Chinese Investment in Latin America-A Futuristic Approach
With the emergence of China at the world stage, it is looking for new areas for investment. Latin American region, which is also considered as one of the most resource-rich regions in the world and has a huge growth potential. China has been investing in the Latin American region for nearly two decades now. The region has become an essential market for Chinese goods and also as an important source of the energy. Over a few years, Beijing has also emerged as the largest creditor to the region, majorly due to its extensive funding to the large infrastructure projects.
Apart from the economic domain, Chinese engagement with the Latin American region has also been increasing at the diplomatic level. The bilateral visits between the leaders of various Latin American countries and that of China have also increased with a multiplier effect. China has also signed “strategic partnerships” with various countries including Brazil, Argentina, Ecuador, Venezuela, Costa Rica, Uruguay, Peru, and Mexico. [1]
Chinese strategy towards Latin America
Chinese increasing footprints in the region are the part of its greater policy narrative through which it wants to create a supportive environment at the international forum. China has also invited CELAC (Community of Latin American and the Caribbean States) countries for the participation in its ambitious ‘Belt and Road Initiative’ (BRI). At present, around 19 countries of the region are participating in the BRI. Through the BRI, China wants to cover the trade, investment, energy, security, finance, agriculture, infrastructure, science, politics and cultural exchange between the communities.
In the year 2016, China released its second policy paper on the Caribbean and Latin American region. The policy clearly states “the Chinese commitment of building a new relationship with Latin America and the Caribbean countries with five salient which includes sincerity and mutual trust in the political field, win-win cooperation on the economic front, mutual learning in culture, close coordination in international affairs, as well as mutual reinforcement between China's cooperation with the region as a whole and its bilateral relations with individual countries in the region”.[2]
The policy has different parts which give a clear idea about the Chinese approach towards the region. Chinese have stated the region as full of new opportunities and hopes in terms of sustainable development. Beijing will try and establish a new stage for better and comprehensive cooperation and taking them to the new heights. It is seeking to strengthen the cooperation not just in the economic sphere, but in the political and social sphere as well. The political sphere includes the exchange at various levels like at the Legislature level, Political Parties, Intergovernmental dialogue, and Consultation mechanism. The social cooperation includes the exchange of ideas for Social development, Social Governance, Health, Poverty Reduction Cooperation, Cooperation for the Environment Protection, Climate Change and Disaster Mitigation.
The Economic Partnership includes various domains like Industrial Investment, Capacity Building, Trade, Energy, Resources, Infrastructure, Agriculture, Scientific innovation, Cooperation in Space and Maritime affairs, including economic and technical assistance. The policy also talks about the people-to-people cultural exchange which aims at the capacity building in Human Resources, education, academics, sports, media, and tourism. Both the parties seek to enhance cooperation in International Political Affairs, Global Economic Governance, Sustainable Development Goals (SDGs), Fight against Climate Change, Defence, and Cyber Security. [3]
Analysis of Trade between China and Latin America and the Caribbean (LAC)
The trade between China and Latin America and Caribbean countries has increased from $17 billion in 2002 to $315 billion in 2019. China has been exporting high-end technology and manufactured products like military appliances, motor vehicles, electrical machinery and other consumer products. to the LAC. China imports the raw materials majorly oil, various minerals and other agricultural products from LAC. China’s total imports from the LAC in 2019 were around $165 billion, which amounted to 7.9% of the total Chinese imports. [4] China is the top trading partner of Chile, Brazil, Uruguay and Peru and in other countries, it is the second-largest trading partner. Almost, one-third of the total exports from Chile went to China. Countries like Costa Rica, Chile and Peru also have free trade agreement (FTA) with China. [5]
Chinese investment in Latin America
Majority of the Chinese investment has been to resource-rich countries like Venezuela, Brazil, Ecuador, Argentina etc. Venezuela, which is famous for its oil resources is also the highest receiver of the Chinese investment with around $62.2 billion and also the top loan receiver with 17 loans. Brazil, the largest country in the region has received the loan of around $29 billion and 11 loans.
