China is facing several challenges amid uncertainties surrounding the world economy and politics. Among them are the world post COVID 19 pandemics, the war in Europe and the increasing in intensity by the United State of its competition and technological war against China. But China also faces several challenges from within. How will these affect the Chinese economy and how will impact Latin America and Peru?

1. The Chinese economy post pandemics and the challenges ahead: Implications for
Latin America and Peru
Carlos Aquino, Director of CEAS
China is facing several challenges amid uncertainties surrounding the world economy
and politics. Among them are the world post COVID 19 pandemics, the war in Europe
and the increasing in intensity by the United State of its competition and technological
war against China. But China also faces several challenges from within. How will these
affect the Chinese economy and how will impact Latin America and Peru?
I. Challenges facing China from uncertainties in the world economy and
politics
As the economy began to recover from the COVID-19 pandemics in 2021, the demand
for several commodities began rising. The increase in the price of energy and food for
example began pushing inflation in many countries so central banks began increasing its
interest rate (the rates also began increasing as banks began reducing the abundant
money supply that they pumped to help their economies severely affected by the
COVID 19 pandemics).
But in February 2022 Russia invaded Ukraine and the price of energy and food
increased even more. Inflation achieved record levels not seen in more than 30 or 40
years, in many countries, as in US and Europe for example, and this pushed central
banks to raise even more its interest rate. Only in this year alone, specially from march,
rates have increased in a very short time sharply. See Table 1.
Table 1.
Source: Asia Nikkei https://asia.nikkei.com/Economy/Indonesia-hikes-key-interest-rate-to-4.75-highest-in-over-2-
years

2. Besides inflation, that have caused suffering to people in many countries, the rise of US
Federal Reserve interest rates has strengthened the value of the dollar, complicating
matters for the whole world. Devaluation of currency have made for example import
bills more expensive, and capital flights from developing countries have accelerated,
besides making the payment of their external debt heavier.
All these events will slow down the growth of the world economy. See Table 2. And for
China, where international trade is an important factor in its economy, this will impact it
negatively. In March this year, China expected to grow 5.5% this year, probably will
grow only 3.2% according to a recent publication by the IMF. But another event could
severely affect the Chinese economy: the increase in the intensity of the technological
competition with the United States.
Table 2.
Source: IMF https://www.imf.org/en/Blogs/Articles/2022/10/11/policymakers-need-steady-hand-as-storm-clouds-
gather-over-global-economy?utm_medium=email&utm_source=govdelivery

3. The Biden administration is decided to impede or at least slowdown the growth of
Chinese domestic semiconductor sector. In its National Security Strategy unveiled this
October 2022, The White House states that “In the contest for the future of our world,
my Administration is clear-eyed about the scope and seriousness of this challenge. The
People’s Republic of China harbors the intention and, increasingly, the capacity to
reshape the international order in favor of one that tilts the global playing field to its
benefit, even as the United States remains committed to managing the competition
between our countries responsibly”.
“The PRC, …, is the only competitor with both the intent to reshape the international
order and, increasingly, the economic, diplomatic, military, and technological power to
advance that objective.”1
In this context the Biden Administration has singled the semiconductor industry as a
vital area where US must be competitive and deny China the capacity to build its own
semiconductor industry. Besides enacting the CHIPS and Science Act last august, two
weeks ago the US prohibited not only the sale to China of advanced semiconductors
used for supercomputers and AI but also has forbidden US citizen to work in the
Chinese semiconductor sector. Semiconductors are vital to nearly every industrial
product, form computers to fighter jets, and are considered the brain of a product.2
II. Challenges facing China from within
China faces challenges related to its economy of two kinds. Ones are structural, and the
others arising in the last years.
a. Regarding the structural issues facing the China economy, some can be
mentioned, among others: those affecting the real estate sector and financial
sector, the income inequality, the decrease in population, the need to achieve
technological self-sufficiency, etc.
Regarding the problems in the real estate sector, these are: Dependence in the sale of
land for their revenues by local governments, lack of investment alternatives (low
interest rates and of investing opportunities abroad), no property tax, etc. “In China,
land sales refer to local governments' leasing of land parcels to companies for a period
of years. They are essential to regional economies for two reasons. First, land sales
accounted for about 41.6% of their revenue in 2021, a share that would increase if taxes
generated from the land were also considered.
Second, local government financing vehicles (LGFVs) -- a group of state-owned
enterprises (SOE) mainly used to fund infrastructure and public welfare projects -- use
land value as collateral to borrow from financial institutions”.3
1
The White House: NSS, https://www.whitehouse.gov/wp-content/uploads/2022/10/Biden-Harris-
Administrations-National-Security-Strategy-10.2022.pdf
2
Carlos Aquino: https://www.slideshare.net/carlosalbertoaquinorodriguez/chinaunited-states-
competition-and-the-chip-4-alliance
3
Nikkei Asia https://asia.nikkei.com/Spotlight/Caixin/China-s-plunging-land-sales-threaten-local-
governments#:~:text=In%20China%2C%20land%20sales%20refer,the%20land%20were%20also%20cons
idered.

