The Chinese president used his time wisely, dropping in on the Asia-Pacific Economic Cooperation (Apec) forum, an annual conclave of the economic leaders of 21 Pacific Rim economies. He visited three heads of state: Peruvian president Pedro Kuczynski, Chilean president Michelle Bachelet, and Ecuador’s outgoing president Rafael Correa.
Each of those house calls was carefully and purposefully selected. Over the past decade, China has nurtured ties with a region that was, until recently, allied with Europe and North America. China has upended the status quo by using its commercial and development banks to lend huge sums to sovereigns and, increasingly, leading regional corporates.
Much of China’s attention has focused on the region’s poorest and most troubled states, notably Venezuela (which has secured $65bn in funding from China, repaying its debts in the form of subsidised shipments of crude oil) and Ecuador, whose debts to China make up more than 15% of domestic economic output.
But China’s leaders aren’t stopping there. Grand plans to build a $10bn rail project linking Lima with the Brazilian port of Acu are aimed at slashing the cost of shipping grain and minerals to the People’s Republic. Chinese companies are financing and building two nuclear power plants in Argentina worth up to $15bn. And in March 2017, Nicaragua’s Supreme Court gave the final go-ahead to the $50bn Interoceanic Grand Canal, a 273km, China-controlled channel that will cleave the tiny Central American state in two and allow Chinese tankers to bypass the US-controlled Panama Canal.
Low key globalisation
In truth, Xi’s visit to Latin America was remarkably low key, at least by recent standards. He did not arrive bearing lavish gifts. No fresh loans were extended to struggling corporates or sovereigns. Nor were any new defence or infrastructure deals signed — though Xi did remind Apec members of China’s 10 year plan to double bilateral regional trade.
And he worked his soundbites carefully. Fully aware that Trump was committed to withdrawing his support for the US-led Trans-Pacific Partnership, Xi spent much of his journey talking up the Free Trade Area of the Asia Pacific, which some have long seen as an ersatz rival to the TPP, and which has already garnered support from the Australian government.
Sovereign leaders across Latin America were left with the distinct impression that of the world’s two genuine superpowers, one was truly committed to globalisation while the other was content to devour its own tail, all the while grumbling about the inequities of free trade. And that, of course, is what Xi wanted all along: to portray China, not the United States, as the modern world’s shining city on a hill.
Xi’s visit also inadvertently reinforced a sad truism about the nature of trade relations between Latin America’s sovereigns and the world’s second largest economy. Over the past decade, the mainland economy has grown exponentially in both scale and ambition. China plans to build a permanent space station by 2020, and to send crewed expeditions to the Moon. Chinese cellphones are snapped up by customers across the developed and developing world.
Latin America by contrast remains a region lacking innovation or direction. Its economies, big and small, largely lack growth and direction. Its leading corporates,with some notable exceptions, are typically simplistic affairs, exporting low-margin and unprocessed foodstuffs or minerals, much of which wind up either on mainland dinner plates or powering Chinese factories.
Master and servant
Little wonder Sam Aguirre, senior managing director and Brazil country head at Washington-based business advisory firm FTI Consulting, describes the relationship between the two sides as “wholly subservient. Latin America creates the basic product then ships it to China, which transforms it into high-value manufactured goods. It’s a master-and-servant relationship.”
It’s a state of affairs that’s only likely to persist, reckons Joaquin Cottani, chief Latin America economist at Standard & Poor’s. “Latin America is only competitive when it comes to producing commodities,” he says. “That is unlikely to change. These imbalances are likely to be with us for a long time.”
And if anything, China’s value to, and hold over, the region is growing. Take Brazil. Until a little over two years ago, Latin America’s largest economy had a simple relationship with China. It exported everything from ore to orange juice, and potash to pork, and imported low-grade homeware and industrial goods. But in 2015, the People’s Republic pledged to invest up to $50bn in the country’s infrastructure. In early 2016, China Development Bank, a major policy lender, handed troubled energy giant Petrobras a $10bn loan, repayable in either cash or oil.
