Travel to any country in Latin America and you will see the visible hand of China at work: a computer manufacturing plant in Mexico, a copper mine in Peru, a football stadium in Costa Rica. In the year 2007, the thought of China in Latin America would have appeared, at best, improbable. But in a three-year stretch, China signed free trade agreements with Chile, Peru and Costa Rica, inked billions of dollars worth of deals in oil and mining projects throughout the region, and supplanted the US as Brazil's biggest trading partner. Once almost unseen in Latin America, China’s bilateral trade has risen from $12bn in 2000 to well over $150bn today.
Given the importance of its new Asian friend, Latin Americans are rolling out the red carpets to Chinese business delegations and jumping on planes not only to Beijing but also to Shanghai, Shenzhen, and Tianjin.
Rationale Behind Chinese Investments in Latin America
China has a relatively well defined two-pronged strategy for Latin America: (a) to secure access to the raw materials that it needs in order to sustain its economic growth, and (b) to find a market for Chinese-made products.
This year China became the world’s third-largest economy after the U.S. and Japan. And in 2010 it surpassed Germany as the number one exporter. Factor in 1.3 billion people, a rapidly growing urbanization rate, a burgeoning middle class; and it SOON becomes obvious why China needs resources. Clem Sunter, a noted South African futurologist, and Head of the Anglo American Chairman’s Fund, puts it this way:
“The game is simple but unprecedented. Whereas Britain put 30 to 40 million people through an industrial revolution in the mid-to-late 19th Century and had the colonies to draw its raw materials from; whereas America put 150 million people through an industrial revolution at the turn of the 20th Century and had its own raw materials; China is putting 1.3 billion people through an industrial revolution with neither colonies nor substantial indigenous resources besides coal."
Chinese natural resource deals (in Latin America and elsewhere) are also providing an alternative to investing in US Treasury Bonds. Today, China has over US$2.5 trillion worth of dollar denominated reserves. At one level, China’s commodity investments serve to diversify it from US-denominated Treasuries. And at another level, they serve as a hedge in the event the US dollar devalues.
Latin America is not a monolithic region and each country has a special and different relationship with China as explained below.
Brazil, the largest economy in the region, is clearly China’s most important partner, both as a market for Chinese goods and also as a source of commodities. Brazil currently supplies over 40% of all Chinese soybeans, and 65% of Brazil’s iron ore is shipped to China. Brazil’s status as the most populous Latin country also makes it an important destination for Chinese products, including footwear, electronics, toys and others. China has made Brazil an obvious political and economic priority, and its status as a fellow BRIC nation gives it further clout. Chinese and Brazilian delegations routinely get together and Brazil has no fewer than 30 Chambers of Commerce dedicated to China.
China is developing inroads into Argentina’s agriculture, oil and mining sectors. In 2003, China’s CNPC (China National Petroeum Co) acquired a stake in Argentina’s Pluspetrol, an oil and gas company that operates in both Argentina and Peru. And this May, China National Offshore Oil Corporation (CNOOC (NYSE:CEO)) bought a 50% stake in Argentina’s Bridas Holdings for $3bn. Rumours of a multi-billion dollar deal between Spanish oil giant Repsol and CNOOC regarding the $17 billion sale of Repsol’s Argentine oil subsidiary YPF, however, have yet to materialise.
Investment plays linked to China: Repsol YPF (REP), Minera Andes, Geopark Holdings.
Both Chile and Peru are members of APEC (Asian Pacific Economic Co-operation) and these countries are starting to see themselves not just as Latin Americans but also as members of the “Pacific Rim.” Chile is a copper producing nation with roughly 30% of the world’s known reserves. In addition to copper, Chile has other important minerals including large deposits of iron and precious metals.
Peru, with an estimated 10% of its population of ethnic Chinese descent, offers huge potential to China. Peru has oil and gas deposits, one of the world’s largest fishing industries, and it is also well endowed with minerals including zinc, copper and gold. China has been on a buying spree in Peru over the last few years, and Chinese firms control significant mining assets including Toromocho, Rio Blanco, and Marcona. Both Chile and Peru have signed free trade agreements with China.
Investment plays linked to China: Southern Copper (NYSE:SCCO).
Colombia, while not yet an APEC member, is increasingly seeing its fortunes tied to Asia. Over a decade of reforms and stability have turned Colombia into one of Latin America’s most dynamic economies. Colombia has opened its oil and gas sector and many analysts believe that it could be one of the most promising oil producing countries in the region. Colombia also has large quantities of precious metals (mainly gold) and is Latin America’s largest coal producer.
Investment Plays linked to China: Continental Goldfields.
Mexico’s relationship with China is complex and affected by the former’s proximity to the US. It is also affected by the perception of competitive overlap between Chinese and Mexican exports. Of Mexico’s 20 main exporting sectors, 15 are in direct competition with China. Yet, Mexico has the ability to turn this into an advantage by recruiting Chinese firms to Mexican “maquiladora” border towns where Chinese goods can arrive, get processed and assembled, and enter the US market through NAFTA. Additionally, Mexico is rich with resources including copper (Grupo Mexico), manganese (Minera Autlan) and silver (Peñoles).
Investment plays linked to China: Grupo Mexico.
Linking up with China is seen as good news in most Latin American countries. But globalization has both winners and losers. Over the past few years China has fueled a boom in the natural resource sectors of Latin America.
However, some Latins worry about falling into a “commodity trap” pattern in which resources are exported abroad and cheap imports flood the local markets. While experiencing a boom in commodities, certain Latin America’s manufacturing sectors have been eroded by inexpensive Chinese imports. Yet some pundits argue that Chinese imports are actually good for Latin America in the sense that consumers ultimately benefit, as Chinese products are much more affordable. Trade and globalization invariably involves displacement and conflict. It is unclear what the future holds. But one thing remains: China is a new player in Latin America, and it is here to stay.
Disclosure: No stock ownership