Will Lula's Visit Deepen the Brazil- China Economic Relationship?

May 18, 2009

Brazilian President Lula hopes to increase Brazil -China trade and investment linkages in his May 2009 visit to China, which became the country's largest single trading partner in 2009. Brazil is a key supplier of soybeans, iron ore and other raw materials to China. In addition to boosting trade and especially investment, China and Brazil may also coordinate in seeking a greater role in global economic governance and in attempts to gradually diversify their savings and trade flows away from the US dollar.

Lula:With trade between Brazil and China increasing more of it should be conducted in reais or yuan not in USD.

Lula: Agreements signed on this visit likely to include sharing of images from satellites, agreement between China Development Bank and Petrobras, cooperation in trade and civil law, for ports and waterways. Brazil has more JVs in China (431 at the end of 2007) than China has in Brazil (94). (via Caijing)

China, the world’s third-biggest economy, became Brazil’s leading trade partner in 2009 after the global recession choked sales to the U.S. Yet China, buys almost exclusively raw materials to manufacture goods that compete with Brazil’s finished products, particularly in Latin America. Of the $7b in deals promised by Chinese companies after Hu Jintao's 2004 visit, only about $141.6 million or about 2 cents on the dollar has been invested. (Bloomberg)

Ziemba: Even more than the currency in which bilateral trade is conducted, how Brazil and China manage their savings will affect asset markets. Further use of the RMB in trade with brazil could be the latest step in which the RMB is used overseas following pilot projects in Asia and swaps with other EMs including Argentina.

DB: While Chinese trade with Brazil has been increasing from a low base especially given China's resource demands, Chinese investment in Brazil has been limited. China may also become a threat to Brazil’s manufacturing sector and future economic development as it increases its high-tech manufacturing exports
Chinese plans to develop aerospace technology domestically might limit the amount of opportunities for Brazilian companies like Embraer.
Lula is traveling with an entourage of 180 business leaders, the government's ministers of mines and energy, industry and commerce, agriculture, health, and the space agency, as well as a number of state governors, all of whom have either visited or worked with China. (Caijing)

China promised to loan $10b to Petrobras, the state oil company which is seeking new funds to finance its extensive investment program especially as it plans to exploit the new pre-salt layer oil finds which could be quite costly. The deal is expected to be finalized on this May visit, one of several loans to resource-rich but cash strapped companies (Ziemba) China has also been signing RMB currency swaps with several emerging and frontier market economies including Argentina which may increase the amount of trade conducted in RMB.
Both countries are now seeking more significant roles in the governance of international institutions like the IMF and may buy IMF bonds.
China is now engaged in pricing debate with Brazilian iron ore exporter Vale, asking it to lower the cost for the raw material.

Wickenbockel: China’s booming demand for goods of Brazilian origin over the period 2001 to 2006 concentrated heavily on a narrow range of primary commodities, contributing to a noticeable “Dutch disease” pattern, which in nonetheless relatively limited from the economy-wide perspective. The share of manufacturing value added in GDP may drop by a around 0.3-0.4 percentage points in favour of the primary sectors.