The new Atlantic Council – OECD Development Centre report, Chinese FDI in Latin America: New Trends with Global Implications, shines a light on an area previously clouded by unclear data: annual investment flows by Chinese firms to the region have averaged over 10 billion dollars over the previous five years. This new reality establishes China as a major partner for trade, lending, and now, investment for Latin America.
In a speech to the leaders of the Community of Latin American and Caribbean States (CELAC) in Beijing in January 2015, President Xi Jinping said Chinese companies will invest 250 billion dollars by the year 2025. The afore-mentioned report shows that they are almost halfway there.
This is a direct result of several factors: China’s “going out” strategy, where the government encourages Chinese firms to invest abroad; China’s renewed focus on Latin America, as evidenced by China’s 2016 policy paper, launched in November 2016, which laid out its strategy for engaging with the region; and Chinese companies have awakened to the investment opportunities Latin America has to offer, and are now more experienced in the region.
Alongside the rapid rise in investment, the report shows that the nature of Chinese investment in Latin America is changing as well, with the service sector receiving over half of all investment since 2013. In fact, industries like finance, electricity, renewable energy, and transport have all received more than 4 billion dollars in Chinese investment. This is an important shift, as previously the sectors of oil and gas, as well as mining and metals – capital intensive but low employment areas of the economy – received a large proportion of the total.
The sharp rise in Chinese investment in renewable energy is important. The sector has received over 6 billion dollars since 2013, with China’s Three Gorges Corp leading the way. Given Latin America’s leadership on green energy, and China’s growing attention and need for it, there is plenty of scope for further investment. From factories that assemble solar panels to the creation of wind farms and hydro dams, Latin America and China should form a “green” working group to collaborate on shaping the future of these industries.
Elsewhere, Latin America’s automotive industry has received over 10 billion dollars in investment, as Chinese firms race to capture market share in the Americas. These investments are concentrated in Brazil, Mexico, and Argentina – which is consistent with overall Chinese investment in Latin America, focused in a just few countries: Brazil, Peru, Mexico, Argentina, and Bolivia.
It is also to be noted that 80% of Chinese investment comes from state-owned enterprises (SOEs), contrary to Chinese direct investment in the US and the EU, which comes from mainly private firms.
Governments across Latin America are welcoming Chinese investment. Mexico has facilitated this in the auto industry, as well as signing new oil and gas exploration contracts. Brazil has welcomed Chinese investment in the electricity industry, and has been duly rewarded with nearly 9 billion dollars, mainly from the State Grid Corp of China. This includes purchases of hydropower dams and transmission lines.
A growing portion of Chinese investments are mergers and acquisitions, which shows that Chinese firms are finding partnerships with Latin American companies increasingly attractive. Chinese banks have been especially active, acquiring or investing in over 20 financial firms in Latin America, including BTG Pactual, Banco BBM, BicBanco, and Standard Bank.
Chinese investment in the extractive sector remains large, so governments in Latin America should strengthen their environmental laws and increase accountability for compliance, with stronger monitoring mechanisms. It is ultimately their responsibility to ensure that investments are sustainable and environmentally friendly.