Brazil among most exposed to China’s slowdown

Explosivo usado no ataque ao Consulado da China é caseiro, diz Polícia do  Rio | CNN Brasil

The concern that a possible default by the Chinese real estate giant Evergrande could result in an abrupt financial contraction in China and cause a sort of repeat of the 2008 financial crisis resulted in a strong wave of risk aversion in Monday’s trading session. In a week making investors anxious already because of interest rate decisions by the U.S. Federal Reserve and other central banks, including the Brazilian one, these fears led to a generalized drop in stock markets and commodity prices around the world, as well as a jump in demand for the dollar and other currencies considered “safe havens,” such as yen and Swiss franc.

In Brazil, where the local scenario already left investors wary, the bias brought in from abroad was enough to bring the benchmark stock index Ibovespa down 2.33% to 108,844 points, the lowest since November 23, 2020. The foreign exchange rate, meanwhile, rose 0.87%, to R$5.33 to the dollar, after reaching R$5.3772 during the trading session, a level not seen since August 20.

The concerns of investors around the world seem to have condensed into one expression: the fear of a “Lehman event,” in reference to the bankruptcy of the U.S.-based bank Lehman Brothers in September 2008, which effectively started the global financial crisis that year.

One of the largest real estate developers in the world, China’s Evergrande has debts of more than $300 billion, and without the Chinese government bailout, it may not be able to honor its commitments. According to the consultancy Capital Economics, the company is not the only highly leveraged Chinese real estate developer, but because of its heavy dependence on short-term debt, it is especially vulnerable to a tightening of credit conditions.

Since the Chinese economy is highly regulated, analysts warn that much of the consequences for the world economy of a possible default by the developer depends on how Beijing will handle the situation.

Alberto Bernal, head of global strategy at XP Investments, believes that it is not in the Chinese government’s interest to let the situation escalate too much. “I doubt that even a Evergrande failing would lead to a Lehman event because that would be too dangerous,” the strategist said. The professional recalled that under the Chinese system, interventions can be put in place “almost immediately” and that for this reason, letting a Lehman event happen would be a deliberate choice by the Chinese government, which has the necessary capacity to contain contagion.

To assess the effects of a firmer slowdown in China on other countries, Wells Fargo ran a regression analysis with data back to 2016. The exercise suggests that Brazil is among the most exposed economies, along with Singapore, South Africa, South Korea, Chile and Russia. “Our analysis indicates that countries heavily reliant on exports, high commodity prices, and which are tightly integrated into China’s financial system should come under the most pressure,” Wells Fargo economists Brendan McKenna and Jessica Guo said.

The study divided the effects into three categories: sensitivity of the local currency, the stock market and exports. Regarding the first one, the Brazilian real is among the most exposed assets, along with the South African rand, the Russian ruble, the Polish zloty and the Mexican and Colombian pesos. These currencies would have sensitivity equal or higher than 0.9 to variations in the yuan – that is, a 1% devaluation of the Chinese currency would result in a depreciation of at least 0.9% of these currencies.

As for the stock market, Wells Fargo found only a “moderate” correlation between Brazil and China. In this case, countries most at risk are Singapore, South Africa and South Korea.

In relation to exports, Wells Fargo places Brazil as a country of moderate sensitivity, since it exports between 2% and 6% of its GDP to China.

Source: Valor international

https://valorinternational.globo.com/