The U.S.-Latin America-China Relationship and Implications for Emerging Markets Debt

The relationship between the U.S., Latin America, and China is complex and evolving, creating significant implications for emerging markets debt. Listen to this special edition of the TCW Investment Perspectives podcast as our emerging markets experts discuss trade, politics, and compelling return opportunities across the regions – from Argentina to Mongolia.

Creators and Guests

AG

Host

Anisha Goodly

AM

Guest

Ayoti Mittra

LL

Guest

Lin Jing Leong

What is TCW Investment Perspectives?

TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.

Welcome to a special edition of the TCW Investment Perspectives Podcast.

I'm Anisha Goodly and today I'm delighted to introduce our

new Latin America sovereign analyst, Ayoti Mittra, who

is here with our Asia sovereign analyst, Lin Jing Leong.

Today we're going to dive into how investors can approach both Asia

and Latin America, two interconnected regions increasingly shaped

by geopolitical shifts, trade tensions, and strategic realignments.

From tariffs and protectionism to China's economic reach and

Latin America, we explore how these forces are reshaping

capital flows, investor behavior, and sovereign risk profiles.

What does the China-Latin America relationship mean for debt markets?

How are geopolitical risks and macro volatility
being priced in across Asia and Latin America?

And where are the opportunities and blind spots for global investors?

Today we'll unpack the important trends, risks,
and forward-looking themes that matter the most.

Lin Jing and Ayoti, thank you for being here today.

Thank you for having us.

Same.

I'm really looking forward to this discussion.

Just to set the stage, China's trade influence
in Latin America has been significant.

Total China-Latin America trade reached around $520 billion in 2024.

And as you know, this was near zero in 2000.

Brazil, Chile, and Peru's exports to China have roughly doubled
since 2019, with China the top purchaser of their exports.

So Ayoti, I'd like to start with you.

As we know, more recently, the US has increased its engagement in Latin America.

How do you see this dynamic evolving?

Indeed, and thank you for pointing that out.

I think this dynamic is here to stay,
especially with the new Trump administration.

I think this government is pretty keen on being able

to regain their influence in the region that they sort

of lost, so to speak, earlier in the decade to China.

So one thing to remember is that the Latin American
countries, they are emerging markets for a reason.

And when they needed financial help and they went to the US, what
they got was more policy prescription and economic recommendations.

Whereas when they went to China, what they got was direct investment.

And I think this is the moment where the US realizes that ultimately, if
they want to be able to have the same degree of influence, money matters.

And now we're beginning to see lending in a more direct format.

And I think the main case in point here is Argentina.

I will say that the support that Argentina
has received from the US is unprecedented.

It's around a total of $40 billion.

Now, of course, there are actual strategic investments for the US as
well in order to gain access to Argentine rare earth and minerals.

So there is obviously an underlying incentive for both countries to align.

But it's not just Argentina.

We've seen the US influence in terms of direct
lending come up even in the smaller countries.

We've seen that in Ecuador.

We have seen that in El Salvador.

And while the US hasn't directly been lending money there, they have

been able to influence the IMF in terms of either increasing the

size of the program or helping loosen some of the conditionalities.

And I think this is maybe a shift where the US realizes that if they

want to have that continued influence, then a direct lending or indirect

lending, but there has to be some monetary influence in the region.

So I think that's why this dynamic in my view of US engagement is here to stay.

But I do think that the Chinese influence and US influence can coexist.

So that could be an interesting evolving dynamic as well.

So I'd like to pick up on what you just mentioned.

Just compare and contrast the US relationship with Venezuela with Argentina.

So the US, currently the relationship with
Venezuela is obviously a very difficult one.

Trump in his prior term tried to find a way to remove Maduro from office.

And then you had sanctions.

And eight years later, Maduro is still here.

So now there is sort of this renewed effort by the
US to find a strategy that's going to be done.

a strategy or an exit strategy for Maduro, but it's a very difficult one.

Dictators never go easy and there's no negotiation really with Maduro.

