The best China News & Insight from the web in one place.

Credit, Infrastructure & Tariffs, China`s Latin American Investment.

On June 27th, Chinese Premier Wen Jiabao arrived in Santiago for his first official visit to Chile. The stop was the last of his recent, four-country South American tour, which also took him to Argentina, Brazil and Uruguay, and another indicator of deepening economic and political ties between China and Latin America. Upon his arrival in Chile, Wen said “China treats its relationship with Chile from a strategic perspective and will work with Chile to bolster exchanges and cooperation.” The trip was concluded with Wen pledging $10 billion in credit towards infrastructure projects and for a joint initiative to combat trade protectionism between the two countries.


What is China doing in Latin America? This is a big question, and one that is proving to be increasingly important for policymakers and analysts around the world. After all, China’s interest in the world across the Atlantic is barely a decade old – for years if it did have any involvement in the Americas and the Caribbean, it was only to lure its nations away from supporting Taiwan.


This has changed in recent years. Since President Jiang Zemin’s two-week visit to Latin America in 2001, and subsequent trips by Hu Jintao in 2004 and 2011, China’s presence in the region has become a firm reality. In 2003, the year before Hu’s first stopover, China’s annual investments in all of Latin America totaled just over a billion. Today, China is the top trade partner of Brazil and Chile, and the second largest export destination of Argentina, Cuba and Peru. According to China’s National Development and Reform Commission, China had invested almost $45 billion in Latin America by 2010. It is currently the third-largest investor in the region, with 9% of FDI (foreign direct investment); the US is still on top with 17%. Between 2000 and 2008, trade between China and the Latin American region grew at an average annual rate of 31%.


The political forces underlying China’s recent bids are by now fairly clear. In order to maintain the economic supremacy that is has enjoyed for the past three decades – average GDP growth of 9.8% annually from 1979-2009 and a strong showing in 2009 despite global economic collapse – China has undertaken a global search for the natural resources that it needs to ensure sustained growth. By the end of 2011, more than $3 trillion in foreign exchange reserves had been set aside by China’s leaders to assure its continued acquisition of primary commodities around the world. This search has extended from South-East Asia to Africa, Latin America and even Iceland (Wen Jiabao met his Artic counterpart, Johanna Sigurdardottir in April of 2012). Efforts to ‘purchase’ political stability at home through foreign investment will likely become even more frequent as China approaches its next leadership transition in the fall.


Nevertheless, unlike China-Africa relations, which have raised more than a few questions from concerned countries in the West, Asia-Pacific (AP)-Latin America (LAC) trade may actually result in a win-win situation for both regions. In May of 2012, Fitch Ratings released a special report stating that Latin America has generally benefitted from China’s economic rise through increased bilateral trade, FDI and commodity-backed loans (Close-Up Media, Inc., 2012). China’s growing trade and investment with Latin America have also helped cushion the latter against weaker export markets in both Europe and the US as a result of the recent global recession. Seeing as how both the AP and LAC regions stand to lose from a disorderly sovereign debt default in Europe and rising oil prices (a report released by the UN Economic and Social Commission for Asia and the Pacific (ESCAP) in May of 2012 held that a $25 hike in international oil prices would reduce growth in AP by at least 0.8% that year) improved bi-lateral relations will be crucial for their continued growth.


As China continues what has become the largest urbanization drive in history, it will only need more food to satisfy the appetites of a population that its scarce resources already fail to fully nourish. The emergence of a burgeoning middle class in China will only exacerbate this food demand, as increased wealth traditionally leads to demands for food in wider varieties. Queue in Latin America’s clean water and arable land, and we have a match made in heaven. For its part in helping to satisfy China’s insatiable appetite for raw materials and commodities, Latin America is paid handsomely: FDI, loans and endowments for infrastructure building flow freely into the region from the East. Although 85% of Chinese FDI and 60% of its loans are funneled into extractive industries, the money has nevertheless allowed finance-constrained firms in LAC to undertake large energy and infrastructure projects that would not have been possible otherwise. Furthermore, we really cannot stress enough the importance of China’s role in shielding LAC from Europe’s renewed austerity. In addition to weakened demand for exports, many of Europe’s top banks have reduced lending to Latin America as part of their attempts to weather contractions back home. For example, Spain’s Santander bank has large operations in Brazil, and is the #1 bank in Chile. Barring stimulus from AP, sizable credit cuts could seriously hamper growth initiatives in the region.


