Podcast Summary

The CGD Podcast: If China Sneezes, Will Latin America Catch Pneumonia?

Guest: Liliana Rojas-Suarez (Senior Fellow, Center for Global Development & Head of Latin America Shadow Financial Regulatory Committee, CLAFF)

Host: Lawrence MacDonald

Date: June 16, 2014

Overview

In this episode, Lawrence MacDonald speaks with Liliana Rojas-Suarez about Latin America's growing economic ties to China and the risks these ties create. Using the provocative question, “If China sneezes, will Latin America catch pneumonia?”, they discuss the structural changes in trade relationships, potential risks from a slowdown in China’s economy, and the policy recommendations from the Latin America Shadow Financial Regulatory Committee (CLAFF) to mitigate such risks.

Key Discussion Points and Insights

1. The Role and Purpose of CLAFF

[02:37–04:06]

• CLAFF consists of former finance ministers, central bank heads, and top academics who collaboratively create influential regional policy statements.
• Unlike other regions, this group is unique in its broad representation and high profile.
• The mission: “our audience really is trying to recommend policies or raise awareness of certain fragilities that could be affecting the countries.” (Liliana Rojas-Suarez, [03:14])

2. China’s Increasing Importance to Latin America

[04:08–06:08]

• Over the last two decades, China rapidly grew from a minor to a major trade partner, especially for economies reliant on commodities (minerals, soy, meat).
• “The dependence on Brazil is quite large, but it's the most diversified in terms of the number of commodities. But the commodities that you have mentioned are precisely those that China buys.” (Liliana Rojas-Suarez, [05:31])

3. Systemic Risk: Could a Slowdown in China Infect Latin America?

[06:08–07:18]

• Traditional dependence was on the US; now, the risk is that China’s slowdown would hurt Latin American economies.
• Concerns stem from China's “growth of investment has not always been led by the most profitable investments… the level of non-performing loans in the banking system has been increasing significantly.” (Liliana Rojas-Suarez, [06:08])

4. Dangers in China’s Economic Model

[07:18–09:05]

• China's stimulus post-2007/08 led to rapid investment, including many unproductive projects (e.g., “ghost towns”).
• Emergence of “shadow banking” due to regulated deposit interest rates fueling higher returns in less regulated financial entities.
• Real estate bubbles and mounting non-performing loans pose systemic risk, but China’s control over its financial system may prevent a typical bank run, even if problems manifest differently.

5. Transmission Mechanisms: How China’s Problems Could Spill Over

[09:45–14:37]
Liliana breaks down four primary channels:

1. Commodity Price Shock:
   A Chinese slowdown would lower demand and prices for Latin American exports—especially mineral and agricultural products.
   “They will suffer a double dummy in the sense that both the prices and the quantities of their commodities will decrease significantly...” (Liliana Rojas-Suarez, [10:38])
2. Reassessment of Risk in Emerging Markets:
   Investors may withdraw from Latin American markets upon sensing China’s instability, seeking safer assets.
   “So the class of emerging market could suffer significantly…” ([11:31])
3. Reduced Foreign Direct Investment from China:
   While FDI is not huge yet, Chinese banking and mining investments are growing. If Chinese banks suffer, they may retract overseas investments—especially dangerous given recent Chinese bank acquisitions in Brazil and Argentina.
4. Emerging Financial Links:
   Includes credit lines and swaps with Latin American banks, potentially cut in crisis, restricting trade finance and liquidity.

6. Differential Vulnerability Among Latin American Countries

[15:10–16:48]

• Chile and Peru—most exposed but well prepared, thanks to “so much accumulation of reserves… with more flexible exchange rate… agile central bank… well managed fiscal management…” (Liliana Rojas-Suarez, [15:16])
• Brazil & Argentina—more vulnerable due to inflation and less policy flexibility.
• Venezuela—politically reliant on Chinese funding, could face acute problems if Chinese support is withdrawn.

Policy Recommendations from CLAFF

1. Recapitalize the IMF to Be the True Lender of Last Resort

[16:49–20:51]

• Countries alone cannot respond to shocks of this nature—“The IMF needs to take the role as a land of last resort.” ([17:11])
• Recommended capital increase: over $1 trillion globally, based on Latin America needing $200 billion during the last crisis.
• The logic: “It's callable capital, of course… the fact that it's there means it doesn't need to be called.” ([20:05])

2. Pooling Latin America’s Monetary Reserves

[21:02–23:15]

• Greater regional coordination via a strengthened Latin American Reserve Fund (FLAR).
• While FLAR includes some countries (Colombia, Ecuador, Venezuela, Peru), major economies like Brazil and Mexico have not joined.
• The rationale: “if Ecuador goes bad, we go bad too… it's in their own geopolitical interest to actually protect the neighborhood.” ([21:55])
• Encourages more countries to join and grow the fund’s size/effectiveness. Recent negotiations for Chile to join offer hope.

Notable Quotes & Memorable Moments

• “If China catches cold, Latin America is going to get pneumonia.”
  — Liliana Rojas-Suarez ([15:12])
• “We are not going to stop making this recommendation because it's the right recommendation to make.”
  — Liliana Rojas-Suarez on IMF recapitalization ([17:11])
• “The availability of renminbis is not going to stop a crisis.”
  — Liliana Rojas-Suarez ([20:51])
• “If Ecuador goes bad, we go bad too.”
  — Colombian policymaker, paraphrased by Liliana Rojas-Suarez ([21:55])

Important Timestamps

• 02:37 – Introduction to CLAFF and its unique role
• 04:08 – Growing China-Latin America trade ties
• 06:08 – Main risks from potential China slowdown
• 09:45 – Four risk transmission mechanisms explained
• 15:16 – Differential resilience among Latin American economies
• 16:49 – The call for IMF recapitalization
• 21:55 – Case for pooled regional reserves (FLAR)

Closing Thoughts

• The episode ends on a balanced note: while China’s engagement is largely positive, mounting risks mean Latin America must be better prepared.
• Rojas-Suarez’s take: “There's some risks that you focused on, but overall this is good news.” ([23:47])

This summary focuses on the essential debate and recommendations, omitting the introductory music contest and outro segments.