Pace of investment disappoints Latin America

When President Hu Jintao visited Latin America in 2004, China appeared to be translating its growing econ­omic power into global political influence.

The economic relationship seemed a perfect fit: China’s furious urbanisation was sucking in Latin America’s ample supplies of copper, iron ore and soybeans. And here was the leader of a new­ly confident power spend­ing 12 days in what was seen as the backyard of the US.

By the end of the trip, local newspapers were reporting Mr Hu had left behind investment commitments worth $100bn – even if Chinese officials later said the figure was exaggerated.

Trade flows between China and the region have certainly exploded – from $8.2bn in 1999 to $70bn (€50bn, £35bn) last year. Yet the expected flood of Chinese investment has yet to materialise, although Latin America has watched Chinese companies pour funds into Africa.

“Expectations were really very high,” says Javier Santiso, chief economist of the development centre at the Organisation for Economic Co-operation and Development in Paris. “But there have been many obstacles.”

The headline figure for Chinese direct investment in Latin America surged from $1.76bn in 2004 to $8.47bn last year, nearly half the Chinese total. However, more than 90 per cent of that money went to the Cayman Islands and many economists doubt it is real direct investment.

Genuine activity has in­creased this year, and in­cludes three different copper projects in Peru. Yet the hoped-for influx of Chinese investment in new infrastructure has not been seen and for some Latin American countries Indian investment has become more important. Jindal Steel and Power, for example, agreed this year to invest $2.1bn in a Bolivian iron ore and steel project, the biggest foreign investment ever in Bolivia.

“Where everyone was expecting the Chinese dra­gon, the Indian elephant has appeared,” says Mr Santiso.

Although Latin America should be fertile ground for Chinese companies, they have faced a host of difficulties in the region.

One issue has been the model Chinese companies like to use abroad, especially in the construction sector. In Africa, Chinese groups have often brought workers with them to build roads or ports. But such schemes are controversial in much of Latin America. “The biggest problem is that Chinese companies often want to completely control the projects,” says José Roberto Mendonça de Barros, a Brazilian former economics minister. “It is politically unacceptable to bring in large numbers of workers.”

Opinion polls suggest Chinese companies have a poor image in the region; one early investment, Shoug­ang’s 1993 acquisition of the iron ore miner Hierro Peru, has been plagued by strikes and protests about working conditions.

“The Chinese have done absolutely nothing to engage with civil society, to reach out to trade unions and other groups and convince them that Chinese investment is not threatening,” says a Latin American diplomat in Beijing.

China’s relations with many Latin American countries are less mature than those it has in Africa, where China started building up a heavy diplomatic presence in the 1960s.

Many diplomats believe geopolitics offers part of the explanation. “In Africa, it is relatively easy for the Chinese to build up a large political presence because the region is so neglected,” says Rubens Barbosa, a former Brazilian ambassador who runs an advisory firm in São Paulo. “But the Chinese still see Latin America as an area of US influence.”

Such considerations affect China’s relationship with Venezuela, diplomats say. With an eye on future oil deals, China has agreed to invest $4bn in infrastructure and is helping Venezuela launch a satellite, yet Beijing is wary of antagonising the US by getting too close to President Hugo Chávez.

The relationship has also been soured by mounting trade tensions. Latin America ran large trade surpluses with China in the early part of the decade, but after a recent surge in Chinese manufacturing imports it will record a deficit this year, prompting a slew of anti-dumping actions.

The volatility of recent political trends in the region has also damped Chinese interest – even in countries where leftist governments might be expected to be well-disposed to China.

In one of the biggest Chin­ese investments in the region, Sinopec and Petro­China bought Andes Petroleum of Ecuador for $1.42bn in 2005. But Andes Petroleum has not been spared a windfall tax introduced recently by the new leftist government and is considering taking the government to international arbitration.

“Like everyone else, [Chi­na is] trying to make out what is happening,” says Cynthia Watson, at the National War College in Washington. By contrast African governments have been much quicker to strike deals with China. “African needs are much more pressing and nationalism is far less virulent there.”