China’s Investment in : Themes, Challenges and Future Trends Thomas Mellor, Partner and Brian Sogol , Associate of Bingham McCutchen LLP 1

Introduction skyrocketed, and it seems each week Economic growth in China over the last a new blockbuster investment deal is decade has been remarkable. During announced. Latin America has generally the same period, economic growth in welcomed this investment, though it a number of Latin America’s maturing has also presented some challenges. economies (most notably , but On another level, the increasingly others as well) has also caught the important role China is playing has world’s attention. concerned some U.S. policymakers, who view China as challenging the Both China and Latin America showed historical U.S. hegemony in the region. resilience during the world financial crisis, during which Chinese demand This article outlines the nature of for raw materials from Latin America China’s foreign direct investment in the provided a helpful stimulus to the region to date and what is driving these region. Today, both are sought-after investments from both the Chinese regions for investment. Buoyed by and Latin American perspective. The confidence from their economic article then explores challenges the successes, China and Brazil are playing investment relationship faces and greater roles on the world stage; by the concludes with some predictions for accounts of most experts, both are on future trends. the short list of those countries most likely to shape the 21st century. Recent Trade and Investment Trends

Chinese-Latin American trade has 1. The Explosion of Chinese-Latin recently reached historic highs, to American Trade. China’s recent the mutual benefit of China and its investments in Latin America have Latin American trading partners. been preceded by a vibrant and Chinese foreign direct investment in expanding trade relationship with the Latin American region has also many Latin American countries over

60 global infrastructure, winter 2012 the past decade. Understanding the to almost every country in the region. Chinese trading relationship with Latin Third, China competes in the region’s America provides helpful context for export markets for manufactured the investment relationship. goods (particularly Mexico and Central America). Thus, China’s The change in the trade relationship trade relationship with resource-rich has been staggering. Trade between countries in Latin America differs Latin America and China in 1999 totaled considerably from its relationship with approximately $8 billion; by 2010, it those countries that depend primarily had grown 22 times to approximately on the export of manufactured goods. $180 billion. By comparison, trade between Latin America and the United 2. The Chinese Investment Boom States grew by approximately 0.5 times2 Follows Trade Expansion. The over the same period.3 This statistic is Chinese government has encouraged often cited to support the perception of investment in Latin America as a way the ascendancy of Chinese commercial to strengthen trade ties.5 Sources vary influence in Latin America. The inability on the amount of Chinese foreign direct of the United States to implement a investment in Latin America, though free trade agreement with Colombia4 by almost all accounts 2010 was a (with critics citing the divisive American watershed year. The following provides political environment as the cause) has data on Chinese direct investment in further undermined the U.S. trading certain economies of Latin America relationship with Latin America vis- and the Caribbean. (Other figures for à-vis China. During the same period, Chinese direct investment in Brazil China signed a number of free trade alone put the number for 2010 in the agreements with countries in the $12 billion to $20 billion range.)6 region, including , Peru and, most recently, Costa Rica. a. The Investment Recipients. The vast majority of direct investment The trading relationship between China from China, over 90%, has gone to and economies in Latin America has natural resource enterprises, including three principal facets: it is at the same hydrocarbons, copper and iron ore, time a buyer, seller and competitor. and agriculture. Not surprisingly, the First, China is a huge buyer of raw primary recipients of this investment materials from resource-rich countries have been those economies where such as Brazil, Chile, Argentina, natural resources are abundant, Ecuador and . Second, namely Brazil, Argentina and Peru. China exports manufactured goods While China has been an important

china’s investment in latin america: themes, challenges and future trends 61 China: Foreign Direct Investment in Selected Economies of Latin America and the Caribbean7 (Millions of dollars)

