Economy, Foreign Policy

A new age for China in Brazil and South America?


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by Luiz Pinto

China is unstoppable. Within less than a year, Beijing-led initiatives pledged to mobilize US$477 billion to enhance South-South cooperation and finance trade, infrastructure and industrial projects overseas. High-profile ventures such as the New Silk Road and BRICS-sponsored projects are likely to benefit most.

While figures should be taken cautiously, the trend has clearly settled. Long-term finance for international project development is promptly leaning eastwards. The newly founded Chinese-sponsored development and finance institutions and funds are expected to deploy around US$ 249 billion in Asia, Africa, Latin America, Eastern Europe and the Middle East within a 7-year period.

Yet, while such disbursements will fall short of the overall gap of US$10 trillion to finance infrastructure endeavors in emerging and frontier markets, it will likely outpace the US$215 billion of total loans expected to be directed to infrastructure by traditional multilateral institutions such as the World Bank, the Inter-American Development Bank and the Asian Development Bank during the same period.

Moreover, this “big push” will probably foster the reshaping of global trade and the reinventing of South-South business. Emerging market multinationals are going to face strong incentives to undertake joint ventures, struck mergers and acquisitions, and establish strategic alliances with their Chinese peers.

The recent visit of the Chinese Premier Li Keqiang to Brazil, Peru, Chile and Colombia is part of this wider trend. Indeed, China has promised to mobilize US$75 billion to fund infrastructure and industrial projects within Latin America in the coming years, including funds under the China-Latin American and Caribbean Countries Cooperation Plan and a fund to finance infrastructure projects in Brazil.

MULTILATERAL
NDB 100
BRICS CRA 100
AIIB 100
Silk Road Fund 40
REGIONAL
China-CELAC 35
BILATERAL
ICBC-Caixa Fund  20
CNDRC-Brazil Fund 20
PBOC INJECTION “ONE BELT, ONE ROAD”
CDB 32
EximBank 30
TOTAL 477

Capital mobilized for China-led initiatives (US$ billion)

While Chinese involvement in infrastructure and industry in Latin America is no big news, at least three features bring new light to the recent initiatives. First, Chinese undertakings in Latin America now have a broader geopolitical content, being envisioned to balance the U.S.’s strategic pivot to Asia and support the Trans-Pacific Partnership (TPP).

Second, the Chinese economic slowdown and existing problems with Beijing’s financial diplomacy urged for changes in the country’s “Go Global” policy. Financial cooperation modeled merely as bilateral “resources for infrastructure” deals are expected to give room to more sophisticated projects combining newly founded multilateral development finance institutions, regional initiatives, and traditional Chinese players such as policy banks, commercial banks and contractors. China has been trying to push this new approach to Latin America since the realization of a forum with the Community of Latin America and Caribbean States (CELAC) in July 2014.

And last but not least, Brazil’s “perfect storm” of political scandals and economic crisis are opening unprecedented opportunities for further expansion of Chinese interests in the seventh largest but one of the most closed economies in the world.

Brazilian officials had often been cautious about Chinese investments in strategic sectors such as infrastructure and energy. However, international capital markets distrust and fiscal consolidation are increasing the competitiveness of Chinese solutions in Brazil. On April 1, 2015, when debt markets were still waiting for audited financial statements of crisis-torn Petrobras, the China Development Bank (CDB) provided a US$3.5 billion credit line to the state-controlled company. In May, during Keqiang’s visit to Brazil, Petrobras contracted another US$3.5 billion credit line with CDB and China EximBank. Should Brazil’s National Petroleum Agency (ANP) organize licensing rounds in 2015 and 2016, Chinese national oil companies will likely benefit from the allocation of concessions and production sharing contracts, increasing their stake in both the pre-salt and post-salt oil.

Similarly, Chinese contractors are expected to participate in the concession tenders organized by the Brazilian government in 2015 and 2016. In this case, the Chinese leverage is the fragile position of some big Brazilian contractors involved in Petrobras’ corruption scandal and the slower pace of the new disbursements from the Brazilian National Development Bank (BNDES). China is more than willing to wage its “check book” diplomacy here. Indeed, Dilma Rousseff and Li Keqiang announced that Caixa Economica Federal and the Industrial and Commercial Bank of China are cooperating to create and manage a US$20 billion fund to finance infrastructure projects in Brazil. Similarly, Brazil’s Ministry of Planning, Budget and Management and China’s National Development and Reform Commission are discussing the creation of another US$20 billion fund to finance investment and cooperation in production capacity. These are major undertakings that might consolidate the position of Chinese companies within the construction and capital goods sectors in Brazil.

INSTITUTIONS/AMOUNTS

AIIB 84
NDB 50
Silk Road Fund 40
China-CELAC 35
ICBC-Caixa Fund 20
CNDRC-Brazil 20
TOTAL 249

Expected disbursements of China-led initiatives from 2016 to 2022 (US$ billion)

Moreover, closer relations with Brazil may help China boost its interests in South America. In this sense, the trilateral Brazil-Peru-China Transcontinental Railroad, a regal project aiming to link the Brazilian Atlantic to the Peruvian Pacific, is a good example of how Chinese interests may converge with Brazilian initiatives. In fact, Chinese money and Brazilian regional expertise and institutional knowledge may prove a perfect collusion to re-shape South America’s infrastructure. One should not be surprised if new such partnerships form sooner rather than later.


Luiz Pinto is a Post-Doctoral Visiting Scholar at the School of International and Public Affairs at Columbia University, New York.