China’s Investment in Latin America: 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 Brazil, 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 Chile, 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 Venezuela. 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 Cuba. 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 Panama 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