This boost, which allowed the Chinese economy to deal quite successfully with the global financial crisis, brought about significant indebtedness of local governments, high exposure of the financial system to projects of dubious quality, and substantial over-investment. The need to put a stop to this impulse in order to safeguard macroeconomic stability has defined China’s economic policy decisions since 2010. Accordingly, the contractions in investment projects and credit availability have been the main stabilization tools used in China. However, this process coincided with the aggravation of problems in Europe, which resulted in a very sharp reduction of external demand for the Chinese economy, among other things. The fall in exports, together with the need to withdraw the stimulus that had been given to investment over the past few years, has put significant pressure on China’s growth. Its capacity to offset the drop in demand with increased domestic consumption is limited in the short run, especially since the necessary conditions to promote lower savings rates, such as changes to social security and health-care plans, a deepening of the household credit market, and changes in relative prices – such as a real exchange rate appreciation –, are often slow to implement. Until now the Chinese economy has continued to decelerate, and somewhat more rapidly than was foreseen a few quarters ago. In my view, China has the necessary tools to deal with this deceleration, and to deal with a possible worsening of problems in Europe.
Sebastián Claro: Chinese challenges facing Chile and Latin America Speech by Mr Sebastián Claro, Board Member of the Central Bank of Chile, at the 2012 Latin American Cities Conferences “Chile on the path to development”, organized by the Americas Society/Council of the Americas, Santiago, 30 August 2012. *  *  *  I would like to thank Consuelo Edwards and Yan Carrière-Swallow for their help in translating this speech from the original Spanish. Thank you for inviting me to this event that for several years now has been gradually positioning itself – both in Chile and in the rest of Latin America – as a seminar dealing with key issues for the region’s economic development. On this occasion, and at the organizers’ suggestion, I would like to share with you some thoughts on the economic development of China and its implications for Latin America. Rather than focusing on aspects of the Chinese economy – which I will come back to at the end of the presentation –, I would like to focus on those dimensions in which China’s spectacular growth affects the region directly. Let me begin by recalling a widespread debate in the region in the early 2000s. While Europe was boastfully launching its new single currency, Latin America was struggling to leave behind the havoc of successive crises that had hit the region, starting with Mexico in 1994.