China seeks natural resources in Latin America

Feeding the dragon

02 November 2009 00:00  [Source: ICB]

Latin America's rich resources have been attracting a great deal of interest from China

CHINA FIRST went to Africa to satisfy its thirst for natural resources. Now Latin America is on the itinerary. Will China get the oil, tin, iron and other natural resources that it needs to maintain a growth rate that is not only the envy of the world but also the foundation of its uncertain social stability?

Chris Eyles

Africans initially considered China's interest a boon to the economically stagnant subcontinent, but perceptions became more complex once critics began to question the long-term benefits of the relationship, using the term "Chinese neocolonialism."

Wary of provoking the same response, China is treading more softly in Latin America. Ties have nonetheless developed quickly. For example, trade between Argentina and China reportedly grew from $1.85bn (€1.25bn) in 2001 to $12.4bn in 2008, while trade between Chile and China grew from $2.1bn to $15.3bn. Trade between China and Latin America as a whole grew by a factor of 10 between 2000 and 2007, according to the US Congressional Research Service, and reached $142bn in 2008.

EXPANSION OPPORTUNITIES
These figures reflect opportunities for economic expansion, but also highlight China's threat to Latin America, whose attractions as a site for low-cost manufacturing have been overshadowed by China's emergence as the world's factory. Since 1985, Latin America's merchandise exports have increased fivefold; but China's have increased by 20 times and now exceed Latin America's by 15%, according to a recent World Bank report, China and India's Challenge to Latin America.

Foreign direct investment (FDI) has shifted accordingly, and indeed, even Latin American companies have invested more in China - $20bn - than Chinese companies have sent in the opposite direction.

Officially, China's total FDI into the region was $22bn through 2006, but most of that actually went to shell companies in the Cayman Islands and other offshore financial havens, to be reverted back to China, while taking advantage of tax breaks for nominally foreign companies.

China's interest in Latin America has always been apparent. In November 2008, however, China made its objectives explicit with in its first white paper on the region, which referred to "abundant natural resources, a good base for economic and social growth and tremendous development potential." China's voracious manufacturing sector presents Latin America with a tremendous opportunity. Oil, iron, tin, copper, lead, zinc, nitrates, gemstones and numerous agricultural commodities are major exports.

But many Latin Americans, sensitized by their colonial heritage and authoritarian political history and aware of China's activities in Africa, worry that the very size of the opportunity could drive out manufacturing and other dynamic, higher-value industries in favor of natural resource-based ones, distorting the economy, increasing wealth disparities and weakening democratic institutions.

Some Latin American industries and countries have suffered from China's rise, according to the World Bank study - for example, the textiles and electronics industries in Mexico, and the shoe industry and Brazil. On balance, however, the benefits have outweighed the disadvantages, says the World Bank, which notes that China is both an export market and a source of financing.

Governments throughout Latin America seem already to have drawn the same conclusion, and China and Chinese companies have also struck deals all over the region.

For example, China this year gave Ecuador $1bn up front in exchange for access to 96,000bbl/day of crude at a price discount of 25% to 28%, according to US energy industry publication The Oil Daily. China also extended a deal with Venezuela that involves an $8bn payment for delivery of up to 253,000bbl/day of fuel oil to China through 2012. The hungry dragon also loaned $10bn to Brazilian state oil company Petrobras in exchange for oil shipments of 150,000bbl/day in 2009 and 200,000bbl/day over the next nine years. Acquisitions are figuring heavily, as well. In March, a consortium of Chinese metals and minerals producer China Minmetals and compatriot Jiangxi Copper bought Northern Peru Copper to for $408m. In September, aluminum producer Chinalco announced that it was going forward with the $2.2bn Toromocho copper project in Peru.

In August, China National Petroleum Corp. and China National Offshore Oil Corp. were rumored to be pursuing the $17bn acquisition of YPF, the Argentina unit of Spanish energy firm Repsol.

Some deals have been opposed using nationalist arguments. Critics charged that Venezuela's oil deals favor China. On the other hand, Latin America has always chafed under the influence of the US, so stronger relations with China actually serve nationalist interests, as well. China has been careful not to challenge US dominance in Latin America directly, but the balance of power is changing, a development hastened by the financial crisis, which has called the strength and reliability of US power into question.

GROWING ROLE
Signs of China's new status in Latin America include the new membership of China's central bank, the People's Bank of China, in the Inter-American Development Bank, to which it has pledged $350m. China has established free-trade agreements with Chile and Peru, and earlier this year, Brazilian President Luiz Inacio Lula da Silva proposed working with China to move away from the US dollar as the currency for trade.

Additionally, in August, the director for international trade and integration of the Economic Commission for Latin America and the Caribbean said China had become a "privileged partner of Latin America." The actual extent and significance of the privilege remains to be seen, but there is no doubt that a new era has dawned for Latin America's place in the world.

Read Paul Hodges' Chemicals & the Economy blog

By: Clay Boswell
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