Bogota, Colombia — By Carlos Rodríguez Salcedo
The people of Bogota had to wait 77 years and almost 20 governments to sign the final contract that would give life to the first subway line in the capital of Colombia, a project that was conceived in 1942 and that only until 2019 saw the final step so that it could become a reality. Four years earlier, but in Brazil, one of the main deals in Latin America took place in 2015 when a tender was held for the concessions of the Ilha Solteira and Jupiá hydroelectric plants for US$3.68 billion. Although it might seem that the two projects have nothing in common, they do have a commonality. Both projects are financed by China, the world’s second largest economy.
And this is no coincidence. The Asian giant, which today faces the collapse of the real estate giant Evergrande, went from representing less than 1% of foreign direct investment (FDI) in the world to 11% in 2020, becoming the third largest source of FDI in the world after the European Union and the United States.
The Latin American and Caribbean economies have not been unaffected. A report by the Economic Commission for Latin America and the Caribbean (ECLAC), a United Nations agency, analyzed the growth of Chinese investment in the region. To do so, it took into account mergers and acquisitions of assets located in the countries and announcements of new investment projects.
The figures speak for themselves: between 2005 and 2020, Chinese and Hong Kong companies carried out 150 mergers and acquisitions in the region, representing a total of US$83 billion. Thus, they went from being 1.7% of the total of these deals in Latin America to representing 16.3% of the total between 2015 and 2019. In addition, 652 investment projects were announced for an estimated total amount of US$75 billion.
China was among the main investors in Latin America and the Caribbean in the form of mergers and acquisitions, and last year it was the country with the largest number of deals, followed by Spain and Canada.
The strategy also comes in the midst of China’s Belt and Road initiative, an infrastructure and financing plan of the Asian giant that has benefited countries in the region despite not formally belonging to it. According to law firm CMS, Argentina, Brazil, Colombia and Mexico have signed agreements to benefit from Beijing’s money.
“There are solid economic reasons for Chinese investments. In addition, the region has a relevant consumer market and is important for the internationalization strategy of many Chinese brands,” says Cláudia Trevisan, executive director of the Brazil-China Business Council, founded in 2004 to promote dialogue between the two countries.
According to a study published by the Council, between 2007 and 2020, there were 176 projects in Brazil under the leadership of Chinese companies. Latin America’s largest economy, the report says, received 47% of that country’s investments in South America. “It is also important to mention that a large part of Chinese investments in the region occurred in sectors that did not attract U.S. interests, such as infrastructure,” adds Trevisan.
For Alicia Bárcena, executive secretary of ECLAC, China has used this strategy for its own medium-term development plan and in the midst of its strategy, to 2049, to be the leading manufacturing power. “It is one of the main trading partners of Latin America and the Caribbean. It has gained great prominence as an investment,” she said at the presentation of the agency’s report.
Bárcena highlighted that the presence of Chinese companies has deepened in different modalities, which can open a door for the region to join the technological progress they bring, such as in electromobility sectors. “I think Latin America could play an important role there,” he said.
The International Monetary Fund (IMF) has also analyzed this behavior, in an article by Ding Ding, deputy chief of the Caribbean Division of the Western Hemisphere Department, and Rui C. Mano, senior economist in the U.S. and Grenada teams of the same department.
“Chinese companies are expanding overseas, particularly in sectors where domestic overcapacity has built up after years of overinvestment. These tend to be the sectors in which Chinese firms are most competitive in world markets,” the IMF document highlights.
The trend identified by ECLAC is also seen in the Latin American and Caribbean Network on China (LAC-China Network) monitor that analyzes outflows of foreign direct investment flows: the 480 Chinese transactions from 2015 to 2020 accounted for US$159,786 million and generated 565,000 jobs in the region.
IMF economists add that the electricity sector is an example of Chinese behavior. After the local market became saturated in 2010, companies sought opportunities abroad at the same time that Latin American countries were struggling to meet energy demand.
Chinese investment, the authors add, helped to correct this deficit. For example, citing data from the LAC-China Network, since 2000, three Chinese electricity companies have invested in 18 projects in the region, totaling US$34 billion.
Countries with benefits
Acquisitions by Chinese companies have encountered an obstacle with more demanding regulatory mechanisms in countries such as the United States and the European Union. The veto of Huawei’s technology during Donald Trump’s presidency is an example of this. Thus, in 2020, while Chinese mergers and acquisitions decreased in Europe, North America and Asia-Pacific, they increased in Latin America and the Caribbean, says the ECLAC report.
According to its analysis, the largest mergers and acquisitions were concentrated in Brazil, Peru, Chile and Argentina. As for investment announcements, in addition to Brazil, Peru and Mexico were leading.
For Enrique Dussel Peter, professor at the National Autonomous University of Mexico (UNAM) and member of the LAC-China Network, there has been “a very important process of diversification by country, sector and ownership, which has allowed a learning process and benefits for both parties”.
The LAC-China Network monitor shows that, between 2010 and 2014, Argentina and Brazil accounted for 61.17% of the amount of Chinese investment in the region and 46.02% of the employment generated. Three years later, the protagonists were Chile, Colombia, Mexico and Peru.