Chinese top ten fund receiving countries are mentioned in the table along with the respective value:
Data courtesy: The Dialogue[6]
Investment analysis of top four Chinese Investment receiving countries:
Venezuela:
Venezuela has received the highest amount of investment from China. A huge share of Chinese investment in Venezuela doesn’t deal with the new infrastructure projects. Majority of the investment is in the resource sector like energy, oil, and mining of various minerals. Venezuela received the highest amount of investment in the year 2010. The important point that the Chinese investment flow to Venezuela suggests is that the country has not received any investment since 2016. The country is not in a good position and is facing various problems like Hyperinflation, Poverty, Inequality, drop-in currency level, shortage of essentials like food, medicines and mass migration which makes the environment negative for the incoming investments. [7]
Brazil
Brazil is the second-largest receiver of the Chinese investment in the LAC region. The majority of the Chinese investment in Brazil deals with the capacity building of the energy sector like the construction of ‘Gas Pipeline’, Coal Plant, Oil Production, Oil field development etc. In 2015, another agreement for the sale of E-195 aircraft was also signed. Almost two-thirds of the Chinese investment in Brazil mostly targets the partial and complete ‘Mergers and Acquisitions’. Less than one-third of the investment is in the ‘Greenfield Projects’. Only about 5% is in the field of Electrical Energy and Auto industry. [8]
Ecuador
The Chinese investment in Ecuador also follows the same pattern as of the other countries in the region. Majority of the Chinese investment in Ecuador between the years 2010 – 2014 was in the Energy Sector. Some of the important projects in the Energy Sector were, ‘Construction of Coca-Codo-Sinclair hydroelectric dam’, ‘Sopladora hydroelectric dam’, and ‘Minas-San Francisco hydroelectric dam’. Many other community investment projects have also been started like the replacement of the kitchen stoves, Yachay education complex, Transportation, health care and Reconstruction projects. [9]
Argentina
Chinese investment in Argentina does not show a particular pattern. Beijing has invested in multiple sectors in Argentina like the Energy, Infrastructure and other development projects. The important projects are the development of the train system, high-speed rail network, various renewable energy projects like Solar Parks, hydroelectric dam construction and development for the small and medium enterprises (SMEs). China has signed an agreement for the currency swap of worth $19 billion which has immensely benefitted the country. [10]
Major Lenders
Much of the investment from China has been coming from the ‘China Development Bank’ (CDB). China Development Bank (CDB) is a policy financial institution under the direct leadership of the State Council of China. “CDB is the largest development finance institution in the world and it is also China’s largest bank specialized in the medium and long – term lending and bond issuance.” [11]
Following the CDB, the investment is coming from the ‘Export-Import Bank of China’ which is also a state-funded and state-owned policy bank. The bank is under the leadership of the State Council. The bank aims to support the foreign trade of China with the investment and enhanced economic cooperation. [12]
Both CDB and China Export-Import Bank were created as the “policy banks” to enhance the Chinese ambitious foreign policy objectives. Chinese policy banks are the major investing agencies in various countries. Apart from the above-mentioned state-owned entities, various other bodies like the commercial banks of China have also invested in various projects in the LAC region. Commercial banks from China included entities like ICBC, CITIC, Bank of China, and various other state-owned enterprises have also invested in the region. [13]
Conclusion
If the economies of China and Latin America are compared, then both economies are on two different and opposite paths. This brings a total a-synchronization between both the economies. The recent World Economic Outlook report presented by the International Monetary Fund (IMF) clearly shows that the GDP of the Latin American region will be contacted by 8.1 per cent in 2020.[14] As per another report which was presented by the Economic Commission for Latin America and the Caribbean (ECLAC), there will be an increase of around 30 per cent in extreme poverty in the Latin American region in 2020. It is expected that from 67.7 million people under extreme poverty in 2019, the number will rise to 96.2 million in 2020.[15] Whereas, China is the only country in the top ten economies of the world which is expected to show positive growth rate both in terms of exports and imports. The trade shows an increase in demand from China for the Latin American products like soybeans, gas, meat, fish, oil etc. This a-synchronization in the economies of the two regions will provide great leverage to already assertive and revisionist China to bargain better with the region on strategic projects.