Country Confirmed Investments Investments Announced 1990 to 2009 2010 2011 Onwards Argentina 143 5,550 3,530 Brazil 255 9,563 9,870 Colombia 1,677 3 — Costa Rica 13 5 700 Ecuador 1,619 41 — Guyana 1,000 — — Mexico 127 5 — Peru 2,262 84 8,640 Venezuela 240 — —

source of investment for certain smaller b. Types of Investments. The form of economies, such as Ecuador and these investments varies widely. They Guyana, Chinese investment has had range from greenfield projects (such very little relevance in Mexico and most as the purchase of exploration and of Central America.8 production concessions—namely in the hydrocarbons sector) to taking One feature of Chinese investments minority or control equity positions. In is the willingness of the Chinese addition to these equity investments, government to make significant Chinese banks have proven to be an investments in a number of economies important source of debt financing, both that have been otherwise shunned in assisting Chinese companies seeking by Western investors. For instance, to finance their overseas investments Ecuador has been shut out of global and, in some cases, lending directly to markets since it defaulted on its bonds companies and sovereigns in the region. in 2006, and Venezuela similarly has had a difficult time attracting foreign c. The Investors. Nearly all of the investors given the nationalization Chinese investors making the headline- program instituted under the Chavez grabbing deals are large state- regime. Both countries have been controlled companies in the natural significant recipients of Chinese resources area.9 As state-controlled investment, as has . companies, these companies are

62 global infrastructure, winter 2012 obviously useful instruments for the 1. Resource Security: Feeding the Chinese government to implement Dragon. The primary motivation state policy. In addition, the debt associated with Chinese investment financing mentioned previously offered is the need to secure a stable supply to Chinese investors by Chinese state- of raw materials necessary for China’s owned banks for overseas expansion economic growth. As mentioned earlier, projects has been an important tool to state-owned corporations and financing promote expansion abroad. provided by state-owned banks are incredibly useful instruments to effect While large state-owned companies these goals of resource security. have been associated with many of the Chinese investment has not only largest investments in Latin America, supported the companies that supply Chinese private investors, the source these natural resources, but also the of most of the growth in jobs and infrastructure that allows for more wealth in the Chinese economy, are not efficient transportation of these goods far behind.10 The Chinese government to China. For instance, the Chinese and recently indicated that it would more Colombian governments have been in aggressively promote these private discussion regarding the construction investors, who have argued that the of an alternative to the Canal, government had previously focused a rail route that would link the Pacific too heavily on providing overseas and Atlantic coasts of Colombia. expansion opportunities to state- This would provide for more efficient owned companies, to the detriment transportation of goods to and from the of Chinese private companies.11 Atlantic coasts of Latin America to Asia.

2. It’s Good Business. Somewhat less What Is Driving Chinese Investment considered than resource security in Latin America? is that even while the Chinese The Chinese government has been government is promoting expansion vocal in its support of investment abroad, such expansion is simply good in Latin America,12 but what is business for many Chinese companies. the underlying rationale? Some As natural resource companies in China considerations are obvious and have grown to feed their economy’s others less so. While motivations demand, investing abroad often makes will vary depending on the particular sense for a company’s own growth and investment, some consistent themes diversification strategies. are listed herein.

china’s investment in latin america: themes, challenges and future trends 63 Infrastructure construction in China otherwise be subject if exporting goods is another excellent example. Over directly from China. Also, selling locally the last two decades, China has produced manufactured goods may gone through a “golden age”13 of help reduce trade deficits in those infrastructure development, building up markets where trade imbalances have its transportation, telecommunications been identified as problematic (as and energy infrastructure. A common further described hereafter). estimate puts recent Chinese construction projects undertaken in a 4. Diversification and Portfolio single year as being equal in scope to Investment. China needs sound all infrastructure currently existing in investments for cash generated by its Great Britain. In some sectors, such huge trade surplus and high savings as railways and telecoms, Chinese levels. For a number of political and companies have demonstrated economic reasons, U.S. treasuries, exceptional technological progress historically the home for surplus over the last few years. Chinese Chinese cash,15 look less attractive than companies are known for their low- they once did. cost operations and their ability to offer financing to their customers from 5. Diplomacy. A common perception, state-owned banks. Infrastructure promoted by the Chinese government, construction is one area in which is that China has a policy of making China has a significant competitive investment decisions without regard advantage, one that will help it to a host country’s domestic affairs, considerably in international markets.14 and this policy has given China an advantage over U.S. and European 3. Side-Stepping Trade Barriers. companies, especially when doing While the largest investments made business with more “controversial” by China have been primarily in the regimes around the globe (this is natural resources area, Chinese sometimes referred to as China’s “no manufacturing companies are strings attached” policy). The accuracy also increasingly investing in Latin of this perception is certainly open to America. Although the size of these debate,16 though what seems certain investments is generally smaller, their is that stronger commercial ties result number will likely increase in light of in stronger diplomatic relations. Over Chinese capabilities in this sector. By the past decade, China has succeeded investing in export markets, Chinese in building on its commercial ties companies are often able to get around and expanding and strengthening trade restrictions to which they might diplomatic relationships throughout

