China Looks South: Problematic Investments in Latin America

China’s economic involvement in Latin America reached an all-time high last month when Beijing was able to gain a large stake in the Brazilian petroleum market. The deal, brokered by Chinese petroleum company Sinopec, allows the Spanish firm Repsol to turn 40 percent of its Brazilian oil stake over to the Chinese state corporation. Worth USD 7.9 billion[1], the agreement has prompted other countries in the Western hemisphere to reevaluate China’s ever-changing economic and political role in Latin America. Recent events highlight the seriousness of China’s drive to stake out a major economic presence in Latin America, as well as a readiness to use economic methods in order to achieve its goal.

China Acquires Brazilian Oil: Part of a Persuasive Pattern

Brazil holds one of the largest reserves of oil in the world, totaling an estimated twenty billion barrels in land and offshore deposits.[2] The majority of Brazilian petroleum remains under the control of Petrobras, the state-funded oil producer. In 1997, the Brazilian government began to take steps to overhaul its oil industry and revitalize its economy. In addition to creating such regulatory bodies as The National Petroleum Agency (ANP), and the National Council of Energy Policies, the government instituted “Law N. 9.478,” which opened Brazil’s oil to foreign investment. These reforms have attracted the attention of a number of foreign investors to the country’s lucrative oil resources.

As China’s second largest oil company, Sinopec is no stranger to extensive foreign investments; in 2009, the company purchased Addex Petroleum, based in the United Kingdom, for USD 7.2 million,[3] thereby gaining reserves in both the Middle East and Africa. China’s recently increased interest in foreign oil is to be expected, considering that the country’s dramatic economic rise as a consumer society during the past decade has created an insatiable demand for energy resources. Indeed, China’s GDP for the second quarter of 2010 surpassed that of Japan, which has long dominated trade between Asia and Western nations. Chinese trade with the West totals USD 1.337 trillion, which has transformed China into the second largest economy in the world.[4] Sinopec’s increasingly aggressive acquisition of foreign oil reserves reflects the Chinese government’s serious commitment to expanding overseas influence, and is a cornerstone of China’s global economic and political strategy.

China Replaces U.S. in Latin America?

Since developing stronger ties with Latin America, Chinese imports from the region have increased by an extraordinary 600 percent, totaling USD 21.7 billion in 2004.[5] China’s mounting interest in Latin American markets is an attempt to meet the demands of its ever-rising population and economy, which grew an unprecedented 25 percent over the same seven-year period in which the U.S. economy (currently Latin America’s largest trading partner) grew 20 percent.[6]

Some do not consider Beijing’s interest in Latin America as an entirely positive development. The U.S. is closely monitoring China’s expanded role in Latin America, a region that it has historically considered its “backyard.” Like many developing countries, China undervalues its currency so as to encourage rapid economic development that is frequently associated with cheaper trade.[7] This move has generated much criticism of the Chinese Premier Wen Jiabao for his reluctance to increase the value of the Yuan, given its now stronger economy and market shares.[8] Consequently, China has been able to formulate agreements and offer interest at rates that are lower than other competing developed countries, including the United States. A Washington Post article reported that “in some cases, China has handed out billions of dollars at less than 1% interest; under OECD (Organization for Economic Co-Operation and Development) rules…the United States must lend at market rates.”[9] Thus, China remains a more logical partner for many Latin American countries struggling to become greater players in the global economy.

China’s influence in Latin America’s economy has expanded through other, more indirect, avenues as well. China recently loosened Latin American travel restrictions on its citizens, a decision that will, undoubtedly, promote further economic ties between the two. China’s latest dealings have been described as part of an “aggressive push to invest in industries overseas…to bolster the country’s image and political influence.”[10] This is particularly evident in the case of Brazil. China’s investment in various sectors of the Brazilian economy, such as a large port factory in Sao Paulo, is strategically fashioned to boost the volume of Chinese exports to Brazil. Constituting the so-called “BRIC” countries, along with Russia and India, Brazil and China are predicted to be increasingly important players on the global economic stage. In a sign of things to come, China replaced the United States as Brazil’s largest trading partner at the beginning of 2009.[11]

The Political Persuasion: China’s Effect on the Americas

In addition to its heightened economic influence in Latin America, China’s political presence is growing in the region as well. As China continues to grow as a global power, the topic of Taiwan’s sovereignty becomes the elephant in the room. Currently, twelve Latin American countries still recognize Taiwan’s sovereignty. The loyalty of these countries, which include Panama, Paraguay, and Guatemala, could shift away from Taiwan as China invests more time and money in the region and plays a stronger role in their economic growth. A shared concern among those that recognize Taiwanese sovereignty is that Beijing still “clearly wishes to diminish Taiwan’s formal and informal ties to Latin America.”[12] If China continues to gain political clout in Latin America this fear may prove to be valid and become a contentious issue in the region between those who favor a Chinese political and economic presence and those who do not.

Many Latin American leaders are carefully weighing the positive and negative political implications that China’s growing involvement may have in the region. In March, Ecuadorean President Rafael Correa “compared China to the worst imperialist corporation … and refused to bend on terms for financing a $1 billion hydroelectric dam.”[13] Despite initial opposition, Correa eventually agreed to China’s conditions after recognizing that the dam project would fall through if he continued his unyielding insistence for more favorable terms. Correa’s climb down demonstrates the overbearing power that China can exert on Latin America’s governments.

Another concern is that China’s increased interest in the region, largely driven by its need to secure new markets for its products, will not have tangible benefits in Latin America. Brazil’s outgoing President Luiz Inácio Lula da Silva hinted at his skepticism over the potentially one-sided nature of the Sino-Latin American relationship this past July: “the truth is that sometimes they win a mine contract and they bring all these Chinese to work, and this doesn’t generate opportunity for work in that country.”[14] This concern was previously raised in 1996 when Brazilian Ambassador to Beijing, Roberto Abdeneur, suggested that China might be “more of a challenge to Brazil than an opportunity.”[15]

For Better or for Worse: A Marriage of East and West

China’s growing influence in Latin America will continue to raise questions regarding its role in the region’s economic development. If the past decade is any indication, China’s unprecedented power will continue to bring considerable economic growth to the Latin American region. Yet valid concerns exist regarding China’s potential to misuse its influence. At present, a number of Latin American leaders’ are seeking greater independence from the United States. It remains to be seen, however, whether China’s increased presence in Latin America will aid these efforts or simply transfer external power from one economic giant to another.

References:

[1] http://technews.tmcnet.com/topics/associated-press/articles/106321-repsol-sells-stake-brazil-unit-71b.html

[2]http://www.country-data.com/cgi-bin/query/r-1744.html

[3] http://www.thefreelibrary.com/Sinopec+buys+Addax+for+7.2+billion+US+dollars-a01611909386

[4] http://www.businessweek.com/news/2010-08-16/china-gdp-surpasses-japan-capping-three-decade-rise.html

[5] http://italy.usembassy.gov/pdf/other/RS22119.pdf

[6] http://129.3.20.41/eps/dev/papers/0512/0512002.pdf

[7] http://online.wsj.com/article/SB10001424052748704689804575536022547062314.html

[8] http://www.investopedia.com/articles/07global_trade.asp

[9] http://www.washingtonpost.com/wp-dyn/content/article/2010/07/25/AR2010072502979_3.html?sid=ST2010092006580

[10] ibid. Washington Post.

[11] ibid. Washington Post.

[12] http://carnegieendowment.org/files/latin_leap.pdf

[13] ibid. Washington Post.

[14] ibid. Washington Post.

[15] ibid. Washington Post.