So now I think what the U.S. really hoping to do is find

a way where internally there will be within Chavismo,

there could be a more negotiated exit for Venezuela.

But the story doesn't end there.

The transition is also a difficult period.

Bondholders are hoping for the regime change so that finally
bondholders can move forward with the restructuring story.

But that could also take a little bit of time.

But the good news would be that the process could start.

But ultimately, I think for the cabinet, for the
likes of Marco Rubio, this goes beyond Venezuela.

I think the intent is to then deal with Nicaragua, with Cuba.

So this is a very important step for the U.S. government
directionally to also gain influence in the region.

And the contrast with Argentina is very clear.

I think to me, one of the most striking thing that I saw with the U.S.-Argent

relationship was earlier this year in April, shortly after the Liberation

Day and the tariffs were announced, Scott Besson was in Buenos Aires.

And at that time, there was speculation that there was
going to be a swap that was going to be announced.

Besson came back and we didn't hear about the
swap, which clearly was in the works we know now.

But my point is, it's very important to remember that in the most kind

of difficult turmoil in the U.S. equities market, and in general,

the U.S. markets in April, Scott Besson made a trip to Buenos Aires.

So I think the relationship between these two countries is
actually quite strong and both parties tend to benefit from it.

Thank you, Ayoti.

That's a really great transition over to Lin Jing.

Lin Jing, how do you think Chinese policymakers are strategically thinking
about Latin America and especially in the context of U.S.-China trade tensions?

I think on that point to Ayoti's point earlier, right,
China has been involved in Latin America since the 2000s.

And for them, they really view Latin America as
a complementary production and resource base.

And more recently, it also helps mitigate exposure to U.S.

restrictions on trade and investments as well.

So for them, really, rather than seeking short-term returns

from Latin America, the way the policymakers view Latin

America is through three interconnected strategic lenses.

So number one, diversification.

Reducing exposure to U.S.-related geopolitical,
financial, and supply chain pressure points.

Beijing recognizes that the United States retains outsized

influence over global politics, security, and finance, and

does seek to make China less isolated across these domains.

So for them, it really is about that diversification.

Secondly, security.

Strengthening food and resource security by securing long-term access to

key commodities such as soy and beef for consumption and other materials

such as lithium and copper that are critical for China's

industrial and green transition is priority for them.

And number three, resilience and opportunity.

There's been a long-standing long-standing Renminbi
internationalization project they've been on.

And right now, they're getting the opportunity to do that through
Renminbi-based trade settlement, lending, and infrastructure digital projects.

That's in hopes of reducing their systemic reliance on the U.S.
dollar, while deepening China's global financial footprints as well.

Let me pick up on your first point there about the diversification.

So when we think about Asia overall, in what ways has the shifting
global supply chain dynamic impacted capital flows into Asia?

I'm actually very positive with regards to this particular story.

The reordering of global supply supply chains has positioned Asia,

ex-China, particularly ASEAN and parts of South Asia as well,

as the epicenter of both production and capital reallocation.

This transformation is unfolding along two
quite complementary channels, I'd say.

First, multinational firms are certainly not abandoning China's upstream
capacity, and they are instead redirecting incremental investments, i.e.

new factories, new assembly lines, and logistics hubs

toward Vietnam, India, Indonesia, and Malaysia instead, to

diversify operational risk and capture cost efficiencies.

Initially, we all thought that they will start pulling out of China.

Now, secondly, Chinese companies themselves are accelerating
outbound foreign direct investments into ASEAN.

They are offshoring segments of their production to preserve

global market share and also to benefit from preferential

trade agreements amid their own domestic soft demand as well.

I do think the result is a mutually reinforcing flow of capital.

Western firms are diversifying exposure, while
Chinese firms are for externalizing capacity.

And both of them together can create a more regionally
integrated and resilient manufacturing ecosystem.

And the trend is increasingly evident in the data.

ASEAN region has attracted double-digit
foreign direct investments application growth.

