China & Latin America: New Priorities

China firms seeks deeper ties to the Pacific Alliance.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Chinese Premier Li Keqiang in late May made a four-nation tour of Latin America where a number of energy-sector deals were announced, including at least $7 billion in financing for Brazil’s struggling oil company, Petrobras, as well as an announcement that China’s BYD Co. will build a solar-panel factory in Brazil. How is China’s energy engagement with Latin America evolving? Is the Asian giant beginning to orient more toward Pacific Alliance countries and away from Argentina, Ecuador and Venezuela, which have been the focus of most regional Chinese lending until now?

Jiang Shixue, vice president of the Chinese Association of Latin American Studies in Beijing: China has everything it needs, but needs to import everything it has, as its population size is more than twice Latin America’s. Moreover, its economy has been growing fast, and importing energy from Latin America and other parts of the world is highly necessary. Latin America is rich in energy. Therefore, China’s purchase of and/or investment in the region’s energy sector is a win-win. It is interesting to note that when China imports energy and other kinds of natural resources from Latin America, it is criticized for contributing to the so-called ‘re-primarization’ and ‘re-commodification’ of the region’s economy. However, when China’s economy starts to grow less vigorously, as in the past one or two years, Latin America is concerned that the largest emerging economy’s ‘new normal’ will result in less demand for the region’s energy and other commodities, leading to lower oil prices on the world market and less export earnings. Indeed, if you want to beat a dog, you can easily find a stick! It seems that there is a minor adjustment of China’s strategy of promoting cooperation with Latin America in the energy sector—that is, focusing more on investment, rather than on importation. This adjustment is a natural result of China’s greater efforts at ‘going global’ by making foreign direct investments worldwide. China wants to engage with any country that has the best potential for cooperation in energy. Remember Deng Xiaoping’s ‘Cat Theory.’ In choosing a partner in the energy sector, China would prefer an ideal investment environment, including huge energy reserves, political stability, less resource nationalism and favorable attitudes toward foreign investment. In the age of globalization, competition matters. On the one hand, China needs to compete with the United States, Europe, Japan and others to secure the best investments in Latin America; on the other, every country in Latin America must compete to attract more Chinese capital.

Matt Ferchen, resident scholar at the Carnegie-Tsinghua Center for Global Policy in Beijing: China’s energy engagement with Latin America is likely to retain significant elements of current relationships while at the same time seeking to expand into new areas. China’s most significant and most problematic energy relationship in Latin America is with Venezuela, and this is unlikely to change. Despite the many problems of Venezuela’s oil sector, the country still maintains the world’s largest petroleum reserves, and China has built up a massive, if dysfunctional, loans-for-oil relationship with the country, which will be difficult for either side to unwind. China will also certainly seek to take advantage of low fossil fuel prices to gain further access to sources of oil and gas in its other Latin American energy partners like Ecuador, Brazil, Argentina and Colombia. At the same time, China is looking to expand the type and range of its energy cooperation with Latin America, including in alternative energy sources like solar and wind. Chinese companies have also been active in seeking electricity production and grid investment opportunities in the region, including in countries like Brazil and Chile. As Chinese firms seek deeper energy ties to the Pacific Alliance, they will very likely be unable to leverage state-to-state financing deals like those established with Venezuela or Ecuador but instead will find more success through private investment or possibly new types of public-private partnerships.

Jeremy Martin, director of the energy program at the Institute of the Americas: After a decade that saw enormous economic growth, China’s economy slowed in 2014. The slowdown greatly affected several commodity exporters in Latin America, many of which had been principal partners of China’s early economic and checkbook diplomacy efforts. Moreover, as U.S. foreign policy emphasizes a pivot to Asia, China ramped up its economic diplomacy closer to home with important advances on the Silk Road Economic Belt project. But Premier Li Keqiang’s visit underscores that China has not dismissed its interest in Latin America. Rather, it remains eager to foster trade and economic ties, but in a much more strategic manner than before. Nowhere is this clearer than in the adoption of the Cooperation Plan 2015-2019 between China and the member nations of CELAC. The agreement targets and repeatedly mentions infrastructure development, not just access to energy. And it is a clear nod to the desire on both China and Latin America’s part to shift the nature of its relationship, both in terms of diversifying exports from Latin America to China and where and how China invests in the region. It was not surprising that the avalanche of agreements from the four-country swing placed a heavy emphasis on infrastructure and regional integration projects. The attention on ports, railways and roads throughout the visit points to a shift from what had long been a principal desire to lock up hydrocarbon reserves across the hemisphere. By visiting countries largely on the Pacific Coast and discussion of infrastructure linking Brazil to the Pacific in Peru, the premier’s visit served as China’s own Pacific pivot in Latin America.

Erica Downs, senior analyst for Asia at the Eurasia Group: China’s energy relations with Latin America are changing in line with China’s slower, less energy-intensive economic growth. To be sure, securing oil supplies and upstream investment opportunities for China’s national oil companies will remain one of Beijing’s objectives. But higher priorities include helping Chinese providers of capital goods hard hit by the country’s economic slowdown and firms in sectors earmarked for greater international expansion, notably high-speed rail and nuclear power, find new markets abroad. The motivations behind Chinese lending to Petrobras illustrates this shift. When China Development Bank extended a $10 billion oil-backed line of credit to the Brazilian oil company in 2009, as part of a spate of ‘loans for oil’ deals inked with exporters around the world, enhancing China’s oil supply security was a key driver. Fast forward six years. An important objective of the $10 billion that Chinese banks agreed to lend to Petrobras this year is facilitating the export of Chinese equipment. Another $2 billion from the Export-Import Bank of China is for the purchase of marine equipment from China, while $3 billion from the Industrial and Commercial Bank of China is to lease marine equipment, while $3 billion from ICBC is also for marine equipment. Although the terms of China Development Bank’s $1.5 billion and $3 billion lines of credit are not known, it would not be surprising if some of this money is tied to buying from China; $3 billion of the $10 billion line of credit issued in 2009 was earmarked for the purchase of Chinese oil equipment. Moving forward, China will look for opportunities export power generation technologies and equipment to Latin America. Beijing is especially eager to sell abroad its partially homegrown nuclear power technology, and plans to build two nuclear power plants are a case in point.

Beatrice Rangel, member of the Advisor board and director of AMLA Consulting in Miami Beach: While its strategic play has become visible over the past decade, the truth is that China had made the decision to secure food and energy imports from Latin America by the end of the 1980s. At that point in time, growth rates were double-digit, and urbanization was beginning to take off. Given the long-term view China takes on public policy, the country’s leadership, led by Deng Xiaoping, designed a foreign policy grounded on the foundations of low price exports, energy, rare earth elements and food imports, and trade financing. Over the last two decades, these pillars have created a complex web of exchanges with the region that account for the tripling of trade. In contrast to the United States where investment decisions are guided by short-term gains, China takes a long-term view seeking to secure food, energy and industrial inputs for 50 years or even a century from today. The expansion of its economic footprint can thus be considered a part and parcel of its national security policies. Crucial to these policies is the China Development Bank, which lends billions to Latin American countries. This financial institution provides resources to projects that range from extractive industries to construction. Construction projects are creating the regional infrastructure network aimed at securing trade routes and development inputs. And while initially China’s door into Latin America were the so-called ALBA countries, today Colombia, Peru and Mexico lead the way in terms of resource assignment and credit priorities.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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