The key challenges that China and Latin America face now lie in increasing the scope of their co-operation without LAC countries perceiving themselves merely as food for the hungry Dragon. Those countries that do have an abundance of natural resources would like to escape the China-trap of commodities-for-manufacturing goods trading, either by producing their own manufacturing exports or by expanding into more diverse industry. For those countries not in the Southern Cone (i.e. Mexico, Central America), which supplies approximately 90% of LAC’s exports to China, the issue is more one-sided. Without any commodities to offer China, they gain little and lose much by having to compete with low-priced Chinese imports. These have triggered both resentment from the local populations, and calls for protectionist measures to be introduced. In order to find a healthy medium, efforts must furthermore be undertaken to diversify composition of trade. Although LAC imports a wide range of manufacturing goods from China, almost 80% of exports heading East account for only 10 different products: Soya beans, copper and alloys, iron ore and concentrates, petroleum and oils, crude oil, paper pulp, flours, meals and fish, iron ore, copper waste and lead ore (IDB 2010).


In addition to diversifying trade, efforts must also be made to reduce trade costs between AP-LAC, which are currently much higher than OECD norms. Although average tariffs on exports were reduced from 40-50% in 1980 to just under 10% in 2010, most exporters in LAC and China still face double-digit tariffs on virtually all of their goods. Particularly high tariffs on manufacturing goods and agriculture will further hinder attempts by LAC to expand beyond commodities-based trading. Elevated trade costs are also influenced by the presence of Non-Tariff Barriers on both sides, which, although they are not ‘official’ tariffs, have similar effects once enacted. Typical examples include anti-dumping measures (predatory pricing policies where a country charges less for a good in foreign markets than it would in its home country) and countervailing duties (when an exporting country is found to subsidize its goods at the expense of the importer’s domestic producers). Even though China has made significant efforts to remove NTBs since its WTO entry in 2001, it still levies sizable quotas on LAC’s agricultural exports (of which the money is sent to state companies). On LAC’s part, the goodwill that accompanied China’s WTO entry has actually deteriorated in recent years: rather than afford China market economy status, many countries have begun to rely upon the WTO’s China-specific antidumping and safeguard provisions, which are generally more severe. To address these concerns, China must continue to improve bilateral relations with the countries of the LAC region by signing Free Trade Agreements (FTAs) such as the ones with Chile, Peru and Costa Rica (2005-2010). Efforts should center around countries like Brazil, Argentina, Colombia and Mexico – those that stand to lose most from aforementioned competitive Chinese manufacturing imports.


Finally, China-LAC’s weakest area of cooperation seems to be investment, on both sides. Although Chinese investment in LAC has been steadily rising since 2001, it only represented 0.3% of worldwide Chinese FDI on average between 2005-2010. Like trade, investment is heavily concentrated in Brazil (41%), Argentina (11%), Peru (12%) and Chile (2%), in order to extract resources more efficiently from mines and agricultural land (IDB 2010). Despite signs of increased outwards investment beginning in 2010 (China announced initial investment projections of US $15.6 billion in the LAC region), new stimuli have not been accompanied by major sectoral shifts. Burgeoned by Mexico and Brazil, LAC’s FDI abroad still surpassed that of China as of 2010. Nevertheless, its FDI in China is still modest, irregular, and accounts for less than 1% of investments abroad. Furthermore, nearly 40% originates solely from Brazil.


Ultimately, China and Latin America must overcome certain, key challenges, as they move forward with what appears to be the framework for a long-term relationship. This relationship extends beyond mere economics: Latin Americans have begun attending Chinese language classes in droves, and Confucius Institutes throughout the region are fast becoming a normal sight. More bilateral trade agreements must be signed, cooperation must extend beyond the realm of commodities vs. manufactured goods, LAC firms should establish a larger presence within China, and likewise a larger, more diverse portfolio of Chinese investment in the LAC region should be created as well. Although bringing down the costs of trade is important, it is equally important to remember that trade costs will not be the end-all, be-all of this complex regional partnership. Nevertheless, both parties have demonstrated a willfulness to cement future agreements, and recent policy initiatives hint at a bright future for China-Latin America relations.





User: yitaoTime: 2012-07-13 16:37:04
An Interesting follow up article here:

Comparing Chinese and Indian Engagement in Latin America
By Margaret Myers

Foreign Policy Research Center, New Delhi, India, July 9, 2012
This article was originally published in the New Delhi Foreign Policy Research Center's online journal.

