“Brazil is so dependent on China that some traders even describe Brazil as a “derivative” of China. Derivatives are contracts whose prices depend on the value of another asset. This expression shows to what extent the performance of Brazilian market is linked to China.
Although Brazil holds record reserves of $350 billion and has a robust domestic market that limits exposure to external negative scenario, China is still the most crucial point that will determine how much Brazil will suffer with a global downturn. According to Funcex (Brazilian Center of the Study of Foreign Trade), without the “China effect” that caused rising commodity prices, Brazil’s current $3.1 billion trade surplus, which more than doubled in one year, would turn into deficit.
Brazil has immensely benefited from its exports to China, but if the Asian giant succumbs to the crisis, Brazil will deeply suffer contagion. The main effects in Brazil of a Chinese slowdown would be: drop in commodities prices, less exports, surge in current account deficit, inflation and falling real.
Brazil should learn from Confucius, China’s most important Chinese philosopher, who once said that “too little is as bad as too much.” Therefore, instead of relying so much on Chinese appetite for growth, Brazil should be investing in infrastructure development, tax reforms, increase in investment rate, which is below 20%, and fighting inflation, which leads to higher interest rates and causes real appreciation.”
Original article here.