64 global infrastructure, winter 2012 Latin America, from the largest to various infrastructure projects. The the smallest economies, with both infrastructure needs are greater than strong U.S. allies in the region (such the money available from traditional as Chile and Colombia) and those sources. Historically, financing has countries with more antagonistic views come from a mixture of international of Washington (such as Venezuela, banks, local banks and international Ecuador, Nicaragua and Cuba). This development banks, as well as local comes during a time that critics have development banks such as Brazil’s argued the U.S. government did not Banco Nacional de Desenvolvimento “prioritize” its relationship with Latin Economico e Social (BNDES). America, given its preoccupation with the War on Terror. With the debt crisis in Europe unresolved, the United States teetering on the brink of another recession and What’s in it for Latin America? the possibility of banking regulations The benefits of Chinese investment forcing a shift to more conservative for Latin American economies are lending practices, many international multifaceted, and vary from country to banks will be less able to play the country and investment to investment. prominent lending role they once did. Four of the most often-cited benefits While BNDES and other development include the following: banks have financed a significant portion of infrastructure needs, it is 1. The Need for Financial Capital clear they will not be able to fund in Latin America, Especially for the existing shortfalls. The local Infrastructure Investment. Latin banking sector in Latin America has America has an incredible list of strengthened and deepened over the infrastructure needs. While Brazil’s last decade, providing an important preparations for the upcoming World source of financing for local companies Cup and Olympic games and pre- during the growth phase. Nonetheless, salt oil exploration grab headlines, the scale of infrastructure needs dwarfs throughout Latin America inadequate what the local banks would be able to roads, ports, airports and energy grids provide. Chinese financing sources can are in serious need of upgrading. help fill this gap. Without this upgrading, many Latin American economies will not be able to 2. A Political and Economic fulfill their economic potential. In the Alternative to the United States and period from 2011 to 2014, Brazil alone Europe. The recent financial crisis anticipates spending $750 billion17 on provides an excellent argument for

china’s investment in latin america: themes, challenges and future trends 65 diversifying financing sources—i.e., and food security) and not subject to embracing sources other than Western the same pressures as investments ones—for Latin American users of from publicly traded companies in financial capital. On a political and the United States and Europe, whose philosophical level, many in Latin shareholders typically demand America are paying closer attention immediate returns. While there may to the Chinese economic model given be some merit to this notion, whether that China has been less affected by the Chinese government will in fact be the global economic slowdown than a patient investor has not been tested the United States and other leading by time. Also, it seems that the next capitalist countries. With increasingly wave of investors in Latin America—the robust democracies and economic Chinese private investors—may face gains, many Latin American countries the same market demands as their have become more self-confident with Western counterparts. a view toward asserting their own diplomatic independence. In other What Are the Challenges? cases, countries have elected left- wing governments that are seeking The increasing commercial relationship a different status quo for ideological between China and Latin America is not reasons, such as building “south- without its challenges. south” alliances. 1. The “De-Industrialization” Concern. 3. “No Strings Attached” Policy. The “no Given the huge outflow of raw materials strings attached” investment policy of from Latin America and the large the Chinese government cited previously inflow of manufactured goods from certainly has appeal to a number of Latin China that compete against products America’s countries today, including manufactured domestically, there those economies that do not have is an increasing concern among access to traditional Western market policymakers in Latin America that the sources of financial capital. commercial relationship with China will not lead to the long-term diversification 4. China’s Long-Term View. Given the of Latin American economies. For Chinese government’s involvement instance, in 2002 approximately 29% in many of its country’s foreign of Brazil’s exports were raw materials, investment decisions, there is a though by 2009 that figure had grown sense that Chinese investments are to 41%. The Brazilian trade deficit with motivated by stability over the long China in manufactured goods has term (especially as related to energy grown from several hundred million

