When Chinas two largest state-owned oil and gas
majors, China National Petroleum Corp (PetroChina) and Sinopec,
agreed separate deals totalling almost $5 billion for oil and
gas assets in Argentina within 10 days of each other last
December, they capped a remarkable year for the Asian nation in
Chinese investment in the region surged in 2010, led by
state-owned resource companies acquiring direct-equity stakes
in local energy companies, offering loans in return for
guarantees of oil, gas and industrial commodities, or
exploration rights for future projects.
According to Washington, DC-based think-tank the Heritage
Foundations widely followed China Investment Tracker,
Chinese companies pumped more than $32 billion last year into
Latin American ventures, accounting for 36% of global Chinese
non-bond investment, up from $4.5 billion (6% of overall
investment) in 2009. The vast majority of the deals were by
Chinese state-owned energy and commodity firms.
Chinas Ministry of Commerce has yet to release its own
figures for overall foreign direct investment (FDI) in Latin
America in 2010, but it says FDI in Brazil alone was $12
billion last year, more than 20% of the total for the region
and up from just $116 million in 2009. Brazils central
bank estimates Chinese FDI in Brazil hit $17 billion in 2010,
around 35% of overall FDI in the country last year, up from
less than $300 million in 2009.
The logic behind the investment drive is clear: China is a
net commodity importer with vast foreign reserves looking to
diversify its resource supply and to secure upstream and
downstream ownership stakes where necessary. Moreover, many
South American countries have abundant natural resources but
lack investment capital, and are keen to cultivate new
investment and trade partners, not least to break a
long-standing dependence on the US.
But the implications of this sudden influx of Chinese
capital are less obvious. Although the inflows have served as a
major short-term boost to regional economies, they could
exacerbate long-term overreliance on commodity exports and
hinder diversification. Whats more, growing Chinese trade
and investment in the region is likely to shift the economic
centre of gravity of the region further away from the US, and
increasingly towards emerging Asia, and China in
Chinese trade flows with Latin America have been growing for
much of the past decade, but until last year direct investment
remained muted. The Chinese have been promising for years
that investment would flow into Latin America, but until last
year we had seen very, very little of it, says Mauricio
Mesquita Moreira, senior trade economist at the IDB.
To some extent, the Chinese investment boom last year was a
natural consequence of a decade of deepening trade ties between
the regions. According to Chinese customs data, imports from
Latin America increased by 1,800% between January 2000 and
January 2010, while exports rose 1,153% over the same period.
Having solidified its trade relationship with the region, the
natural next step was for China to have its state-owned firms
invest in it, thereby gaining access to the regions
strategic resources and a foothold in rapidly growing
But most observers agree the catalyst for last years
sudden surge in Chinese investment was the global recession,
which followed an oil and commodity price spike in mid-2008,
and led, in turn, to a commodities slump.
Derek Scissors, a research fellow at the Heritage Foundation
who has tracked Chinese foreign investment flows for over a
decade, says record global commodity prices in the run-up to
the global financial crisis threw Chinese concerns over energy
security into sharp relief. The collapse in commodity prices
that followed in late 2008 and 2009 created a buying
opportunity which grew more urgent as prices began to
Latin America with its abundant resource pool
and thirst for investment dollars to kick-start its economic
recovery was an obvious destination, especially
considering an ever more saturated investment landscape in
Africa, another resource-rich region where China has already
made substantial inroads.
Investment in Latin American resources also represents a
shrewd way of diversifying Chinese assets, says Michal Meidan,
a China energy expert at Eurasia Group. As a result of the
global financial crisis, Beijing had also begun to rethink its
policy of holding a large chunk of its foreign exchange
reserves in US dollars, given its fears over a possible loss in
The Chinese took dollars that were losing their value
and turned them into a valuable asset, while enhancing supply
security, says Meidan.
Beijings drive to create globally competitive Chinese
multinationals is another motivation: the bulk of its Latin
ventures have been led by three state-owned oil and gas
companies, PetroChina, Sinopec and China National Offshore Oil
and Gas Corporation (CNOOC), which the government is keen to
transform into vertically integrated global energy majors. By
buying direct equity stakes in the regions energy
companies and partnering with them on exploration projects,
Chinese companies are also acquiring managerial and technical
know-how, as well as assets and expertise outside of their
specialist sectors, Meidan notes.
Sinopecs $2.5 billion purchase of Occidental
Petroleums upstream Argentine assets last December is a
clear example of this, as Sinopec has traditionally focused on
downstream production and buys more than three-quarters of the
crude it refines.
So far Chinas new engagement with Latin America has
been a tremendous boon for the region. Its investment in and
demand for natural resources has boosted current account
balances and diversified the regions export markets,
while also pushing up global commodity prices. For the
Conosur [Southern Cone] in particular, Chinese investment has
had a huge benefit in terms of foreign exchange and promoting
growth, Moreira says.
Kevin Gallagher, an associate professor of international
relations at Boston University, notes that the terms of Chinese
commodity investment and trade in South America is not
overwhelmingly weighted in the buyers favour: China is
paying competitive prices. Latin American exporters are
getting a better global price for iron ore and copper because
Its important not to oversimplify and think that
the new investment winds in South America are giving the region
away to China, says Guillermo Mondino, head of Latin
American research at Barclays Capital. Its a
natural development, part of Chinas new role in the
global economy as an increasingly large economic
Says Scissors: The Chinese will pay you properly. The
one-way investment flow is because South America has what China
wants, and theyre willing to pay for it.
