Over the past decade, China-Latin America relations have boomed, aided in large part by China’s increasing demand for the region’s plentiful natural resources.
But as Matt Ferchen highlights in this Q&A, China’s increasing commercial and diplomatic ties with Latin America are fraught with political and economic risk.
These risks are brought into sharp relief by the challenges China faces in Venezuela as President Hugo Chávez’s health falters. Changes in China’s growth model could alter the China-Latin America dynamic further—with important repercussions for China’s presence in the region.
- What is China’s tolerance for risk in its trade and investment relationships with developing countries?
- What key factors influence China’s trade and investment relations with Latin America in particular?
- What are the main political and economic risks China faces in Latin America?
- What are the prospects for China’s political and economic relations with Venezuela?
- What other Latin American countries pose significant risk for China?
- If China’s economic growth slows or its development model changes, how will this affect China’s relations with Latin America?
What is China’s tolerance for risk in its trade and investment relationships with developing countries?
As China has expanded its trade and investment relations with developing countries in Africa and Latin America over the last ten years, both Chinese and international analysts have observed that Chinese companies have a relatively high tolerance for risk. In Sudan, Angola, and Zimbabwe, for example, Chinese firms have ramped up investments despite relatively risky political and investment environments. In Latin America, the best example of this would be Venezuela.
There is no consensus about what drives this perception of China’s higher tolerance for risk, but two reasons are often cited. Some argue that China is a latecomer to international energy markets and therefore has little choice but to engage with relatively high-risk countries. The other line of argument is that Chinese government support provided to state-owned enterprises boosts these firms’ tolerance for risk. In large part, this is due to the preferential access to credit and other assurances of state support that these enterprises receive.
The recent cases of Libya and Myanmar demonstrate the challenges China faces in assessing political risk. In both, China was confronted with the sudden need to understand and respond to internal political changes that challenged the Chinese economic and diplomatic presence within those countries.
As Libya was caught up in the Arab Spring and the opposition rose up against former Libyan leader Muammar Qaddafi, China faced concerns about its investments in the country. It worried that tens of billions of oil and construction contracts might be at risk, not to mention having to rescue tens of thousands of Chinese citizens.
China has been wrong-footed by the dramatic domestic political and foreign policy transformation made by Myanmar’s government over the last two years. China was particularly concerned about the Myanmar military government’s shutdown of a major Chinese investment project, the Myitsone Dam, and at the same time the diplomatic opening to the United States.
Developments in places as far away as North Africa and as near as Southeast Asia have caused deep anxiety among Chinese foreign policy analysts. As a result, the Chinese government and its firms have begun to rethink how to assess foreign political risk, especially in developing countries. There is a growing awareness in the Chinese government and companies of the need to better assess, anticipate, and react to these kinds of changes.
Chinese demand for raw materials has been the main driver of the increasing amount of exports traveling from Latin America to China in the last decade. These exports have been divided into mineral, energy, and agricultural products.
But in the last year, prices for key commodities, like Brazilian iron ore and Chilean copper, have been especially volatile with iron ore prices plummeting in 2012 only to make a dramatic recovery in recent weeks. Some of these results have been due to supply-side changes but much also has to do with the volatility of China’s demand. This demand depends on a combination of domestic market and political factors in China.
As a result, many Latin American countries are concerned about the future of their mining exports to China. Chinese firms will continue to be interested in oil deals in Latin America, but this too is an increasingly complicated story.
Opportunities for increased China-South America cooperation are plentiful in the area of agricultural trade and investment. China’s desire for “win-win,” complementary ties with Latin America is most likely to be fulfilled in the agricultural sector since the demand of the growing Chinese middle class for safe and healthy food products will only increase. Given the abundance and productivity of and room for growth in South American agriculture, this trade dynamic is a perfect match.
The most obvious example of booming agricultural trade with China is soy, which is largely grown in the Southern Cone countries of Brazil, Argentina, and Paraguay. Indeed, soy and soy products have become all of these countries’ number-one or number-two export to China. Beyond soy, there is a range of South American agricultural goods—from sugar to beef—that possess vast room for growth.
Nevertheless, Chinese interest in expanding investment into South American agriculture has also run into obstacles in Argentina and Brazil, where foreign ownership of land touches on sensitive concerns about sovereignty. In those countries, existing laws have been reinterpreted to make foreign, and in particular Chinese, investment subject to increased scrutiny.
In the past decade China’s economic ties with Latin America have experienced a boom, based on rapidly expanding trade and more recently on increased Chinese investment. The region has also been largely free from major controversies or setbacks on the scale of the events in Libya or Myanmar.
The primary political and economic risk China faces in Latin America is in Venezuela. Despite Venezuelan President Hugo Chávez’s often-controversial domestic and international policies, China’s investments and loans in Venezuela have rapidly increased in the last ten years, with Chinese banks lending Venezuela more than $42 billion since 2005.
