For much of Latin America, its economic relationship with mainland China has resulted in increased trade and investment over the past decades. Recently, however, one facet of the relationship seems to have shifted.
A recent report underscores a modest, albeit significant, reversal in foreign direct investment (FDI) from the People’s Republic of China (PRC) in the Americas. After years of high commodity prices that benefited the many Latin American raw material export sectors, the amount of Chinese FDI decreased by a third in 2018. A study by the China-Latin America Academic Network (Red-ALC China) estimates that while the figure for Chinese overseas investment in the region was $16 billion in 2016, it declined to $12 billion in 2017 and again to $8.4 billion in 2018. The decline reflects a trend.
The figure is significant considering that between 2014 and 2015, China accounted for 10 percent of global FDI flows into Latin America. This, along with increasing trade and generous credits and loans, led to an unprecedented penetration of the region’s economies, which have long relied on U.S. and European foreign investment for sustainable development.
Another significant change is the shift in the countries and sectors receiving investments. As Argentina, Brazil, and Venezuela—once major Chinese FDI recipients—faced continued economic stagnation, countries such as Chile and Peru, both with stronger, more competitive economies, have benefited from Chinese capital. The trend has also seen a shift away from raw materials and commodities towards investments that focus on manufacturing and other sectors, such as financial services and telecommunications.
Brazil, as the largest economy in the region, continues to garner the lion’s share of Chinese FDI at approximately $48.5 billion. Argentina and Chile each benefit from about $12 billion, while Peru and Mexico come in at about $6.5 billion. Chinese state-owned energy companies made substantial commitments under both the Lula and Rouseff governments, but the new Bolsonaro government, while rhetorically hostile to China, has yet to move against any ongoing ventures.
The Fat Years…
Historically, when the PRC’s economy has grown at an unprecedented rate, the country has fueled the growth through imports of raw materials and commodities. This meant rising demand and higher prices for petroleum (Venezuela, Brazil, and Ecuador), soybeans (Argentina), copper (Chile), and other critical resources. The boom in commodity prices benefited the region’s exports and, in several instances, turned China into the largest trade partner for key countries. Additionally, as trade increased, China’s policy banks extended generous credits and loans to help build infrastructure for accessing commodities.
However, concern was raised that dependence on exports of commodities in exchange for imported manufactured goods would create a path dependency. With increased FDI, the focus of many governments was to encourage investments into new revenue-generating industries.
The sum of the China-Latin America relationship, from the perspective of many governments and economists, was a vision of China offering an alternative source of trade and investment to the hegemony of U.S. and European capital. But as China entered the hemisphere, concerns were raised in Washington over growing Chinese influence and long-range intentions. It was especially worrisome given the generous loans and credits extended to Venezuela and other governments seen as part of the region’s “pink tide.”
As the PRC has expanded its global presence, lessons have been learned about possibilities and challenges in regional markets. For instance, China’s overabundance of capital outlays may have been sustainable when its economy was thriving, but as it begins to slow and contract, it appears Chinese investors are becoming more risk-averse. One case in point is Venezuela, to which China extended $60 billion in loans and credits in exchange for petroleum. The combination of a steep drop in global oil prices and economic mismanagement has devastated the economy and led to the migration of some 4.6 million Venezuelans. Such an experience could well lead to rethinking investments and shifting to more promising venues.
…And the Lean.
The possible reasons for these shifts reflect both the internal and external factors weighing on Chinese actors. Domestically, China is experiencing a period of economic slowdown relative to its decades-long spectacular track record of growth and expansion, as well as some concern about over- and under-production in critical areas (particularly agriculture) of the Chinese economy. The PRC also faces external factors, such as the looming trade war with the U.S. and the political shift in Latin America that has ushered in less friendly governments.
One case that bears watching is Argentina. In a recent election, a new Peronist coalition has brought back former president Cristina Fernández de Kirchner as the new vice president. Ms. Kirchner, like her husband before her, relied on soybean and other commodity exports as well as generous Chinese loans to grow government spending, subsidize state-owned enterprises, and stifle the private sector. Mauricio Macri, a center-right politician, defeated Kirchner’s hand-picked candidate but was unable to make a dent in fixing the Argentine situation over his four-year term. With Kirchner back, it remains to be seen whether she or the new president, Alberto Fernández, make a state visit to Beijing in search for a renewed financial pipeline. With significant foreign subsidies to finance its welfare state, the new Argentine government is unlikely to tackle any systemic changes in order to make the Argentine economy productive and prosperous. If either the president or vice president returns to Buenos Aires empty-handed, it will send a signal that Beijing is in a cautious mood, at least where Latin America is concerned.