66 global infrastructure, winter 2012 dollars a year to $23.5 billion in 2010. Chinese imports is harming the Policymakers are concerned this manufacturing sectors of many Latin imbalance will hinder growth and lead American economies, and this image of to “de-industrialization.” China in Latin America is one that China must take care to manage. Mexico and 2. The “Foreign Government Control” certain Central American economies Concern. This concern manifests itself have been the hardest hit, especially in several different ways. First, given for competition in the U.S. market, that the Chinese companies closing where Mexico has seen its share of blockbuster deals in the region are the textile market lose considerable state-owned, there is an increasing ground to the Chinese. In Brazil, certain concern that large and valuable manufacturing sectors have been very segments of Latin American economies adversely affected (the toy and shoe are coming under the control of a sectors are often cited). A primary foreign government. On another level, cause suggested for this imbalance many in Latin America are concerned is that average wages in China are with the concept of foreign ownership one-fifth to two-fifths of those in Latin of land and mineral rights. A Brazilian America, thus allowing substantially court recently took a reportedly “novel” cheaper production and sale of Chinese approach to interpreting an old law goods.18 As a result of these concerns, in order to prevent a transaction in Latin American countries have filed the agricultural sector in which huge more than twice as many anti-dumping tracts of agricultural land would be actions at the World Trade Organization turned over to a Chinese concern. than the United States. Similarly, Brazil New regulatory frameworks are has increasingly sided with the United contemplated in Brazil that will restrict States over China’s monetary policy, foreign ownership of “strategic” areas which keeps the yuan at artificially and minerals. In other examples, low levels and greatly assists China in critics worry that entire economies export markets. are becoming overly dependent on China (e.g., Ecuador and Venezuela, 4. Cultural and Political Challenges. which have much smaller economies Some suggest that growing commercial than Brazil, but which have recently ties with a non-democratic country like announced large investment deals China undermine Latin America’s own with Chinese companies). hard-won commitment to democracy. At least for those economies in Latin 3. China as Latin America’s Competitor. America that are strong democracies, Competition from manufactured this fundamental difference in political

china’s investment in latin america: themes, challenges and future trends 67 and, in some sense, cultural systems characterized by large blockbuster would seemingly put a cap on how deals by Chinese state-owned deep the Chinese relationship with enterprises, has paved the way for the some countries can naturally progress second wave, which will likely include (consider the U.S. relationship with more activity by private Chinese Saudi Arabia). While there is no way companies. While transactions by to quantify this issue, this aspect of private Chinese companies may be the relationship seems impossible smaller in size, these companies will be to ignore. able to move more nimbly and increase the number of transactions, suggesting that the second wave will have as great What’s Next? an impact as the first. What does the future hold for Chinese- Latin American trade and investment? 2. Chinese Infrastructure and Manufacturing Investment Will 1. Material Chinese Investment in Increase. While natural resource the Region Will Continue. While transactions will continue to be a staple the interests of Chinese and Latin of future Chinese-Latin American trade economies are not perfectly aligned, and investment, it seems likely that the significant Chinese investment in Latin second wave of Chinese investment America will likely continue because will be characterized by the increasing the mutual benefits outweigh the role of Chinese companies involved in challenges by a significant margin. infrastructure, manufacturing and other The Chinese demand for raw materials sectors in which the Chinese have has been lucrative for many Latin significant competitive advantages. countries. Financial capital in Latin Infrastructure investment in particular America, particularly in the case of would seem to be neatly aligned with infrastructure investment, is sorely the needs of many Latin economies, needed. The heavy involvement of and it would seem to serve the Chinese Chinese state-owned enterprises, the image in Latin America well to be significant investment already made part of the story of Latin America’s and the material efforts of the Chinese development. government to expand commercial and diplomatic relationships in Given the increasingly important Latin America suggest that Chinese role Chinese companies play in interest in the region will continue infrastructure development in Latin for some time. The first wave of America, Chinese banks will follow, Chinese investment in Latin America, offering financing for projects. Less

