Chinese investment in Latin America is set to soar over the next decade even if demand for natural resources falls, leading experts have said.
The region will become a magnet for Chinese finance as firms seek to secure long-term commodity supplies and investment in the region’s manufacturing sector gathers pace.
But Latin America must urgently beef up its domestic competitiveness and diversify its industrial sector in light of this rising competition, Kevin Gallagher, economics professor at Boston University, told Emerging Markets.
Fears of an economic slowdown in China that would moderate the pace of resource-intensive investments in Latin America over the next decade are overdone, he said.
China’s outbound investment strategy, demand for new export markets and still-strong commodity import demand would turbo-charge Chinese foreign direct investment (FDI) to Latin America, he said.
The comments come as the industrial sector in South America is reeling from the ill effects of export-damaging currency appreciation.
Gallagher is a co-author of a flagship study on Chinese bank finance in Latin America, released at the end of February, which concluded that Chinese lending in 2010 was greater than the World Bank, IADB and Export-Import Bank of the United States combined.
Gallagher said structurally strong Chinese demand for copper should trigger a rise in state-backed Chinese investment in Peru and Chile, which have so far been more modest beneficiaries of Chinese-backed sovereign credit lines relative to their neighbours
In January, Ecuador announced it would receive a $1.7 billion loan from China, in exchange for oil exports. Chinese cash-rich firms might seek to acquire equity stakes in Latin American resource companies, replicating a more aggressive acquisitive strategy pursued in the African copper belt last year, he said.
While the downside of growing Sino-Latin ties has focused on its potential to fuel long-term over-reliance on commodity exports and hinder economic diversification, more attention should be paid to the need for Latin American manufacturers to increase their competitiveness in light of rising Chinese competition in domestic markets via both exports and direct investments, he said.
“The Chinese will look to increase manufacturing investments in Mexico, attracted to low labour costs and its proximity to US markets,” Gallagher said.
Eric Farnsworth, vice-president of the Council of the Americas, a US-based business lobby group, said. “Latin American policymakers have not begun to grapple with the challenge of industrial competitiveness in light of the new threat of private sector companies in China setting up shop in Latin America,”
He cited highlighted a $700 million investment in 2010 by the private Chinese automaker Chery in a manufacturing plant in Jacareí, Brazil.