That's unfortunately the only sort of constant data we've got at the moment.

And you're certainly seeing anecdotally a surge in industrial park and
logistic developments aligned with global supply chain realignment.

So let's put all of that together.

Ayoti, I'll go back to you.

Where in Latin America do you feel like there are the best
and most compelling risk-adjusted return opportunities?

Yeah, sure.

The country that comes to mind really is Argentina.

Now, this is a very unique moment for the country.

We've seen change in administrations in Argentina, obviously, a few times.

And even when you had a quote-unquote market-friendly regime, they were

not able to deliver on the fiscal reform or the fiscal recalibration

in a way that investors could buy into the story, right?

President Milley, who is definitely a more extreme candidate,

he's a libertarian, and his campaign was completely

based on a very radical fiscal consolidation process.

And unlike prior administrations, he actually has delivered on it.

So we've had a couple of years where Argentina has actually
results to show for and not just promise a fiscal consolidation.

Now we have a market-friendly administration
that has actually delivered the results.

But now they need to stay in office and they need to attract the investments.

We already got a preview of the electoral red volatility a couple

of months ago when there were elections, regional elections in

the province of Buenos Aires that didn't go according to plan.

And the bonds were down 18, 20 points.

And then as soon as the actual midterms
happened, the bonds completely recovered.

And now we are in this stage where the
government actually has a lot of governability.

So the next, I would say, three to six months are very important for

the government to actually pass some important structural reforms

and with the backing of the U.S., which is a very big deal.

So I think Argentina is actually in a good position to
attract the FDI that really should be going into Argentina.

And if they seize this moment, then there is a lot of USD flows that can come

into mining and energy and potentially help Argentina come out of this sort

of triple C rating basket and over time go into the single B-type category.

That's a great example.

Thank you, Ayoti.

How about you, Lin Jing?

To first start with, you know, Asia can be quite idiosyncratic.

So some things don't always come together thematically.

But to what Ayoti pointed out just now, there are certain inflection points
in politics and credit upgrade stories, which Asia does benefit from as well.

To start with, Sri Lanka got a new government at the start of this year, and
this new government is currently very committed to the IMF program post-default.

So that's been quite positive.

Away from, I guess, the credit upgrade story with regards

to that, the thematics which I talked about earlier with

regards to US-China geopolitics led China plus one strategy.

That's really benefiting some of the ASEAN countries at the moment.

China's transition of growth drivers does keep this inflationary pressures.

And so that in itself is quite positive for China's own bond market.

And then you also have Malaysia Ringgit will continue to be supported by robust
tech and China plus one related export and foreign direct investments in flow.

Last but not least, a part of Asia which I haven't really mentioned, Mongolia,

US dollar bonds actually, are benefiting not only from its own transition from

past distress into policy orthodoxy, but their own aim

for fiscal consolidation and prudent monetary policy.

It is also a key beneficiary from China's resilience and China's

green ambition and China's security ambition, where you are seeing

a lot of imports from Mongolia by way of coal, copper and gold.

So that pretty much sums up all the different
opportunities we can find in this region at the moment.

Yeah.

Ayoti, tell me about the biggest blind spots that you're seeing in the region.

And if you could tie it a bit to the potential of a political

shift to the right, yes, I think it's very important for us to

remember that in Latin America, the politics really matters.

Because in the past, there have been unintended
defaults even when there's been a change in government.

But that also creates opportunities.

I think it's very important to kind of be on the ground, meet

with various stakeholders and try to understand what their

policy agenda is going to be if they if they win the election.

So I think these blind spots do exist because the politics can be volatile.

But that also means that it creates a lot of opportunities for investors.

And Ayoti, to your point, the markets react so quickly.

And then what I see you doing so often with the sovereign

research team is assessing those headlines and really

trying to determine, OK, what really is the path forward?

What are the different scenarios?

Lin Jing, let me turn it to you as well.

Asia is quite diversified.

Where do you see some blind spots?