68 global infrastructure, winter 2012 certain is whether Chinese banks will ethnic young democracies that uphold leverage this activity to provide capital common values with respect to free for Latin American corporate borrowers markets, rule of law, individual rights, (much the way many Japanese banks religious freedom, and diversity and became active in Latin America). This equality…”19 seems less certain, though it will be interesting to see how the role of Chinese diplomacy in Latin America Chinese banks develops. So far, apart has so far been a natural outgrowth from investments in international of its trade and investment ties. These banks doing business in Latin America ties have on balance contributed to and a few large transactions, Chinese economic growth and development banks have been fairly quiet in the in Latin America and are part of the region. collective story of Latin America’s successes over the last decade, a story 3. The United States Will Continue to that includes tens of millions of Latin Play a Leading Role in Latin America. Americans crossing the threshold to Alarmist concerns in some U.S. policy the middle classes. This prosperity circles of the deepening Chinese results in additional markets for involvement in Latin America seem U.S. goods and services. As long as misplaced. While Chinese trade and Chinese economic and diplomatic investment has reached historic highs ties contribute to this virtuous cycle in recent years, the Chinese numbers of prosperity and stability, U.S. are still a fraction of the U.S. figures, policymakers should not be alarmed. and it seems likely that the United This is not to suggest the United States will continue to lead in these States should “stand down” in Latin areas for the foreseeable future, America—to the contrary, the United especially in Mexico. Notwithstanding States should monitor Chinese ties and China’s recent diplomatic successes, aggressively work with Latin American significant challenges to the China- governments on a number of areas of Latin America economic relationship common interest (including on issues remain. Also, business, governmental of trade and monetary policy vis-à-vis and cultural ties between the United China). The United States must also States (and its significant Latin work to undo the perception that it has populations) and Latin America are very neglected its Latin American neighbors. deep. As a leading think tank recently reported (in this instance, on U.S.- In short, the challenge to Latin Brazil relations), “[T]he two countries America will be one of sustainable are remarkably similar: both are multi- development—of balancing its

china’s investment in latin america: themes, challenges and future trends 69 lucrative trade in raw materials while manufacturing sector. Finally, the protecting its local manufacturing challenge to the United States will be sector and developing its infrastructure. to not overreact to deepening Chinese China’s challenge will be to secure its ties in the region, while at the same raw material sources while maintaining time re-engaging with Latin America a positive image in the region. To do in a manner that underscores the so, China will need to carefully consider importance of its relationships there. its export policies, especially in the