“Latin America and the Caribbean require a better understanding of Chinese FDI - its regulations, objectives, companies, for example - to generate better conditions in the short, medium and long term,” says Dussel.
The hydrocarbon key
According to the ECLAC report, in a first phase, in the first decade of this millennium, Chinese investments were characterized by entering sectors such as hydrocarbons, metal mining, agriculture and fishing. However, they have been diversifying.
Between 2005 and 2020, 81% of the amount of mergers and acquisitions was concentrated in electricity, gas and water; oil and gas; and mining companies. In project announcements, 54% of the amount was concentrated in metals, automotive and auto parts, and transportation and warehousing.
“After an initial concentration in commodities, there was a gradual diversification of investments into other sectors, such as electricity, infrastructure, finance, manufacturing, information technology and communications,” adds Trevian. The director lists expansions such as that of the mobility app Didi; Tencent’s US$180 million investment in Brazil’s Nubank or the US$150 million it invested in the Argentine fintech Ualá together with Japan’s Softbank.
One of the characteristics of Chinese investment is that it has a “strong presence” of state-owned companies or companies that have the support of the government to internationalize their companies through tax benefits or public financing, says the ECLAC report. For example, there is only one non-state-owned company among the ten companies with the highest participation in mergers and acquisitions in the region, between 2002 and 2020.
The LAC-China Network monitor, after analyzing the five main Chinese companies investing in the region (China Petroleum & Chemical Corporation; State Grid Corporation of China; China Three Gorges Corporation; State Power Investment Corp; China National Petroleum Corporation), found that in addition to the fact that they are all state-owned, they accounted for 36.88% of the amount of Chinese investments and 10.28% of the employment generated.
The United Nations agency also highlights the financing given by the Asian giant to the governments of the region, by means of loans made through the China Development Bank and the Import and Export Bank of China. Between 2005 and 2020, Latin America and the Caribbean registered 99 loans for an amount of US$137 billion. Of this total, 93% was concentrated in Venezuela, Brazil, Ecuador and Argentina.
The US on alert
China’s strategy has not gone unnoticed in Washington. Bloomberg reported that Daleep Singh, the U.S. deputy national security advisor for international economics, will travel to Colombia, Ecuador and Panama to, among other things, evaluate the possibility of implementing a public works and international trade program to compete with China’s Belt and Road initiative in Latin America.
Read more: Biden Team Aims to Rival China’s Belt and Road in Latin America
For Biden administration advisors, quoted by Bloomberg on the condition of anonymity, this initiative has become “a centerpiece” of China’s foreign policy strategy. The visit led by Singh plans meetings with Colombian President Iván Duque, Ecuador’s President Guillermo Lasso and Panama’s Minister of Public Works Rafael Sabonge.
David Marchick, chief operating officer of the U.S. International Development Finance Corporation, will also be among the envoys. Among the projects that could benefit from U.S. investment are companies led by women in Brazil or water treatment facilities in El Salvador.
The Colombian president said during his recent visit to New York to attend the United Nations General Assembly that Colombia is open for business and is interested in continuing to expand Chinese investment, when asked by Bloomberg about the money from Beijing that has come to infrastructure projects in the country, such as the Bogota subway.
Dussel believes that the region should not fall into tensions between the United States and China, but rather seek a balance and relationship with both. “Falling ideologically into one of the two camps would be a serious mistake in terms of FDI for Latin America and the Caribbean,” he says.
Reciprocal relationship?
Francisco Urdinez, associate professor at the Institute of Political Science at the Pontifical Catholic University of Chile, says there has been a “learning curve” with respect to dealing with China, in a process in which decision-makers have moved from a “honeymoon” in the early 2000s to “a more cautious look”.
Urdinez also highlights the role played by provincial or departmental governments in Latin America, which are receiving funding directly from China without going through agencies at the national level. “That’s something that shows a very steep learning curve. Regional governments now have the staff, the knowledge and the courage to ask for a loan from a Chinese bank,” he said in a conversation led by the Wilson Center.
For Trevian, the investment is mutually beneficial. “The region has a huge investment gap, with little fiscal space to fill it. The Inter-American Development Bank estimated in 2019 that in infrastructure alone Latin America and the Caribbean would need investments of US$150 billion a year,” he said.
However, Barbara Stallings, a research professor at Brown University and Tsinghua University, has a contrary position.
“I’m not sure Latin America has learned much at all. There is still a huge knowledge gap on both sides, both on the Chinese side and the Latin American side. But there really is not much learning, not much knowledge of a way of doing business from the major Latin American players,” she said at the Wilson Center event.
In this conversation, they also highlighted the influence that China has had in the vaccination campaign against Covid-19. As compiled by the Financial Times in May of this year, by then the Asian giant had sent more than half of the 143.5 million doses of vaccines delivered to the 10 nations with the largest populations in the region. At that time, Astrazeneca and Pfizer had delivered 59 million doses, between them.
The executive secretary of ECLAC warned that it is necessary for the countries of the region to advance “towards a greater understanding of the role, vision and strategy of that country” so that there is effectively a mutually beneficial position.
So far, the report of the United Nations agency highlights, the countries of Latin America and the Caribbean have had a relationship of dependence with China rather than mutual benefits, which “has not contributed to achieving a more inclusive development that reduces poverty and increases equality”.