India began its period of heightened economic engagement with Latin America nearly fifteen years ago with the initiation of its FOCUS LAC program, which encouraged Indian private sector trade and investment in the region. Despite an early focus on strengthening economic relations with Latin America and the Caribbean, however, India was quickly overtaken by China in terms of economic, political, and social engagement. From 2000-2009, Indian trade with Latin America grew to approximately $20 billion as it sought out new markets for goods and services. Chinese trade with the region reached $140 billion in the same period, however, contributing to a commodities-based economic boom for certain countries in the region.

As South-South cooperation and economic ties strengthen, the Chinese and Indian presence in Latin America will also continue to grow. For China and India, Latin America is both an attractive export market and as a source of much-needed raw materials and agricultural goods. The extent to which China and India will expand existing ties with the region depends to a great extent on these countries’ domestic economic, political, environmental, and social considerations. The quality of relations between these two emerging powers and Latin America will depend on China’s and India’s various approaches to engaging the region. Thus far, the two Asian nations’ approaches to investment and project negotiation/ implementation in Latin America have been strikingly different. India, for the most part, is thought to have adopted a more cautious and well-informed approach to engagement with the region.

Indian and Chinese Interests in Latin America

The vast majority of Chinese and Indian economic engagement in Latin America and the Caribbean (LAC) is still trade-based, and to a lesser extent, investment-driven. China conducts nearly seven times more trade with Latin America than India, and invests more than India, though the two are fairly equal in terms of Greenfield investment. Unlike China, however, which focuses nearly exclusively on energy sector, agricultural, and infrastructure-related trade and investment, Indian companies have been highly active in the region’s information technology, manufacturing, and pharmaceuticals sectors, in addition to agrochemicals, mining, and energy. Since 2000, Indian companies invested over $15 billion in the region, with a significant portion directed toward services and manufacturing. In Argentina, according to Jorge Heine and R. Viswanathan, Indian firms are focused on both manufacturing and IT-enabled services. Major Indian firms operating in Latin America include Tata Motors Ltd (automobiles), Tata Consulting Services Ltd (IT), Dr. Reddy’s Laboratories Ltd (pharmaceuticals), United Phosphorus Limited (agrochemicals), and many firms associated with India’s technology and service sectors.

India and China also look to Latin America to supplement domestic energy production. As China and India modernize, their energy usage is expected to increase. The China Energy Group estimates that household energy will double as the China continues to urbanize. In order to secure access to the region’s oil supply, China has negotiated US $46.5 billion in oil-backed loans in Latin America from 2005-10, with most of the contracted oil coming from Venezuela. From 2006 to 2010, India launched eighteen cooperative oil exploration projects in Latin America – the vast majority (75 percent) of which were in Brazil and Colombia. Indian ambassador R. Viswanathan has indicated plans to invest in Argentine, Colombian, Peruvian and Bolivian national resource sectors in coming years. India also has invested in Venezuelan oil projects, albeit to a lesser extent than China. In April 2008, India signed its first energy cooperation treaties with Venezuela, establishing the provision of 200,000 barrels per day of Venezuelan crude from an oil field jointly explored by Indian firm Videsh and PdVSA.

Latin America’s agricultural giants also are of growing interest to Asian nations like China and India, with limited arable land and water. In China, nearly 20 percent of land area is desert. Because of poor farming practices, drought, and growing demand for groundwater, desertification has become one of the country’s most critical environmental challenges. Much of the remaining arable land is located in poor areas, where farming is sometimes restricted by terrain limitations or water scarcity. The loss of high-quality, arable land has seriously affected China’s agricultural production capacity, and threatens national food security. India faces very similar issues, although the PRC has lost more cropland in recent years and faces more severe water constraints than India.

While China has a comparative advantage in the production of labor-intensive agricultural goods – garlic, mushrooms, and bamboo shoots, for example – it does not have a comparative advantage in land-intensive agricultural production, and is therefore best served by importing land-intensive products. India faces significant challenges in terms of irrigation infrastructure, market infrastructure and food distribution. Volatile weather throughout much of the country leads to alternate periods of flooding and drought. Expanding populations and emerging middle classes in China and India will require considerably more food in the near future. South America’s major soy producers – Argentina, Brazil, and Paraguay, for example – have benefitted considerably over the past decade from growing Chinese and Indian demand for soy. The area under soybean cultivation in these three countries grew 188 percent from 2000 to 2011. China and India increasingly are looking to Latin America as a supplier not only of soy, but of many other agricultural products.

