When the Brazilian president Lula da Silva landed this Friday in Beijing It did not have any kind of reception. A large entourage welcomed him at the Great Hall of the People in Tiananmen Square. An honor that this year has also only been offered to the French president, Emmanuel Macron.
But unlike the French visit, The arrival of the Brazilian president was preceded by announcements that show a renewed alliance of Xi Jinping with the largest Latin American economy: The strengthening of a development bank, a currency to replace the dollar, and, more specifically in the short term, promises of millionaire investments.
This last point is especially important in a region that depends on foreign investment; And it’s not just Brazil that is benefiting from China’s renewed focus on its Latin American partners.
Beyond trade, in which China is already South America’s main trading partner, displacing the US, your role as an investor is growing rapidly.
Figures from the Center for Global Development of the University of Boston reveal a shift in China’s interests in Latin America. Between 2005 and 2015, Chinese banks provided loans for some US$114 billion to countries in the region close to Beijing, especially Venezuela, Ecuador and Argentina. The financing clauses included the provision of resources or contracts for Chinese infrastructure companies. A practice that he also applied in Southeast Asia and with countries in Africa.
Between 2005 and 2015, Chinese banks provided loans for some US$114 billion to countries in the region close to Beijing, especially Venezuela, Ecuador and Argentina.
However, since 2015 there has been a constant drop in these loans, from its peak of US$21.3 billion in 2015 to zero in 2020, the year of the pandemic. Last year, two loans for projects in Brazil would have totaled about $800 million.
The great actors
Sovereign lending was followed by increased foreign direct investment (FDI) activity concentrated in mining and energy projects, especially in Brazil, Chile and Argentina.
For Sophie Wintgen, researcher at the European Institute for Security Studies, China’s influence on FDI, especially through mergers and acquisitions (M&A) and construction projects is often underestimated. Chinese companies would have invested some US$160 billion in Latin America between 2000 and 2020 in 480 operations, the vast majority of them M&A.
Cepal calculates a much lower figure, but recognizes that it is difficult to have an official amount, given that not all operations are public and many Chinese capital companies use firms created in Luxembourg or the Netherlands for regulatory reasons.
“Loans to governments were designed to help Chinese companies enter Latin America, when they had little experience. But Chinese companies are today extremely well positioned in various industries throughout the region. These companies can now invest on their own or in alliance,” explains Margaret Myers, director of the Asia and Latin America program of the Inter-American Dialogue, to DFMAS.
The evolution of Chinese multinationals has been clear in technology, an area that has concentrated expansion, especially in the US and Europe, in the latter region together with consumption. But, A Baker Mackenzie study shows that Chinese interests in Latin America have focused on energy and infrastructure in the last decade.
For example, in Colombia, the Chinese infrastructure companies Civil Engineering Construction Corporation (CCECC), China Harbor Engineering Company and Xian Metro Company are getting ready to start construction this year on the first sections of the Bogotá metro and a commuter electric train.
Another area of activity has been mining, in a way, more traditionally linked to China, and the idea that the Asian country needs to ensure the supply of raw materials. According to data from EY, Argentina stands out as one of the countries where Chinese direct investment grew the most in 2022, mainly due to mega acquisitions in the mining sector.
However, even before the pandemic, the US$2.9 billion investment by China Southern Power Grid International (CSPGI) for Enel’s assets in Peru confirmed the strategy that has been in the making for a decade: interest in assets in the electric sector.
The crisis of the Brazilian Odebrecht, due to a regional corruption case, and the withdrawal of European multinationals left the field open for Chinese capital, And the amounts are increasing. The purchase of Enel’s assets in Peru represented in a single operation almost double the amounts invested by Chinese companies last year, according to EY data.
It is also worth noting that it is no longer just a matter of financing or the construction of hydroelectric or solar power plants, but also an aggressive incursion into the distribution business.
A Baker Mackenzie study shows that Chinese interests in Latin America have focused on energy and infrastructure in the last decade.
After the purchase of Enel’s assets, Chinese companies control 50% of electricity distribution in Peru. Their reach is even greater in Chile, where they acquired Chilquinta and Naturgy to control 56% of the sector. In Brazil, CSPGI acquired the leading distribution company in the country in 2019.
Economic factor
Explaining the acquisition of CSPGI in Peru, academic Lin Boqiang told the Chinese state press that South America offers “enormous potential” to develop the electricity sector. Boqiang, director of the Institute of Energy Studies at Xiamen University, told China Daily that Chinese companies have ultra-high-voltage transmission technology that is attractive to receiving markets. “Investment and construction of electrical infrastructure will boost the export of technology, machinery and capital by Chinese companies, and the formation of alliances for further global expansion,” says Lin.
For Myers, electricity generation and distribution of natural interest to Beijing due to the excess capacity of its companies in the domestic market. “This sector is also part of what China has called ‘new infrastructure’, or innovation-based industries that are closely linked to China’s own development, which is of paramount importance to its leaders,” he adds.
Of the 140 electricity generation projects that Chinese firms have acquired or developed in Brazil since 2015, only one corresponds to gas and two to oil, the rest is divided between hydroelectric, solar, wind and biomass.
In Chile, according to the generation database of the Global Development Center, of 12 projects acquired or developed between 2016 and 2020, four correspond to solar plants and two to wind sources, and five hydroelectric plants.
Baker Mackenzie’s report to 2022 sees a strategy not just by Chinese power companies, but by their electric car firms to expand globally. China’s interests in Argentine lithium (Lithea for almost US$1 billion) and the investment of US$2 billion by the Great Wall automaker in Brazil last year.
Resources for the energy transition and renewable energies are emerging as the favorite investment assets for the coming years. If there is a race for them, China has found in Latin America, and its friendlier governments, the ideal setting to gain ground.
“It is difficult to know whether the rapid growth of Chinese ownership of energy assets in parts of the region has a strategic dimension or not.. But the growing Chinese footprint in this sector undoubtedly increases Latin American dependence on Chinese state-owned companies in these industries,” Myers warns.
From Washington to Beijing, the dependency of the region would be changing its axis. China is no longer just a strategic partner for shipping the region’s products, without its companies who will finance the energy transition.