From an emerging market debt point of view, I think one of the biggest blind

spot among global investors is really treating Asia as a single uniform

market and also treating Asia as very much your typical emerging market.

Deep differences in policy frameworks, market architecture and

investor behavior mean that the typical sort of Western analytical

approach often fail to capture the region's full complexity.

For instance, Indonesia's local government bonds tend to sell off during global
risk-off episodes, behaving quite like higher beta Latin American markets.

However, in contrast, markets such as China, India, Malaysia and Thailand
actually see their government bonds rally in the exact same conditions.

And that's because they're generally supported by really
large domestic saving pools and captive institutional demand.

This strong local funding base actually also reduces their reliance on U.S.

dollar borrowing as well.

In fact, fun fact, many sovereign U.S. dollar issuances

are actually conducted primarily just to maintain a

benchmark curve for their country's corporate borrowers.

Another example, the recent Chinese sovereign dollar bond

sale, for example, that drew $120 billion in demand for

just about $4 billion, which they were planning to issue.

And tell us where that priced.

You'll be very impressed to hear that three-year price flat to U.S.

Treasuries, while the five-year price at two
basis points above U.S. Treasury yields.

And at this current point, the three-year is
actually trading 25 basis points inside U.S.

Treasury, while the five-year is about 31 basis points inside U.S. Treasury.

So that really illustrates the depth of appetite for some of these
high-quality Asian paper, even when relative yield against U.S.

Treasury is really low.

Now I want to step back a bit.

Lin Jing, Ayoti, if you had to pick one macro trend that will
define your regions over the next five years, what would it be?

I think what the biggest macro trend that I'm noticing in
Latin America is what I would call the shift to the pink tide.

Remember, the last five years, the better part of the last five
years, you did have the more kind of left-leaning governments.

And now, over the past two, three years,
it's very clearly shifting to the right.

And I think that's going to be a very dominating theme, because that's where
you also get financial and sort of the FDI support, even from the U.S.

So that is what's going to bring in the capital flows.

And that's sort of the overarching theme in my mind over

the next three, four years, because that's really going

to shape the policy trajectory for the whole region.

And as I mentioned, potentially bring in rating upgrades and improve the
credit profile of these countries in the coming three, four, five years.

Lin Jing, how do you see it in your region?

I might have alluded to it earlier, but amidst this U.S.-China geopolitical

rivalry, the combination of China's domestic deflationary pressures and

multinationals hedging geopolitical and sanctioned risk by expanding operations

in Asia, ex-China, will certainly keep imported disinflation flowing through

some of these regional supply chains, which will help contain core inflation

and support lower funding costs, aside from typical

Asia temporary food and weather-related shocks.

And this is always positive for bond markets, right?

Lower core inflation, lower headline inflation.

And then you've also got sustained foreign direct investment inflows as well.

That is bolstering growth, bolstering employment, helping out the external

balances, and also currency stability across all of these recipient

economies that will help the equity and FX markets as well.

Thank you, Lin Jing.

That's all that we have time for today.

As we've heard, the fixed income landscapes in
Latin America and Asia are anything but static.

Thank you, Ling Jing and Ayoti, for your insights today, and we
look forward to hearing from you on how this situation evolves.

Thank you for joining us today on TCW Investment Insights.

For more insights from TCW, please visit tcw.com/insights.

This material is for general information purposes only and does not constitute
an offer to sell or a solicitation of an offer to buy any security.

TCW, its officers, directors, employees, or clients may have

positions in securities or investments mentioned in this

publication, which positions may change at any time without notice.

While the information and statistical data contained herein are based on sources

believed to be reliable, we do not represent that it is accurate and should

not be relied on as such, or be the basis for an investment decision.

The information contained herein may include preliminary
information and/or "forward-looking statements".

Due to numerous factors, actual events may
differ substantially from those presented.

TCW assumes no duty to update any forward-looking
statements or opinions in this document.

Any opinions expressed herein are current, only as of
the time made, and are subject to change without notice.

Past performance is no guarantee of future results.