June 26, 2017
Chinese FDI in Latin America
By Adrienne Arsht Latin America Center
Fred Kempe, president and CEO of the Atlantic Council, kicked off the event with welcome remarks and introduced Gerardo Mato, chairman of Global Banking of the Americas at HSBC, who provided comments on the timeliness of the report and long-term significance of China’s investment in Latin America.
Jason Marczak, director of the Latin America Economic Growth Initiative at the Adrienne Arsht Latin America Center, moderated a keynote conversation with H.E. Sergio Amaral, ambassador of Brazil to the United States. In the broader context of China-Latin America relations, the conversation focused on Brazil, by far the largest recipient of Chinese FDI in the region.
“The economic presence of China in Latin America is very impressive, but more impressive than the presence, both in trade and investment, is the rate of growth,” stated Ambassador Amaral to start the conversation. He highlighted that China and Brazil have a sustainable partnership that stems from their complementarity.
Amaral expects more investments will be made, as Brazil and Latin America are part of an integrated and comprehensive global strategy from the Chinese government. The state’s central role in outward direct investment is an important factor to consider when dealing with Chinese businesses, especially state-owned enterprises.
Amaral noted further that “[In] competition between China and the United States in Latin America, China has a wider presence, its growing fast. In a time where the relationship between these two big powers is still to be better shaped, the United States may be losing ground with respect to opportunities for investment, increasing participation in the market, and even in the political aspect.”
In the panel that followed, Shawn Donnan, world trade editor of the Financial Times, moderated a discussion that analyzed the report and its global implications more closely. The panel featured Angel Melguizo, head of the Latin America and Caribbean Unit at the OECD and co-author of the report; Claire Reade, former assistant USTR for China; and José Juan Ruiz Gomez, chief economist and manager of the research department at the Inter-American Development Bank.
Melguizo, emphasized the importance of our research in context of China-Latin America relations, where there has been a “long story of under-reporting” of FDI. Melguizo argued that “still, FDI flows between China-Latin America are a story of extractive industries: mining, metals, oil. More than 50% of all these flows in the last 15 years are related to commodities, but in the last five years things are changing.” In fact, since 2012, over half of incoming Chinese investments were directed at the service sector.
While China’s investment has poured into new and growth-promoting sectors in the past few years, Ruiz Gomez warned against optimism towards diversification.
“Most of the investment is concentrated in a handful of countries, the largest economies in Latin America; it’s concentrated, at least until now, in very few sectors; and what’s even more worrying for Latin America and the future, the correlation between this investment and the rule of law and good governance in Latin America is not as impressive as it used to be when you look at other patterns of behavior in other countries’ foreign direct investment.” He added that the China-Latin America relationship is often viewed as a one-sided issue, and investment opportunities for LAC in China are often overlooked, as are risks concerning China’s potential financial disruptions in the internal bond market and capital account.
Claire Reade offered her perspective on the geopolitical implications of Chinese FDI in the region. “For Latin America, this relationship offers leverage, it offers more options.” Reade argued. She also noted that Chinese involvement in state-to-state lending has allowed Latin American leaders to achieve their national goals. That is not necessarily a positive development, as some regimes have used Chinese funds to remain in power by pushing aggressive expenditure programs and populist platforms.
Finally, she added that “China is not acting as a selfless global leader in moving into Latin America, it’s doing it for its self-interest(...) It needs natural resources, it needs to keep economic growth going for its own political stability reasons, it wants to create national champions who will be dominant not only in China but also globally, it wants to influence global rules, and it also has military security issues.”
The panelists identified important opportunities to build prosperity around Chinese investment in the region, given mutual interests at both sides of the Pacific.
Melguizo argued that “China-Latin America is a partnership to be built. Now Latin America has to be more proactive. We cannot wait until China decides which sectors to invest in, we also have to decide which is the kind of development we want.” With the right incentives, Chinese investments in commodities and infrastructure can foster domestic investments in value-added services. Likewise, areas of great mutual interest, such as climate change, could galvanize the creation of more renewable energy projects, green funds, and stronger social and environmental standards for investment.
Given Latin America’s low FDI restrictions and China’s ongoing economic transition, FDI as we have seen it is likely to keep growing. Whether Latin America can come to the table as a savvy negotiator, with an integrated and comprehensive strategy on how to deal with China, remains to be seen.