not all China’s manufactured imports are for domestic consumption. China’s exports are evolving from textiles and clothing to electronic and other high-tech products. A recent study estimated that imports now constitute between 52 to 76 percent value of exports.

 China’s energy demands are growing rapidly. Like the US, it has large coal reserves. But because of global pollution, China is making efforts to cut back on its use. Part of this effort is manifested in its nuclear initiative. China now has 11 nuclear plants operating. It has another 22 under construction and 27 more in the planning stage.

Table 6 provides a breakdown on Brazil and China’s energy sources.

Table 6. – Energy Sources (in Mtoes*), 2007

  Coal/ Crude       Combustible/
Country Peat Oil Gas Nuclear Hydro Renewables
Brazil 6% 40% 8% 1% 14% 31%
China 66% 17% 3% 1% 2% 10%

* Mtoe – Million ton oil equivalent

Source: International Energy Agency

 The table shows how dependent China still is on coal for energy. It also indicates the diversity of energy sources in Brazil. Table 7 gives a further breakdown on energy use in each country.

Table 7. – Energy Use, 2007

Item Brazil China
Energy Production (Mtoe) 216 1814
As Percent GDP 15% 20%
     
Net Imports (Mtoe) 24.81 166.75
As Percent GDP (bil. US$) 1% 2%
     
CO2/GDP 0.22 0.61

Source: International Energy Agency

 It shows that GDP is more energy intensive in China than in Brazil and that energy imports in China are twice what they are in Brazil. The higher CO2 number in China results from its heavy dependence on coal.

 China’s natural resource dependence is also reflected in exports. 95% of China’s exports are manufactured products. In contrast, 32% of Brazil’s exports are primary products.

Does Brazil have an Achilles heel? If it does, it is not readily apparent. In Latin America, there is always the fear of another populist seizing power and setting off another round of inflation. But in recent years, the Brazilian government has developed an impressive track record.

Conclusions

I view Brazil and China as the two most impressive economies in the world. China does have a natural resource deficiency. And with the demands of its growing middle class, could we see it running a trade deficit along with a weakening currency in less than a decade? We could, but I doubt it will happen.

It has better government policy makers than any country in the world, and the governing Communist Party follows most of their recommendations. China is already on the way to solving its energy dependence problems by becoming the leading alternative energy producer in the world. In my travels, only the Vietnamese people work harder than the Chinese. And for the foreseeable future, Brazil will be a major benefactor of China’s natural resource needs.

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