China’s Advantages

China and India face some similar challenges when engaging Latin America. Both countries are still poorly understood by most Latin Americans, for example. Business relationships in China and India are exceedingly complex. Latin American business communities are only slowly beginning to develop an understanding of Chinese and Indian business culture. Geographical distance also has limited engagement and communication, especially with respects to tourism. Language barriers are much less of an issue in the India-Latin America relationship than in China-Latin America relationship, but significant barriers remain in terms of cross-regional understanding. Chinese and Indian understanding of Latin America is equally limited.

Despite some common challenges, however, China has pursued a much more aggressive and wide-reaching policy of engagement with the region over the past decade. Years of rapid economic growth, China’s centrally-directed foreign investment and trade policy, and its extensive distribution network all have contributed to a rapid expansion of China-Latin America relations over the past decade. In addition to surpassing India in terms of trade and investment, China also has made significantly more progress in terms of cultural engagement in Latin America. As it has done elsewhere in the developing world, China is intensifying its soft power initiatives in Latin America and the Caribbean. It does so in accordance with a central government-articulated interest in expanding “the international competitiveness and influence of Chinese culture.” Confucius Institutes, or Chinese central government-funded language and culture centers, are now prevalent throughout the region. CCTV en Español and China Radio International (CRI) are broadcast in various countries. Congressional and other political exchanges are common. And People’s Liberation Army-conducted humanitarian assistance is increasingly evident. India’s cultural initiatives in the region are limited, for the most part, to Bollywood filming and screenings.

China also has been more successful than India in establishing partnerships with Latin American regional organizations. China’s leaders indicated their intent to establish relations with LAC regional organizations in the Chinese Ministry of Foreign Affairs 2008 Policy Paper on Latin America and the Caribbean. China has since become a member of the Inter-American Development Bank (IDB) and recently established a cooperative partnership with the UN’s Economic Commission on Latin America and the Caribbean (ECLAC). It was only this year that India expressed its interest in becoming an IDB donor-member. Even taking into account its 2009 preferential trade agreement (PTA) with Mercosur, India still trails China in trade and investment agreements with the region. Both China and India (as well as Brazil and South Korea) are becoming increasingly important sources of development aid in Latin America and the Caribbean, however.

China’s system of centralized, top-down decision-making is partially responsible for the country’s rapidly expanding ties with Latin America and other regions. Central government generated policy and guidelines promote extensive, firm-led commercial engagement with Latin America and the Caribbean, often with financial backing from the state or individual provinces. The Chinese government first implemented its “going-out strategy,” or zouchuquzhanlue in 1999. The policy encouraged firms to go abroad in an effort to supplement China’s supply of natural resources, promote the export of goods and services, and foster the development of China’s multinational companies. Since implementation of the “going-out strategy,” and especially over the past decade, China’s firms have become increasingly active overseas. State-owned enterprises are thought to receive a degree of financial support from the central government, or at least to receive low-interest financing for overseas projects from China’s policy banks.

India’s relations with Latin America over the past few years have been driven by two primary factors: domestic pressure on both sides to expand trade and investment, and an interest in strengthening ties in the context of a shifting global power dynamic. As a democracy, however, India must often harmonize local, state, and private sector interests in major commercial interactions. Formulation and application of Indian commercial policy can be slower and more cumbersome, therefore, than Chinese commercial and investment policy-making and implementation. In China, the interests of the Chinese state and of its large firms have proven to be one in the same, in certain cases. India’s commercial engagement instead is driven by its private sector.

A lack of direct shipping between Latin America and India also impedes economic engagement. Whereas China maintains a vast and highly efficient distribution network, the time cost for transportation can make Indian goods up to 17 percent more expensive. India has proposed the creation of direct shipping routes to Latin America, but has yet to adapt current routes or schedules.