For many observers, this implies that China is a major supporter of Venezuela and of Chávez himself, even if just financially. Since there is no other political figure in Latin America quite as controversial as Chávez, China faces a unique challenge in managing its trade and investment as well as diplomatic position there. Chávez’s deteriorating health condition underscores the precariousness of China’s position.
Argentina is also a source of potential economic and political risk for China. This concern is largely based on the Argentine government’s high-profile nationalizations of foreign assets last year, including the nationalization of a Spanish oil company. This has caused some Chinese analysts to worry that Chinese investments in Argentina could be nationalized, too.
After Chávez’s reelection as Venezuelan president in October, many Chinese observers publically declared it a positive development for China-Venezuela relations. They argued that existing loan and energy deals between China and Venezuela would be extended and deepened.
For his part, Chávez has expressed interest in expanding ties with China, including exporting ever-increasing amounts of Venezuelan oil. But the future of China’s relationship with Venezuela is complicated because it rests so clearly on Chávez himself.
Chávez’s ongoing battle with cancer is the immediate cause for anxiety. If Chávez were to die or be unable to govern the country due to illness, then there is a crucial question as to who will govern instead and in which direction they will take Venezuela domestically and internationally.
Chávez has designated Vice President Nicolas Maduro as his successor. But if a new election were called, there is a real possibility that the opposition candidate would win. If Henrique Capriles, who ran against Chávez this past October, wins, China could face a number of unpredictable outcomes.
Capriles has declared that he would honor the existing agreements China has with Venezuela, in particular the “loans for oil” agreements, in which the China Development Bank has provided fixed-term loan tranches between $4 and $20 billion, which are repaid in sales of Venezuelan oil to China. But many within the opposition are unhappy with how these agreements have been tied to a larger strategy involving Chávez’s use of the national oil company, PDVSA, to further his domestic and international agenda. They believe the future of PDVSA has been mortgaged to China through these agreements.
There is thus also a possibility that beyond simply publicizing the details of previous agreements, a future Venezuelan government may seek to more comprehensively restructure the terms of oil sales to China.
Currently, China-Mexico relations are probably the most difficult among China’s relations with Latin America. In part this is due to a large trade deficit that Mexico has with China. Mexico does not export large volumes of raw materials to China as Brazil and Chile do, and it perceives China to be a strong competitor for exports to third markets like the United States. This has led to a great deal of tension in the China-Mexico relationship.
There is a great deal of interest on both sides in improving this relationship. The recent election of a new president in Mexico—Enrique Peña Nieto of the PRI (Institutional Revolutionary Party)—may open up some opportunities.
Since China-Mexico relations have been relatively difficult, room for improvement is vast. Mexican manufacturing competitiveness has been steadily improving, and as labor costs in China rise, it may make increasing sense for China to invest more in Mexico. This is particularly the case if Chinese firms see that investment in Mexico can be leveraged to take advantage of the vast U.S. market to the north.
If Chinese investment starts to go into more value-added manufacturing in Mexico, this will benefit relations with Mexico and potentially offer a sign of hope to other Latin American countries seeking similar types of Chinese investment.
In Colombia, the recent peace talks between the government and the FARC guerrillas highlight a different challenge for potential Chinese investment. China has shown an interest in Colombian land for increased agricultural investment. China is also involved in discussions about a proposed project to build oil and gas pipelines from Venezuela through Colombia to the Colombian coast.
Doing so would mean greater exposure of Chinese companies and people to Colombia’s complicated rural conflict. China’s long-standing policy of noninterference in other countries’ domestic politics may prove inadequate to deal with the practical challenges of deepening economic ties in Latin America.
If China’s economic growth slows or its development model changes, how will this affect China’s relations with Latin America?
As China seeks to reform its development model by moving away from a reliance on exports and government-led investment, Latin America will face important and complex repercussions.
The recent decline in China’s economic growth rate has raised concern about decreasing Chinese demand for minerals. Some have linked decreasing Chinese demand to the decline in the price of those commodities. Others argue that overall Chinese demand for these minerals will remain strong as China continues to urbanize.
Ultimately, the future health of mineral trade between South America and China will depend on the state of China’s domestic economy.
Chinese leaders have declared their intentions to reduce government investment in heavy industrial production and infrastructure development, which could mean a further relative decline in demand for raw materials.
At the same time, the new Chinese leadership has emphasized that urban development will be key to maintaining Chinese economic growth. That could mean a continuing demand for raw material inputs needed for property development as well as urban consumer products like cars and white goods.
If mineral and agricultural exports from Latin America to China have been at the heart of booming trade and investment relations over the last decade, a changing China is likely to affect these patterns. Important companies like Brazil’s Vale may be in for a rough ride as Chinese demand for iron ore ebbs and flows, but Brazilian (and other Southern Cone) agricultural producers may benefit from rising demand from China’s growing middle class consumers. And as China seeks to expand and diversify its outbound foreign direct investment, Latin America could be the beneficiary of the country’s changing development model.
Either way, Latin American countries should be ready to adjust to changes and unpredictability in their relations with China.