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This blog post in The Telegraphdescribes a research report from Renaissance Capital (Russia) that describes how China has overtaken the West as the leader in trade with Africa and Latin America. While this is not exactly news to many investors, it is worthwhile noting some of the key observations on the manner in which this trade is handled by China. For starters, here is a Bloomberg trade graphic from the blog:


China imports hard and soft commodities from Africa and Latin America, and exports low-cost manufactured goods in return. The report notes that Chinese goods, including machinery, are replacing both costly Western goods as well as local products. One of the main complaints regarding Western aid to developing countries, in Africa and Latin America, has been the fact that very little of that aid actually reaches the intended masses. Corrupt government intermediaries in these countries squander most of that aid. This is true even of loans provided through IMF and the World Bank. China has structured its financing in a clever manner to sidestep this problem.

China channels its loans, intended as buyer financing, through the China Development Bank and the China Export-Import Bank. However, the loans are made directly to the contractors who develop the mining and infrastructure projects. Basically, Chinese contractors and mining companies develop the infrastructure needed to deliver the natural resources back to China. In addition, Chinese labor is used for these projects. A sore point, for the locals, has been that the net benefit to the local communities in Africa and Latin America, in terms of jobs, is small. A condition of these loans is that the work must be performed by Chinese firms with at least 50% of the necessary input machinery and parts imported from China.

So, in effect, these are barter deals. China gets the natural resources it badly needs. African and Latin American countries get the infrastructure development and cheap manufactured goods they need. The blog bemoans the fact that these deals often come at the expense of Western countries, which are being marginalized in these regions. The influence of China in these countries is on the rise; the influence of the West in on the wane.

As an investor, here are two ways to play this trade between China and these emerging markets. One is to buy Chinese miners like Jiangxi Copper (OTCPK:JIXAY), which are involved in mining projects in Africa and Latin America. The other is to buy Chinese infrastructure firms such as China Railway Group (OTCPK:CRWOY), China Railway Construction (OTCPK:CWYCY), China Communications Construction (OTCPK:CCCGY), and China State Construction (OTCPK:CCOHY).

Disclosure: I am long OTCPK:JIXAY.

Source: The Chinese Are Taking Over Africa and Latin America