India’s Approach in Latin America

Although China continues to surpass India in terms of trade, investment, and even cultural engagement in Latin America, India’s more restricted approach to engaging the region has its benefits. India’s slower and more calculated approach may be more beneficial in the long-term, according to one Chinese analyst. Dr. Sun Hongbo, a scholar at the Chinese Academy of Social Sciences (CASS) Institute of Latin American Studies (ILAS), and member of the Inter-American Dialogue’s China and Latin America Working Group, recently published an article in Chinese journalEnergy, examining India’s xiaobuzi, or small step approach to oil acquisition in Latin America. In the article, Sun suggests that India’s approach may be preferable at times to China’s more aggressive and spontaneous energy-related engagement with the region.

According to Sun, much like China, India’s approach to energy acquisition in Latin America is based on the country’s national energy security interests, as well as on the capital endowments and pace of internationalization of India’s oil companies. But India also considers several other factors when investing in the region, including countries' resource potential, political stability, and the nature of bilateral relations with potential partners. India has very few cooperative projects with the region’s leftist governments, for example, indicating a lower tolerance for investment risk among Indian firms. Also in comparison to China, which negotiated billions in Latin American oil-backed loans from 2005-2010, India’s oil-related investments are fairly small – they very rarely exceed US $10 million.

Because of its smaller footprint and very calculated approach to investment, India rarely encounters resistance on the part of host governments in the region – nor do its investments generate significant public opposition. China’s model of exporting cheap manufactured goods and importing primary commodities, on the other hand, has generated significant concern among interest groups and policy-makers in the region. China’s model of trade with Latin America is even blamed for export primarization and deindustrialization in certain countries. Latin America trade policies over the past few years show evidence of a protectionist response to China in particular. India’s exports attract considerably less negative attention. India is exporting at a smaller scale than China, in many cases. Furthermore, its mix of raw materials or intermediate goods exports is much less threatening to Latin American industrial sectors than the perceived onslaught of Chinese manufactured goods.

India’s focus on information technology and pharmaceuticals also is attractive to Latin American leaders, who envision opportunities for technology transfer and for service sector upgrading. India has outperformed Latin America in terms of service sector export growth for years, but is not thought to displace Latin America service exports. India’s service exports are highly concentrated in technology sectors, whereas Latin America’s are predominantly government services or tourism-related.

Looking Ahead

Asia’s expanding presence in Latin America has been one of the major surprises of the past decade. Few would have anticipated current levels of Chinese and Indian engagement with the region. Chinese and Indian economic ties in Latin America will continue to strengthen in coming years, as will cross-regional cultural and political relations. Looking ahead, however, China’s officials and firms are increasingly aware, that long-term, sustainable relations with the region will require careful planning, risk assessment, and a greater degree of corporate social responsibility. As China’s leaders have indicated in the country’s 12th Five-Year Plan, coordination and better corporate governance/responsibility are critical to developing long-term investments and to building sustainable relationships.

As Sun Hongbo suggests, China could learn from India’s more cautious and strategic investment, which involves successful risk assessment and responsible examination of country-specific investment opportunities. When operating in Latin America, he argues, China’s companies should consider not only China’s needs and their own international operational interests, but also regional politics, specific policy changes, and other diverse factors. China, he adds, must "steadily and cautiously" avoid "blindness" when operating abroad, or a tendency toward "swarming".

Long-term engagement among China, India, and Latin America also will depend in large part on individual countries’ economic growth prospects. The possibility of an economic “hard landing” in China or of slowing economic growth in India is not far-fetched. China faces a wide range of economic challenges that will probably intensify in coming years. Local debt, public sector inefficiencies, banking sector vulnerabilities, geographical disparities, rampant official corruption, high unemployment, resource scarcity, environmental concerns, and inflation are all possible destabilizing factors. India faces many of the same issues – growth is at its slowest pace in almost a decade and industrial production has risen by lower-than-expected rates. India’s levels of per-capita income, exports of goods and services as a share of GDP and foreign direct investment inflows show similar trends to those seen in China a decade prior, however, suggesting significantly more room for growth. Whatever China’s and India’s rates of growth in the next decade, identification of productive, complimentary, and sustainable economic linkages in Latin American and elsewhere will be increasingly critical drivers economic growth in these countries.
User: yitaoTime: 2012-07-13 15:57:46
I like the article.
To comment please register or login

Please login here

Create new account / Forgot password?

Create new account

And a little about you

Forgot your password?

Enter the e-mail address you used to create your account and we will send you instructions for resetting your password.

* Please check your email to get the temporary password we've just assigned you

Edit Password

To continue reading this article please register below as a site user. Thank you

Create new account

And a little about you

If you are already a member, please login here