Besides this a-synchronization, a major source of risk is the fact that among the companies which have invested in the Latin American regions, more than 70 per cent are being owned by the government of China. First of all, the image of these companies is tarnished because of the controversies and the corruption scandals they are involved in. The strategies of these companies are not at all friendly for the host country.[16] Secondly, in case of a dispute between a Latin American country and a Chinese state-owned firm, it would have political implications for both of the countries. For example, in Mexico and Brazil, a Chinese project was halted which led to a deterioration in the bilateral relations of Mexico and Brazil with China which spiralled out to other spheres like culture, finance, academics and sports.[17]
Apart from the economic concerns, various other issues like environmental concerns, sustainable growth and increasing climate change are the sensitive issues which need to be dealt with carefully. Also, it is very much clear from the analysis of Chinese investment that majority of the funds are directed towards the ‘Merger and Acquisitions’ rather than the ‘Greenfield Projects’ which is not going to strengthen the local economy. Also, the growing investment of China in the LAC has alarmed the US, as it poses a direct threat to the US interests and political influence in the region.
LAC countries at this moment need sustainable growth, equitable growth, food security, stable economy and political stability. The countries are facing various complex challenges which need a long term solution. The region needs investment at the grass-root level with huge investment in education, healthcare and governance system. The region needs to stand together and must work on maintaining the geopolitical balance as it cannot afford to get into the geopolitical turmoil of present times.
Notes
[1] “China’s Engagement with Latin America and the Caribbean.” n.d. Accessed December 1, 2020. https://crsreports.congress.gov.
[2] “China’s Policy Paper on Latin America and the Caribbean.” n.d. Accessed December 3, 2020. https://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1418254.shtml.
[3] Ibid.
[4] “China Exports to Latin America | 2014-2020 Data | 2021-2022 Forecast | Historical.” n.d. Accessed December 3, 2020. https://tradingeconomics.com/china/exports-to-latin-america.
[5] “• Latin America: Share of Exports to China by Country 2019 | Statista.” n.d. Accessed December 3, 2020. https://www.statista.com/statistics/1105815/latin-america-share-exports-china-country/.
[6] “China-Latin America Finance Database - The Dialogue.” n.d. Accessed December 3, 2020. https://www.thedialogue.org/map_list/.
[7] “Venezuela Crisis: How the Political Situation Escalated - BBC News.” n.d. Accessed December 3, 2020. https://www.bbc.com/news/world-latin-america-36319877.
[8] Sergio Amaral, Ambassador, Antonio Barros de Castro, Julia Dias Leite, and Carla Duarte. n.d. “Chinese Investments in Brazil 2 PresIdent of ChIna BrazIl BusIness CounCIl EdItorIal Consultant.”
[9] “How Chinese Projects Are Tearing Communities in Ecuador Apart.” n.d. Accessed December 4, 2020. https://multimedia.scmp.com/week-asia/article/3011618/beijing-conquest-latin-america/chapter02.html.
[10] “Argentina Crisis Prompts Shift in Chinese Investment - China Dialogue.” n.d. Accessed December 4, 2020. https://chinadialogue.net/en/energy/11606-argentina-crisis-prompts-shift-in-chinese-investment-2/.
[11] “China Development Bank.” n.d. Accessed December 4, 2020. http://www.cdb.com.cn/English/gykh_512/khjj/.
[12] “Introduction_The Export-Import Bank of China.” n.d. Accessed December 5, 2020. http://english.eximbank.gov.cn/Profile/AboutTB/Introduction/.
[13] Ibid
[14] “Latin American GDP to Fall by 8.1% in 2020 - IMF | ICIS.” n.d. Accessed December 4, 2020. https://www.icis.com/explore/resources/news/2020/10/13/10562990/latin-american-gdp-to-fall-by-8-1-in-2020-imf.
[15] “CHINA – LATIN AMERICA Chinese Investments Are a Risk for Latin America.” n.d. Accessed December 4, 2020. http://www.asianews.it/news-en/Chinese-investments-are-a-risk-for-Latin-America-51366.html.
[16] “Chinese Firm Involved in New Yangon City Has Long List of Controversies Abroad.” n.d. Accessed December 1, 2020. https://www.irrawaddy.com/news/burma/chinese-firm-involved-new-yangon-city-long-list-controversies-abroad.html.
[17] “China – Latin America Chinese Investments Are a Risk for Latin America.” n.d. Accessed December 4, 2020. http://www.asianews.it/news-en/Chinese-investments-are-a-risk-for-Latin-America-51366.html.
Pic courtesy-Guilherme Madaleno at unspalsh.com
(The views expressed are personal.)