But a failure by Latin authorities to reinvest capital
wisely could aggravate structural economic imbalances and
further the regions overreliance on commodity
Brazilian commodity exports outstripped manufacturing
exports for the first time last year, Gallagher points out. And
a renewed emphasis on primary commodities production in Latin
America could exacerbate the regions resource
curse, he says.
China is a great opportunity for the region, but Latin
American nations cant sit there and let things
happen, says Gallagher. South America has to weigh
the benefits of a massive export market for their commodities
versus the cost of import and global manufacturing competition
and an over-dependence on commodities. The question is whether
or not it can capitalize on the benefits to mitigate the
Chiles copper stabilization fund is an example of a
sensible way of ensuring that Chinas investment drive has
longer-term benefits, says Gallagher. South American nations
must look to develop stabilization funds, sovereign wealth
funds and development banks to channel the investment windfalls
efficiently and to create a buffer against future commodity
price shocks or a possible drop-off in Chinese investment, he
Most experts say Chinese demand for South Americas raw
materials is unlikely to fade anytime soon even if
Chinas economy slows moderately. But whether todays
benign investment and trade relationship can continue
indefinitely is another question.
Gallaghers back-of-the-envelope calculations suggest
that Chinese per-capita commodity consumption has at least
another 30 years left to expand, provided incomes grow at
current levels. But this does not rule out the prospect in the
meanwhile of heightened economic and political tensions with
the region or the possibility that China looks to invest
further afield instead.
Latin America has to try and look beyond the
short-term money and have a more long-term view of its
relationship with China, says Moreira. Look at the
type of barriers that the Chinese impose, or the scale of their
trade surplus with Central America, yet there is silence on the
part of the governments in the region.
There comes a point where the political economy gets
so complicated that in order to avoid a major backlash, you
need to start investing and making, not just exporting goods to
But while there have been isolated examples of Chinese
manufacturing investments in the region such as last
years $700 million investment by the private Chinese
automaker Chery in a manufacturing plant in Jacareí,
Brazil Chinese manufacturing investment in the region
would in any event continue to be dwarfed by commodities for
the foreseeable future, Moreira acknowledges.
Scissors predicts that Chinese investment in South America
will likely crest later this year, before
moderating in the coming years as Chinese state-owned
enterprises look to alternative commodity and investment
destinations, such as Canada.
Latin America has a pretty narrow time-window to use
this money wisely, he says. This is the big jump,
the big initial lottery payment, and they will continue to
receive smaller payments over time. But the region has to make
this investment income work for generations. It mustnt
think that it will last forever. It must think about what
happens after the wave crashes.
Whats clear is that Chinese trade and investment has
already reshaped Latin Americas economic landscape
a trend thats unlikely to reverse given the odds of
continued strong trade flows.
Many experts now agree that Beijing has displaced Washington
as South Americas primary economic driver, although the
US remains the predominant economic force in Central America.
South America is clearly not the US economic
backyard in the way that it used to be, says
Barcaps Mondino. China is now a more important
economic determinant of Latin Americas fate than the
A number of South American leaders, most notably
Venezuelas Hugo Chavez and Ecuadors Rafael Correa,
have hailed closer economic ties with China as the realization
of much-vaunted south-south ties that signal the
end of US political and economic hegemony over the region.
Yet most analysts remain sceptical about reading too much
political significance into the trend. I dont think
theres any political motivation from the Chinese to try
and improve south-south relations its purely
economic, says Moreira.
While Chavez may paint Chinese oil investment in Venezuela
in an ideological light, the Chinese simply see it as a good
trade deal, says Eurasia Groups Meidan.
Still, Gallagher believes the combination of increased
Chinese commerce in the region and US foreign policy
preoccupation elsewhere has undermined Washingtons
influence across much of South America a perception that
US president Barack Obama will no doubt have been trying to
dispel during his recent tour of the region.
Weve looked the other way for the past 10 years,
and, boy, other folks havent, he says. What
we have to offer really needs to change if we want to compete.
Brazil wont touch a US trade agreement with a 10-foot
pole. This has got to be a wake-up call for US foreign economic
policy in the region.
According to Gallagher, Beijings long-term strategic
concerns will often trump short-term commercial logic and could
even pose a challenge to development finance institutions.
The Chinese will lend to you if its strategic,
regardless of what your bond rating is, Boston
Universitys Gallagher says. They dont care if
you default on your multilateral debt repayments or if your
currency collapses, so long as you keep providing them with
commodities. Its a form of barter-based
He cites as evidence the fact that China agreed a $1 billion
loans-for-oil deal with Ecuador in mid-2009, just six months
after it had defaulted on $3.6 billion in bonds.
But Moreira says if such a dynamic is a concern, its
only so in the regions less liberal-reform-minded states,
such as Venezuela or Ecuador.
Since the Chinese invest with no strings attached,
clearly you reduce the clout of [multilateral development]
organizations to try and push reforms. This might be an issue
in terms of not giving the right incentives or the right type
of development model, he says.
At least so far, I dont think that the Chinese
have changed anything in terms of the course of development of
those countries. They might have reinforced trends that were
already there, but they havent changed it. But
should Chinese investment continue to pour into the region at
last years rates, this could change.
Says Moreira: This might become a real issue in the