Chinese Investment in Latin America—No Longer Business as Usual
An era of lavishly priced acquisitions of resource assets in Latin America by Chinese state-owned enterprises (SOEs) appears to have ended. China’s engagement with the region will now chart a new course, one that is more diverse and transparent.
President Xi Jinping’s corruption purge, that has toppled several high ranking officials in Beijing, is also wreaking havoc on Chinese SOE overseas investments. With far less oversight than domestic investment projects, overseas oil and gas and mining rights became preferred channels for corruption in recent years. As investigations delve into projects around the globe, senior managers are being quietly recalled to Beijing to face tough questioning. Experts believe the purge will continue for another three years, casting a pall over natural resource investments by Chinese SOEs.
Additional Factors in the Shift
The end of the Chinese investment honeymoon is also triggered by a growing sense of disappointment in Beijing with Latin America’s business climate. The Mexican high speed rail procurement disaster illustrated to the Chinese an inability on behalf of Latin American presidents to follow up on promises made. Risking billions, Chinese SOE investors expect a high degree of certainty, something that Latin America’s evolving democracy and weak rule of law cannot readily deliver. Maduro’s homage to Beijing in May 2015 in search of a credit lifeline yielded a blank stare from the Chinese.
Beijing is also wary of antagonizing the U.S. The American military’s pivot to Asia and TPP negotiations that exclude China both point to a Sino containment policy. China cannot afford to jeopardize its most strategic and profitable bilateral relationship. Coupled with the fact that China has warmed to Russia for the first time in decades by extending a lifeline via a 10-year natural gas contract, it is no coincidence that President Xi Jinping announced a “Silk road” policy. Chinese overseas investment and lending is to pay much closer attention to the former “Stan” republics and SE Asia. Some SOEs might prefer the commercial opportunities in Latin America to those found in China’s orbit, but they still take their marching orders from politicians, not shareholders.
Strong Potential for China to Invest in LatAm in the Long Run
Despite of these challenging trends of late, China is destined, over the long run, to invest in Latin America. The two economies complement one another nearly perfectly. This is why the Chinese leadership devised a new Latin American engagement called the “1+3+6 cooperation framework”. In this case, “1” means one plan to serve a five-year period from 2015 to 2019, while “3” means three engines:
- Two-way trade, which will grow to $500 billion per year
- Investment, which will increase to $250 billion stock in LAC
- Financial, which involves promoting local currency settlement and currency swaps
The final number in the plan is “6,” referring to six sectors:
- Energy and resources
- Infrastructure construction
- Scientific and technological innovation
- Information technology (IT)
Compelling Potential with Infrastructure and Manufacturing
Of the 6, the most exciting new sector focus will be infrastructure. Chinese domestic spending on infrastructure was its Keynesian response to the financial crisis. China over-built roads, subways, bridges and port facilities and now has an underutilized construction industry eager for projects. To keep them employed, as well as source natural resources more efficiently, China is ready to fund some very ambitious projects. The Nicaragua canal, still ridiculed by some as a far-fetched idea, is gaining momentum as Beijing throws political and financial capital behind the project. No less ambitious is the continental land bridge, a 3,300 mile rail link between the Peruvian Pacific coast and the Brazilian Atlantic coast.
Beyond infrastructure, we will soon see more Chinese manufacturing migrating to Mexico and Central America. Chinese manufacturing costs are now on par with Central America but subject to a higher logistics expense and longer lead times. Chinese companies would rather preserve their US supply contracts from factories based in the Americas than lose them to the competition.
For Long-Term Success, China and Latin America Both Have to Adjust
The logic behind a Sino-Latin American economic marriage is as strong as ever but the costly political mistakes made during the honeymoon phase have created skeptics on both sides. For this relationship to enjoy long-term success, a more honest, transparent and sensible approach is required. Latin America will need to work harder to prove itself as a reliable business partner. Chinese SOEs will need to improve how they vet their deals and business partners. If those objectives are achieved, Latin America will reap many rewards.
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Note: This piece was originally published in Latin Trade magazine.