Publish in Perspectives - Thursday, January 21, 2021
The China Construction Bank opened its office in the Torre Titanium in Santiago, Chile (the highrise seen left in the photo above). (Photo: Denseel)
Chinese banks are expected to continue to boost activity in Latin America.
BY FINANCIAL SERVICES ADVISOR
In recent years, Chinese banks have increased their presence in Latin America. Among them is China Construction Bank, which Chile authorized in 2016 to operate there. Five years ago, China’s central bank appointed the lender as the clearing institution for the yuan in Chile, where it “could serve as a base to finance projects,” then-Chilean Foreign Minister Heraldo Muñoz said at the time. To what extent are Chinese commercial banks making inroads in Latin America and the Caribbean? How would greater integration in financial services between China and Latin America serve China’s goals, and how would it affect Latin America? In the years ahead, how much will Chinese financial services firms grow their presence in Latin America and the Caribbean, as opposed to financial firms from other locations, such as the United States and Europe?
Thomas F. Morante, member of the Financial Services Advisor board and attorney, and Yani R. Contreras, consultant, both at Carlton Fields: Although not uniform throughout Latin America, the presence of Chinese banks in various countries has facilitated Chinese investment in recent years. Chinese bank investment in the region appears to have been primarily driven by China’s interest in financing Chinese companies participating in infrastructure projects. In the past 15 years, Chinese companies have been involved in 86 infrastructure projects focused on a few countries, such as Argentina, Brazil and Peru, although fewer than 15 percent of these projects are located in Mexico, Central America and the Caribbean. The Industrial and Commercial Bank of China (ICBC) and the Bank of China Mexico are the only two Chinese banks in Mexico, having established their presence during the Peña Nieto government at a time when legislative reforms attracted the interest of foreign investors in many sectors. ICBC recently announced plans to raise $300 million through a securities offering on the Mexican stock exchange to secure funding for lending to various industries including energy, infrastructure, telecom, automotive, food, oil and gas. It is anticipated that these banks would also provide financing to Mexican companies such as Cemex and Pemex in connection with future projects.
Perhaps Chinese banks are reluctant to open in Mexico due to the cancellation of several government projects previously awarded to Chinese companies, such as the expansion of the Chicoasén hydroelectric plant in Chiapas, the Dragon Mart tourism complex in Quintana Roo and the high-speed train between Mexico and Querétaro to have been developed by China Railway Construction Corporation. Whether additional Chinese banks will enter Mexico if U.S. banks choose not to finance Mexican companies that received financing from Chinese banks is an open question. Perhaps that decision might be influenced by the USMCA’s ‘Non-Market Country FTA’ provision (32.10), giving signatories the right to terminate the USMCA if one of the parties enters into an FTA with a nonmarket country (that is, China).
Margaret Myers, director of the Asia & Latin America Program at the Inter-American Dialogue: The range of Chinese financial actors operating in LAC has quickly expanded from just policy banks—China Development Bank and China Eximbank—to a much wider variety of institutions. These include four commercial banks, state-owned investment corporation CITIC, private equity funds and other actors. Activity from China’s policy banks has markedly decreased over the past five years, with just a slight increase in 2020—the result of a $2.4 billion loan to Ecuador. Engagement from other financial actors has grown, however, especially since the Belt and Road Initiative began to take shape in 2013. China’s commercial banks have thus far provided financing (often as part of a syndicate) for more than 50 projects across the region, though mostly focusing on Argentina, Brazil and Chile.
Some of this lending, though not all, supports Chinese company activity in the region, especially in certain countries’ renewable energy and mining industries. In contrast to commercial banks ICBC and Bank of China, China Construction Bank’s activity in LAC is mostly limited to clearing renminbi as part of a much broader effort to internationalize China’s currency. With this goal in mind, China also signed currency swap lines with more than 30 central banks, including those in Argentina, Brazil and Suriname. Beyond all of this are Chinese institutions’ efforts to provide advisory services, insurance and other financial services. All of this activity is expected to grow in the coming years, assuming a generally healthy economic outlook in China and based on conditions in LAC. But more extensive international financial connectivity—a purported goal of the Belt and Road Initiative—continues to be limited by China’s enduring concerns about opening its financial markets to foreign investment.
Jorge Heine, research professor at the Pardee School of Global Studies at Boston University and former Chilean ambassador to China: The China Construction Bank’s (CCB) clearing mechanism established in Chile in 2015 has not been used much, as business continues to rely on the longstanding Bank of China (BOC) one in Hong Kong.
That said, in 2019, financial inflows to Latin America from Chinese policy banks reached a one-decade low of $1.1 billion. In turn, in 2020, mergers and acquisitions by Chinese companies in LAC reached $7.7 billion, more than by the United States and the European Union combined. Of these, the most significant was State Grid’s acquisition of Chilean power distribution company CGE.
The presence of Chinese commercial banks such as ICBC, CCB, BOC and Haitong Bank in places including Argentina, Brazil, Chile, Mexico, Panama and Peru, mostly with subsidiaries rather than branches, speaks to this trend. As trade, the original driver of Sino-LAC links, is complemented by foreign direct investment and (diminished) financial cooperation, Chinese commercial banks now step up to the plate to provide more disciplined project financing. When some Western banks, such as HSBC and Deutsche Bank, left various LAC countries, they provided an opening for China. ICBC, CCB and BOC are among the top four banks in the world in terms of assets and have much to offer. With Chinese investment in the region shifting from extractive activities to services, transport, energy, information and communication technologies, and infrastructure, areas that made up half of Chinese investment in LAC in 2016-2019, these banks should help enhance growth and development. Some studies showing that Chinese banks in LAC devote a greater share of their operations to lending and borrowing than U.S. banks, which are more focused on trading, would seem to corroborate this.
Jiang Shixue, professor and director of the Center for Latin American Studies at Shanghai University: In the past, when the United Kingdom and the United States developed their economic relations with Latin America, bilateral trade came first, followed by investment and financial services. China’s economic relations with Latin America have been going on with the same pattern: trade first and then investment and financial services. On the one hand, with its rising economic strength, China can make overseas investment anywhere in the world; on the other, due to economic and cultural factors, Latin America’s capital accumulation is weak. Therefore, Chinese investment in Latin America is a win-win story. In the future, both sides can be expected to make more efforts to implement the Belt and Road Initiative. One of the five components of the initiative is financial cooperation. So more Chinese banks will step into Latin America, bringing more capital and financial services to the region. In this process, four issues are important: First, until now, Latin American banks have failed to take advantage of China’s financial market as the presence of Latin American banks in China is limited, if not nonexistent. Second, Latin America needs to improve its investment environment for Chinese banks. Third, the United States and China might try to create synergy from América Crece and the Belt and Road Initiative. Fourth, the United States should take a positive position toward the increased financial cooperation between China and Latin America. After all, a prosperous Latin America benefits the United States.