Expanding Chinese Global Reach: The Latin American Resource Game

2012-12-20 by Richard McCormack

The Chinese government is setting up shop in America’s back yard.

Chinese state owned enterprises are pumping billions of dollars of direct investment into energy and mining projects in Latin America in “an attempt to strengthen aspects of its economy considered to be strategic in the long run,” according to Enrique Dussel Peters, a researcher at the Global Development and Environmental Institute at Tufts University.

Chinese foreign direct investment (FDI) “is qualitatively different” from other countries’ FDI, says Peters. Not only does the majority of Chinese investment (87 percent) in Latin America come from Chinese government owned enterprises, but it has been pursued with a “great level of coherence [and] a national strategy for the short, medium and long term.”

While China has a strategy for its investment, that is in contrast to Latin American countries which are recipients of the investment. None of them have coherent economic strategies for the short, medium and long term, “much less one that is specifically geared toward the attraction of FDI,” Peters notes.

Overall, 50 percent of China’s global FDI has been going into mining and oil.

But in Latin and Central America, 99.6 percent of Chinese FDI in 2010 and 2011 was in energy and mining.

Latin America was the second largest recipient of Chinese overseas FDI between 2000 and 2011, with only Hong Kong receiving more.

“Massive public overseas foreign direct investment generates important challenges from an economic perspective,” says Peters. While China places numerous restrictions on FDI headed into its own country (by not allowing investments in strategic industrial sectors and requiring mandatory technology transfer), no such requirements are being made by Latin American governments.

“In the case of public overseas foreign direct investment [from China], strategic, longterm criteria involving politics [and] national security may prevail, therefore moving beyond a strictly microeconomic approach,” says Peters. “

Public FDI can generate misunderstandings, suspicions and political responses within the receiving countries, and particularly among ‘sensitive’ sectors for reasons of employment, technology, national security, cultural preservation, etc.

The fact that public Chinese companies are starting to own mines as well as manufacturing and service companies means that conflicts within labor, environmental and commercial spheres must be considered, given that Chinese involvement in these areas has never been experienced to such an extent internationally or in Latin and Central American countries.”

Chinese Mine in Peru — A Chinese employee of Shougang with his Peruvian teammates before a soccer match. Chinese managers live in a district called Playa Hermosa (Beautiful Beach). They drive sport utility vehicles and talk to subordinates through translators. They eat meals at their own cafeteria, generally avoiding mixing with Peruvians in town. Credit: Tomas Munita for The New York Times

At home, Chinese companies are being pressured to make direct foreign investments, Peters notes. The Chinese government’s “Going Global Strategy” remains in full force, since the country must do something with its $3 trillion in reserves. Investments that boost Chinese competitiveness are viewed as “valid strategy for fulfilling macroeconomic as well as microeconomic objectives, such as reducing international reserves and obtaining new technologies, raw materials and energy sources,” says Peters.

Chinese companies making direct overseas investments can be exempt from paying value added taxes for five years. They receive funding from the Export Import Bank of China as well as the National Development and Reform Commission (NDRC).

Every foreign direct investment made by a Chinese company as well as any subsidiary is approved by the NDRC and must further be approved by the Chinese State Council.

“It is clear that the function of the NDRC is to coordinate and encourage FDI through specific processes, which is why the NDRC demands to be informed of all negotiations with overseas counterparts and — contrary to a merely informative process — have the final say regarding overseas foreign direct investment approval.”

All of these government processes were affirmed in China’s Twelfth Five Year Plan, which encourages the growth of new industries — such as environmental protection, advanced machinery, state of the art information technology, renewable energy, new materials and alternative energy for automobiles.

China wants these industries to grow from their current 5 percent of GDP to 8 percent in 2015 and 15 percent in 2020. Chinese FDI encourages the development of these domestic industries.

Chinese Peruvian Mine — In Ruta del Sol a shantytown in the mining town of San Juan de Marcona, residents say the Chinese are exploitative.

Chinese overseas foreign direct investment has been growing substantially, from $916 million in 2000 to $22.5 billion in 2007, to $56 billion in 2009 and to $68 billion in 2010.

Specifically, Peters found that there were 95 Chinese investments in Latin America between 2000 and 2011, averaging $464 million each. Only eight of the investments were carried out by private Chinese companies.

Moreover, 88 percent of all the major investments made by China were in Latin American companies owned by governments, again, mostly in oil, natural gas and natural resources.

Almost 90 percent of the total Chinese investment in Latin America occurred in 2010 and 2011, and investment in raw materials “has increased to more than 80 percent since 2007, while involvement in other areas has drastically diminished,” says Peters.

This is taken from the Study: “Chinese FDI in Latin America: Does Ownership Matter?”

DP33DusselNov12

Also see the following:

http://www.ase.tufts.edu/gdae/Pubs/rp/Dragonintheroom.html

This article is re-printed from Manufacturing News, December 18, 2012.

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