1 The authors would like to thank Bingham summer associate candidate Annie Selden for the research she contributed to this article. 2 This figure represents approximately $636 billion of U.S.-Latin American trade in 2010. Doreen Hemlock, United States Trade With Latin America Reaches $636.2B in 2010, LATIN BUSINESS CHRONICLE, Feb. 22, 2011, available at http:// www.latinbusinesschronicle.com/app/article.aspx?id=4785. 3 John Paul Rathbone, China Is Now Region’s Biggest Trading Partner, FT.com, Apr. 26, 2011. available at http://www. ft.com/cms/s/0/cce437bc-6ef5-11e0-a13b-00144feabdc0.html#axzz1Zpx2nJec; see also Latin America: Relying on China, THE ECONOMIST: ECONOMIST INTELLIGENCE UNIT, Aug. 22, 2011 [hereinafter Relying on China]; Hemlock, supra note 1. 4 This free trade agreement was finally passed by the U.S. Congress on Oct. 12, 2011. 5 At the 2004 Asia-Pacific Economic Cooperation Summit in Chile, media outlets widely reported that the Chinese Premier Hu Jintao promised that the Chinese government would invest $100 billion in Latin America over the next decade. See, e.g., Michael Diaz, Jr. & Robert Q. Lee, China’s Rising Interest in Latin America, THE CHINA BUSINESS REVIEW, September/October 2009, available at http://www.diazreus.com/assets/attachments/261.pdf. Other sources indicate the Premier was misquoted, and that Mr. Jintao actually indicated that he hoped two-way trade would reach that figure by 2010, and that foreign investment would double. See Relying on China, supra note 2. 6 COUNCIL ON FOREIGN RELATIONS, INDEPENDENT TASK FORCE REPORT NO. 66: GLOBAL BRAZIL AND U.S.-BRAZIL RELATIONS (2011) [hereinafter TASK FORCE REPORT]. U.S. direct investment in the region was estimated to be approximately double that of China. See UNITED NATIONS ECON. COMM’N FOR LATIN AM. & THE CARIBBEAN (ECLAC): FOREIGN DIRECT INVESTMENT IN LATIN AMERICA AND THE CARIBBEAN (2010) [hereinafter FOREIGN DEBT INVESTMENT]. 7 Id. 8 Costa Rica is one exception. Since Costa Rica switched political recognition from Taipei to Beijing, the Chinese government built a new $100 million soccer stadium as a “gift” for the people of Costa Rica, and the two nations have entered into a joint venture investment in the petroleum sector worth approximately $1.2 billion in direct investment. See Adam Williams, Costa Rica’s 35,000-Seat National Stadium Opens, TICOTIMES.NET, March 25, 2011, available at http://www.ticotimes.net/Current-Edition/Top-Story/News/Costa-Rica-s-35-000-seat-National-Stadium-opens_Friday- March-25-2011; Diaz & Lee, supra note 4 at 3. 9 These include names like Sinopec (China Petroleum and Chemical Corporation Limited), CNOOC (China National Offshore Oil Corporation), CNPC (China National Petroleum Company), Sinochem (China’s largest trading company that deals primarily in petrochemicals distribution, but also in rubber, plastics and agrochemicals), Minmetals (a Chinese metals and mineral trading company) and Chinalco (the Aluminum Corporation of China Limited), to name a few.

70 global infrastructure, winter 2012 Continued

10 Joe McDonald, China Promises Bigger Role for Private Investment, USA TODAY, July 26, 2010, http://www.usatoday. com/money/world/2010-07-26-china-private-industry_N.htm. 11 Id. 12 China’s 11th Five-Year Plan (2006–2011) provides some guidance to helping to understand the country’s official overseas investment strategy: The plan indicates primary objectives of continued economic expansion balanced by energy conservation and protection of natural resources. 13 Satoru Murase, Focus Report: Asia, GLOBAL INFRASTRUCTURE, Spring 2011. 14 In fact, the U.S. subsidiary of a Chinese state-owned construction company recently won significant contracts to refurbish the Tappan Zee bridge as well as construct part of the 7 subway line in New York. Kirk Semple, As Investors, Chinese Turn to New York, The New York Times, Aug. 10, 2011, available at http://www.nytimes.com/2011/08/11/ nyregion/chinese-investment-grows-in-new-york-city.html. 15 As of June, according to the Treasury Department’s latest data, China held a total of $1.1656 trillion in U.S. debt (or 29.5% of the $4.4992 trillion in U.S. debt held by foreign interests). See Fred Lucas, Biden to Chinese Premier: ‘We Appreciate Your Investment in U.S. Treasuries,’ CNSNEWS.COM, Aug. 19, 2011, available at http://www.cnsnews.com/ news/article/biden-chinese-premier-we-appreciate-your-investment-us-treasuries. 16 For example, China’s recent “gift” of a $100 million soccer stadium to Costa Rica and entering into free trade agreements with Costa Rica came after Costa Rica severed ties with Taiwan. See Williams, supra note 7. 17 Ben Miller, Infrastructure Investment: The Big Shortfall, LATINFINANCE, Nov. 1, 2010, at 26. Brazil’s second Growth Acceleration Program (PAC 2) calls for R$ 955 billion to be spent during 2011 to 2014. Id. 18 The Dragon in the Backyard: Latin America is Tilting Towards China, Iran and the Global “South” and Away From the United States, THE ECONOMIST, Aug. 13, 2009, available at http://www.economist.com/node/14209932. 19 See TASK FORCE REPORT, supra note 5.

china’s investment in latin america: themes, challenges and future trends 71