By Alicia Garcia Herrero, Chief Economist for Asia Pacific at NATIXIS and Senior Research Fellow at Bruegel
In his first official visit to China, Brazil’s President Jair Bolsonaro changed his aggressive tone on China during his election campaign last year. In fact, the tone went from his mantra that “China wants to buy Brazil”, to extending his warmest regards by stating that China and Brazil were “born to walk together”. The reason for Bolsonaro’s pilgrimage to Beijing is simple: Brazil’s massive public sector, with an increasing need for funding, continues to crowd out the private sector, pushing down growth in a highly populated country long trying to escape the middle income trap unsuccessfully. The need to reduce the size of the public sector, clearly stated in Bolsonaro’s presidential campaign, is all the more pressing as Brazil’s public debt could reach 100% of GDP soon if the pension reform that Bolsonaro is pushing through Congress gets derailed. And even if such a landmark reform were passed, public debt would still hover around 90% of GDP for the foreseeable future. Against such a background, Bolsonaro has no choice but to privatize a good part of Brazil’s state-owned companies and, as Brazil’s data on past acquisitions already shows, there is no better buyer than China.
During the last few years, China has invested as much as $30 billion in Brazil with a clear focus on power generation. In particular, one of China’s largest state-owned companies, State Grid, invested more than $10 billion in 2017 to acquire CPFL Energy, one of Brazil’s largest electricity companies. Bolsonaro has a long list of companies, from Electrobras to Petrobras which need fresh capital, so China clearly comes handy in this endeavor.
Beyond the need for fresh overseas capital, the Brazilian economy, which has been stagnating for quite some time after a very difficult period in 2016, has benefitted from the trade war, being a major exporter of agricultural products and, in particular soybeans. The recently announced interim deal between China and the U.S., which exempts many of the U.S. agriculture products from China’s import tariffs, is actually bad news for Brazil, at least as far as agriculture exports are concerned. However, Bolsonaro knows that China needs to find a long term solution to its dependence on agriculture imports so as to become more self-reliant in the light of the United States’s increasingly harsh stance on China. A strategic alliance between Brazil and China is like music to the ears. However, Bolsonaro did not want to look like just another vassal in the form of another new entry to the long list of members of the Belt and Road Initiative, so no commitment was made to Beijing’s gigantic infrastructure plan. In such a context, Xi Jinping might need to think of a more exclusive offer to the President of the largest economy in Latin America. At the end of the day, what really matters is that Bolsonaro needs China’s capital to reduce Brazil’s massive public debt and an export market for its agriculture products. China needs more allies at a time of strategic confrontation with the U.S. Hard to find a larger one than Brazil in the emerging world.
Photo credit: Palacio do Planalto/Flickr