China's continuing demand for commodities will be crucial
By James Painter
BBC Latin America analyst
Latin American economies are undoubtedly in a stronger position to withstand the impact of the international financial crisis compared to previous years.
Most have trade surpluses, stronger currency reserves and a healthier fiscal deficit.
But the combination of a global economic slowdown and falling commodity prices is threatening to reverse the recent pattern of healthy growth rates.
The World Bank and the IMF have already revised downwards their projections for 2009.
There are real concerns that governments may have to slash spending on health, education and poverty eradication schemes.
So could China help to mitigate some of the worst effects?
After all, in the last 10 years many countries, particularly in South America, have diversified their trading partners to include the Asian giant.
In 2000, trade between Latin America and China was worth just $13bn (£7.5bn) - last year it had climbed to $103bn.
Exports to China are very important for some Latin American nations
China has been hoovering up South America's commodities to satisfy its booming economy, which last year grew at more than 11%: soya and iron ore from Brazil, soya and oil seed from Argentina, copper from Chile, tin from Bolivia, and oil from Venezuela.
China is now Chile's most important export market and Peru's second most important.
It is Brazil's second largest trading partner after the US, and Argentina's third largest.
However, a note of caution is in order. In 2007 total Latin American exports were worth $715bn, of which only $51bn - or 7% - went to China.
Exports to China were much more important for some countries, including Brazil, Argentina, Chile and Peru.
A continuing high performance of the Chinese economy would undoubtedly play a crucial role in helping sustain growth in many Latin American economies.
But as China's National Bureau of Statistics announces that economic growth rate has fallen for the third quarter in succession, is high growth sustainable in China? Can China continue to suck in Latin American commodities?
Seventy per cent of the Chinese economy is driven by trade, particularly the sale of cheap consumer goods to the US and Europe.
But declining demand there will undoubtedly affect output and China's trade surplus.
Japan's Toyota began scaling back production over supply fears
The Chinese government has pinned its hopes on stimulating domestic demand to pick up the shortfall.
But the Japanese carmaker Toyota, a heavy investor in China, recently began scaling back production because of fears of being left with a stock of cars it could not sell.
There are differing views as to how far the Chinese economy will slow down.
At one extreme are commentators like David Roche, the founder of the Hong Kong-based Independent Strategy.
"Officially, the economy will not drop below 8% growth," he told the BBC.
"In fact it is already on its way to 4%, but they are not going to tell us that. The fall in exports will cut into fixed asset investment, which represents 40% of China's GDP."
Other analysts see a much lower fall in the growth rate to about 8-9%. They point out that the Chinese authorities have a healthy budget surplus of 2% of GDP to be able to stimulate the economy.
For Latin American economies it is important which sectors of the Chinese economy will continue to grow, and by how much.
Demand for iron ore already looks shaky. Copper demand will depend on how quickly China wants to proceed with bringing electricity to the whole country.
Argentina and Paraguay are particularly vulnerable to any downturn in demand for soya. Since July soybean prices have dropped from $16 to $9 a bushel, in part because of a record crop in China and a slowdown in Chinese imports.
Soybean prices have dropped - partly due to a record Chinese crop
Many analysts argue that Argentina's remarkable economic recovery after the December 2001 crash was due to a huge degree to the boom in soybean exports, particularly to China.
Soya plays a crucial role in driving economic activity and as a source of tax revenue.
• Argentina's total exports to China have grown sharply from about $140m in 1992 to $3.5bn in 2006, and $6.3bn in 2007 - much of this is soya
• The amount of land given over to soya is expected to reach 17.5m hectares (175,000 sq km) hectares this year, equivalent to more than half of the arable land
• Taxes on exports are expected to raise nearly $12bn this year, of which about 50% comes from taxes on oilseed sales. Lower tax revenues from soya exports could seriously affect public spending
Chile would be adversely affected by a drop in Chinese demand for copper. Copper rose in price by a massive 700% between 2001 and mid-2008, but now it is falling.
But unlike other Latin American countries, Chile already has a large fund of about $20bn squirreled away when copper prices were surging.
Peru would definitely be helped by ongoing demand for its minerals from China.
Much of its recent high growth rates have been driven by investment in the mining sector, including from China.
A Chinese company, Chinalco, is investing $3bn in a huge copper mine, whilst another Chinese company, Shougang, has a virtual monopoly over iron ore mining.
Demand from the Chinese economy will do little to offset the declining oil prices affecting Venezuela and Ecuador.
Oil exports from Venezuela to China are far less than to the US
Despite a series of recent highly-publicised agreements signed by President Hugo Chavez with China, Venezuela only exports about 250,000 barrels per day of oil to China.
This is far less than the 1.5m bpd to the US - equivalent to about 60% of all its oil exports. Total export sales to China were only worth about $3bn in 2007.
In general, commodity prices are probably the biggest factor determining Latin America's medium-term economic growth.
After all, according to the World Bank, roughly half of the region's growth in the past five years has been spurred by high commodity prices.
China's role is crucial. The Chinese economy is probably the largest single factor in deciding whether the current downturn in the price of most commodities is just a blip or a longer-term trend.
There may even be a silver lining to the current crisis. Some analysts see China investing more in Latin America.
So far, Chinese investment has been nothing like the $100bn President Hu Jintao promised in 2004. In 2007 it was about $22bn compared to the $350bn US firms invested in the region.
The research analysts Oxford Analytica recently predicted that this could increase as China seeks to ensure its supply of raw materials.