4. Local governments have an incentive to sale land, and this have fuelled investment in
the real estate sector, leading to a bubble. Banks also financed these operations with not
much oversight. Also, there are vested interests that oppose a property tax. People keep
buying homes as a way of investment and those become expensive and unaffordable to
many people.
Though actually, under a sluggish economy and after measures taken from the year
2020 to rein in the loose financing for real state companies, prices of real estate assets
have been decreasing. The problems of the real estate sector is huge and its impact in
Chinese economy also, as it is estimated that the real estate and related industries
account for around 30% of China GDP. The case of Evergrande is an example of the
problems in this sector.4
Graph 1.
Source: Financial times https://www.ft.com/content/13476bf7-a519-427c-afd8-06e5579539d8
Even if in the last ten years it sems income inequality measured by the Gini index have
been decreasing, many people cannot afford buy a house, or send its children to good
schools, or earn enough to cover its necessities. And this phenomenon explains also why
less children are being born and population will soon begin to decrease in China. This
will have serious consequences for China economy, among others, the shrinking of the
labor force and the rapid ageing of the population (and the need for more pension to
paid).
In 2015 China launched the “Made in China 2025” initiative and have been making
advances to fulfill the objectives, but it seems difficult to achieve the aim of having 70%
of self-sufficiency in core materials (parts and components) in 10 key industries. As was
said China wants to achieve technological independence, but specially in the
semiconductor sector it is facing severe restrictions from the United States.
4
Financial Times: https://www.ft.com/content/13476bf7-a519-427c-afd8-06e5579539d8

5. And the U.S. is enlisting the cooperation of other countries and economies to exclude
China from the supply chains needed to produce these semiconductors. It is forming the
so-called Chip 4 Alliance, with Japan, South Korea, and Taiwan, and among them it is
said they control most of the design, machinery, basic materials and production in the
industry, and aim to deny China the ability to produce advanced chips.5
b. In the other hand, the challenges arising in the last years are the maintenance
of a strict zero COVID policy, the efforts to achieve common prosperity, among
others.
Regarding the strict zero Covid strategy, this is seen as one that have avoided China to
have many casualties as seen in other countries, but after nearly three years as the rest of
world have enter normality with no restrictions to daily live, China still is keeping
restrictions. And this is affecting its economy.
The idea to achieve common prosperity is in line with the fulfillment of the “Chinese
dream” exposed by President Xi Jinping. To confront the high prices of homes, an
aspect of Xi policy, he said “housing is for living, not speculation”. But there are
challenges for the application of this strategy.
III. Opportunities for Latin America and Peru
The increase in the size the middle class in China if it achieves "common prosperity"
will be good for the region. This have been reiterated in the 20th National Congress of
the Communist Party of China that recently have finished. China independent
development of its technological sector offer also opportunities for Latin America.
But the most pressing thing is for the China economy to grow, because in this way it
will help the rest of the world including Latin America and Peru. China is the engine of
the world economy, and more than half of the countries of the world have China as their
main trade partner, or main source of imports, or destination for their exports.
March 24, 2022
5
Carlos Aquino: https://www.slideshare.net/carlosalbertoaquinorodriguez/chinaunited-states-
competition-and-the-chip-4-alliance