Opinion: China Still Calls the Shots in Relations with Latin America

01/13/2015 - 09h26

Around a decade ago, when China began to see the world as an investment opportunity, its interest in Latin America was limited mainly to the areas of agriculture and mining.

The aim was to ensure a steady supply of the materials China needed for its own development, both in the long term and at prices of its own choosing.

Of course, the Chinese also wanted to guarantee new export markets.

The supply of commodities will always be important, but Chinese global economic strategy is today far more complex.

Chinese companies have developed sophisticated plans to consolidate their presence abroad.

As a result, direct Chinese external investment is due to exceed direct foreign investment in China for the first time this year.

This amounted to US$ 89 billion by November last year.

In particular, the Chinese have been exporting engineering services, especially in the rail sector, in which China is currently a global leader.

Even fairly recently, Chinese companies tended not to express a great deal of enthusiasm about investing in Latin America.

While they retain some reservations, the mood has changed.

In the rail sector, the Chinese have identified their opportunities.

They have invested in metro systems in large cities - such as Rio and Buenos Aires - as well as improving their understanding of public private partnerships, and creating associations with local companies.

Naturally, there have been some hiccups.

In Mexico, for example, China Railway Construction (CRC) won a contract worth US$ 3.75 billion to build a bullet train service, which was immediately cancelled.

However, bidding will reopen in January, and CRC intends to participate once again.

The future of economic cooperation between China and Latin America will be in the financial sector.

At present, this is limited to loans between governments, with favorable conditions, generally linked to trade.

Only last week Ecuador sealed a 30-year loan, at just 2% annual interest.

Chinese investors and private funds can only invest abroad with quotas that are granted on an individual basis.

In general, they know little about Latin America and they tend to focus on Hong Kong and other Asian markets. This situation will change, though it may take some time.

The main point is that the China - Latin America relation is defined far more by Chinese interest than by Latin American.

The strong role of government in the region also tends to give the Chinese the upper hand.

For many countries in the region, this isn't a problem.

However, for Brazil - the region's largest economy, with a dynamic private sector - the situation is less favorable. As such, Brazil needs to be more assertive.

Brazilian Foreign Minister Mauro Vieira was correct to fly to Beijing last week, only days after assuming the ministry, in order to attend a China-Latin America summit.

Part of the challenge he faces will be to help Brazil to better understand China, in order to make the most of opportunities and participate in regional partnerships.

After all, the Chinese have plenty of what both Latin America and Brazil need most urgently: capital.

MARCOS CARAMURU PAIVA is a diplomat, as well as partner and manager at KEMU Consultancy, based in Shanghai. He has lived for eight years in East Asia. He was Brazilian consulate general in Shanghai, the Brazilian ambassador in Malaysia, secretary of International Affairs of the Ministry of Finance and the executive director of the World Bank, in Washington.

Translated by TOM GATEHOUSE

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