Monday, May 11, 2015

China Tilts Toward Liberal South American Economies

May 11, 2015 7:04 am

China tilts towards liberal Latin American economies

Li Keqiang, China’s premier©Bloomberg
Li Keqiang, China’s premier
China may be nominally communist but concerns over its financial exposure to socialist-leaning South American partners such as Venezuela and Argentina are spurring a tilt towards their more liberal rivals in the region.
Premier Li Keqiang will endorse Chinese rail investment during a visit this month to Colombia, Peru, Chile and Brazil, promoting a Chinese-built, cross-Andes rail link that would allow Brazilian ore and soya to be shipped from Pacific ports in Peru to Asia, bypassing the Panama Canal.
Increased investment in Peru — home to one of the largest ethnic Chinese populations in Latin America — and elsewhere allows China to diversify its exposure away from the leftist governments it has cultivated over the past decade. Venezuela has borrowed more than $50bn from China, mostly from the China Development Bank, but a steep drop in crude prices has added to stress on its already ailing economy.
China is growing increasingly worried about the model of lending secured against commodities, according to Li Renfang, Latin American analyst at Southwest University of Science and Technology in Sichuan province. “I think it’s safer for China to lend the money to centre-right governments,” he says.
International rail contracts are a political priority for Beijing, which sees exports as a solution to China’s burdensome overcapacity in steel, rail, construction and engineering services as the economy slows. Chinese-built rail projects have been proposed for Thailand, Indonesia and central Asia.
A rail programme fits Beijing’s preference for government-to-government infrastructure deals that can be allocated to state-owned companies, which remain wary of complex Latin American tax and labour laws. China engineered a merger in its two state-owned rail companies late last year to prevent them from undercutting each other in international tenders.
The concept of a trans-Andes rail link is ambitious, with cost estimates ranging from $4.5bn to $10bn for a northern link through the Amazon. That route is almost certain to face opposition from environmental and indigenous rights groups as it would cross primary forests. A longer alternative through Peru’s southern deserts would have to include Bolivia but would justify large port investments in the south of Peru.
The Andean rail plan could tie into South America’s vision of developing more ties with Asia through the Pacific Alliance, a trade pact between Chile, Colombia, Mexico and Peru. The Chinese gripe that the plan for freer movement of goods involves few specifics.
“We’ve had trade but investment was more lacking,” says Chen Taotao of the Center for China-Latin America Management Studies at Tsinghua University, noting Chinese appetite for Brazil’s resources. “Chinese companies are increasingly interested so it makes sense to build leadership ties.”
Chart: Chinese lending to Latin America
While Chile and Brazil are some of China’s biggest suppliers of raw materials, Peru is rapidly becoming a focus for Chinese investment in the region.
With $19bn in the pipeline, Chinese investment now accounts for about a third of new mining projects in Peru, including the Toromocho and Las Bambas copper mines. In late 2014, state-owned oil company CNPC bought the Peruvian business of Brazilian oil group Petrobras for $2.6bn.
Chinese investment has, however, proved elusive in some of Peru’s neighbours.
While a senior Colombian official says the two countries were working on “two very ambitious transport infrastructure projects”, other plans have yet to come to fruition. In 2011 Colombia’s president said Chinese investors were interested in a rail and port connection that would link its Pacific and Atlantic coasts. Nothing has materialised.
Meanwhile, Colombian diplomats say Chinese state-owned groups have shied away from directly competing in large infrastructure tenders. In Nicaragua, a Chinese telecoms entrepreneur has broken ground on a $50bn channel to rival the Panama Canal, but the extent to which the project is backed by Beijing remains unclear.
Chinese companies have successfully invested in Brazilian energy — oil groups hold minority shares in Brazilian oil blocks and State Grid has significant power investments. But Chinese proposals for steel mills and car plants in Brazil have never got off the ground, in spite of years of discussion. Their attempts to invest in Brazilian agriculture have borne little fruit.
In Chile, a 2005 option for China’s state-owned trading group Minmetals to take a stake in the Gaby mine expired in 2008, although Minmetals continues to buy Chilean copper under a long-term agreement. Chinese investments in the region are also subject to greater scrutiny.
Beijing is still smarting from Mexico’s revocation of a $3.75bn high-speed rail contract after it emerged that the Mexican president’s family mansion had been built and paid for by a Mexican partner in the Chinese-backed consortium.
Additional reporting by Lucien Chauvin in Lima, Owen Guo in Beijing, Jude Webber in Mexico City and Joe Leahy in São Paulo