There is a pattern at work here, experts say: China spots a country in distress, then gallops to the rescue, bearing much-needed capital that it extends to needy sovereigns or corporates at low rates of interest. (Petrobras’s cash-for-oil loan facility echoes similar deals that China has struck with Venezuela, a country for which the word ‘troubled’ barely does justice). But typically the beneficiary doesn’t care: it is just happy to have a new friend with deep pockets. And China gets what it wants: another accommodating sovereign that it can absorb into its ever-expanding supply chain.
China’s latest push into Brazil coincides with the latter’s decision to allow foreign corporates to finance and build major infrastructure projects. In April, two mainland transport groups, China Railway Engineering and China Communications Construction, said they planned to bid for two new and very different rail lines projected to cost a combined $4.2bn.
The Fiol project in northeast Brazil will link settlements in northeast Brazil to the Port of Salvador in the eastern state of Bahia, while the Ferrogrão railway is scheduled to cut through and across the Amazon, linking the food producing region of Mato Grosso with seaports in the northern state of Pará.
China’s interest in funding the projects comes at a time when domestic engineering and construction firms, many caught up in a nationwide investigation into corporate corruption, are struggling for traction and capital. “You’re getting to the point now where, in terms of inward M&A deals into Brazil, basically the only money that’s flowing in is Chinese,” says FTI Consulting’s Aguirre.
Nor is Brazil the only target of ambitious and capital-rich mainland corporates. Shandong Gold, a state-backed miner based in the eastern city of Jinan, recently agreed to pay $960m for a 50% stake in Barrick Gold’s Veladero miner in Argentina, which is tipped to produce 830,000 ounces of gold in 2017.
China-backed corporates are even making inroads into Mexico, a country heavily dependent on investment from US corporates. State-run Anhui Jianghuai Automobile recently said it is joining forces with Mexican tycoon Carlos Slim to invest $2.2bn in a joint venture in the central state of Hidalgo, with the aim of manufacturing more than 250,000 cars a year for the Mexican and American markets.
Latin America’s trade relations with China are utterly lop-sided, determined far more by what China needs than by what Latin America wants. However, as regional sovereigns cast nervous glances north at a bellicose and protectionist-minded Trump administration, clear sources of overlapping mutual need are beginning to emerge
The only game in town?
Does this offer undeniable proof that the economic bonds between Latin America and China are permanent and unbreakable? And has China really become the only game in town? Does Latin America’s future lie with the world’s second largest economy rather than with old friends in Europe or the United States?
Well, yes and no. Mainland policy lenders are busy channelling more cash than ever into the hands of Latin American sovereigns and corporates. But it’s worth remembering that this remains a complex region, with old and robust trade ties and alliances. Argentina’s biggest trade partner, according to the Observatory of Economic Complexity (OEC), a data tool created by the MIT Media Lab in Massachusetts, is its neighbour Brazil.
Colombia and Ecuador, meanwhile, both send more finished goods to the United States than to anyone else. And fully three-quarters of Mexican-made goods — $291bn out of a total of $391bn — headed north over the Rio Grande in 2015, according to the OEC.
As Marie Diron associate managing director of Moody’s Sovereign Rating Group, notes, Latin America’s pivot to Asia “is still at a very early stage. While Asia’s vast markets and rising incomes present vast opportunities for Latin American exporters, deepening trade relationships will likely take some time. Our baseline assumption doesn’t assume significant changes in the nature of trade flows between the two regions.”
There are of course no guarantees that the US will remain the most valued trading partner for any of Latin America’s nation states. America has dominated the region for nearly two centuries, ever since the fifth president of a young United States, James Monroe, announced his intention of opposing European colonialism across the Americas.
US looks elsewhere, even Michigan
But successive presidents have focused their attentions elsewhere: Bill Clinton on Asia and Europe; George W. Bush on the Middle East and Africa. Under Trump’s predecessor Barack Obama, notes Standard & Poor’s Cottani, “there was very little effort to get involved in the region at all. So I can’t believe that it can get any worse under President Trump.”
That of course depends much on Trump’s state of mind — and whether the changeable US president decides to follow through on some or all of his threats, which have at various times included plans to shred the tri-nation North American Free Trade Agreement, to cut funding to global development institutions and to return production and jobs to US soil. Often this is more than mere bluster. In April, the United States opted not to renew its contribution to a key Inter-American Development Bank fund that supports pilot development projects across the region.