China Courts Latin America to Access Commodities

BUENOS AIRES – China’s president Xi Jinping has left Latin America after signing lucrative deals, especially in infrastructure and energy.

For instance, since 2008, Xi provided US$40 billion in loans to Venezuela in exchange for oil. These funds mainly have helped build unfinished infrastructure.

Beiing’s growing investment in infrastructure, with the construction and expansion of roads, high-speed railways and terminals, aims at cutting out the middle man and facilitating the transport of key raw materials to feed its 1.3 billion mouths and support its rapid growth.

Tapping into Argentina’s wealth

In Argentina, Xi and his counterpart Cristina Fernández de Kirchner signed 19 agreements to boost bilateral trade in infrastructure, agriculture, energy and finance among others.

The largest deals included a US$11 billion currency swap, a US$4.7-billion investment in two hydroelectric plants in Patagonia and a US$2.09 billion project to revamp a dilapidated railway network.

Most Chinese investments in infrastructure in Argentina and Latin America seek to boost the efficiency of transportation to guarantee long-term commodity sales. Because production tends to be in the interior of the countries, infrastructure investments are critical to ensure that raw materials are safely and rapidly loaded onto cargo ships to China.

This is an issue in Argentina, where infrastructure lags behind, according to the World Bank’s Logistics performance index. From 2009 to 2013, Argentina scored 2.94 on a rating ranging from 1 (very low) to 5 (very high). The index evaluates the quality of infrastructure trade and transport-related infrastructure. In comparison, Brazil ranked 3.07, Chile stood at 3.18 and Peru at 2.73.

China Machinery Engineering Corporation is thus financing the refurbishment of the Belgrano Cargas railway in Argentina because it transports grains, sugar, water, wine, wood, cement, coal and metals. The 10,000-kilometer railway network connects 17 out of the country’s 23 provinces as well as Buenos Aires port.

Besides, “today, about 300 millions Chinese belong to the middle class. This number could double in the next 10 years. As many Chinese relocate from the countryside to the city, demand for row materials will surely increase, thereby strengthening ties with Argentina as we sell various agricultural products,” explains Ernesto Fernández Taboada, Executive Director of the Argentina-China Chamber of Production, Industry and Commerce in Buenos Aires.

Argentina is blessed with geology and climate suitable for developing agriculture, mining and fisheries. It is the world’s third producer of soy and corn. In 2013, it was China’s main provider of soybean oil and peanut oil.

Similarly, the two hydroelectric dams in the sparsely populated Santa Cruz province in Patagonia will provide better infrastructure and will ease the circulation of agricultural products.

China is also eyeing Argentina’s most precious resources: the Vaca Muerta shale formation in Patagonia. Xi expressed its commitment to invest in developing what could be the world’s second-largest shale gas reserves and fourth-largest reserves of shale oil reserves. State-run energy firm YPF estimates that it holds 661 billion barrels of oil and 1,181 trillion cubic feet of natural gas resources.

Latin America’s infrastructure opportunities

China is exploiting the enormous infrastructure deficit in Latin America to advance its interests.

The World Bank sets out that Latin America and the Caribbean (LAC) had one of lowest proportions of paved roads in the world in 2011. It stood at 22.2%, after Sub-Saharan Africa, which is at 18.8%.

Less than a third of the national road network is in good condition in most LAC countries, reported the World Bank’s Key Data from Infrastructure in Latin America and the Caribbean.

Besides, infrastructure investment levels are below the 4-5% of gross domestic product the World Bank recommends. It stands at 1-2%.

During Xi’s earlier visit to Brazil, the two nations thus signed a cooperation agreement for railway projects in the South American nation. Rio is hoping that Beijing will help build tracks linking the Atlantic coast to Peru’s Pacific coast.

Today, Brazilian commodities, namely iron ore and soybeans, are mostly destined for China.

Likewise, China brokered a deal in 2009 to take a 40% stake in a rail project worth US$7.5 billion in Venezuela – where Xi is traveling today. It connects oil-producing regions to the capital to maintain a steady energy supply to Beijing. Venezuela is the biggest market in the region for Chinese project contracts and a key energy exporter to China.

Beijing’s infrastructure strategy in Latin America aims at “secur[ing] a steady supply of commodities; reduc[ing] the cost of shipping it to China; and subsequently exert[ing] political influence over local governments, which in turn reverts as reassuring the outflow of commodities towards China,” explains Alberto Pfeifer, Visiting Professor at the University of São Paulo.

Counterbalancing the Western model of investment

Beijing is spurring infrastructure growth by offering an alternative model of investment to Latin American nations deemed “pariah” by international financial organisms. Countries like Argentina, Venezuela and Ecuador refuse to bow to creditors.

Yet, most of these countries suffer from budget deficits and strained public debt markets, which is why they increasingly rely on investment of a friendly power.

According to a 2012 Inter-American Dialogue report titled “The New Banks in Town: Chinese Finance in Latin America,” Chinese loans in Latin America have reached about US$75 billion since 2005.

Indicative of China’s keenness to assert its financial clout in the region to satisfy its energy appetite, Beijing’s loans commitments to the region in 2010, which totaled US$37 billion, exceeded those of the World Bank, Inter-American Development Bank, and the United States Export-Import Bank combined for that year.

Further, Beijing aspires to making the yuan a key currency for international settlements. During Xi’s visit to Argentina, the central banks of both countries signed a currency-swap deal to exchange local currencies for up to about US$11 billion (70,000 billion Yuan or 90,000 million Argentine pesos).

Argentina can pay Chinese imports with yuans, which takes much pressure off due to the scarcity of U.S. dollars in Buenos Aires. The country cannot tap into global capital markets since it defaulted on its bonds in the economic crisis and inflation of 2001.

Emblematic too of China’s desire to spearhead infrastructure growth in Latin America, the BRICS Development Bank created at the summit in Fortaleza in July 15th will be headquartered in Shanghai.

The bank will finance infrastructure projects in poorer countries. As Beijing will contribute the most with US$41billion – more than twice the amount Brazil, Russia and India will put in each – it is likely to further serve China’s interests.

“The [BRICS] Development Bank will allow the financing of major infrastructure projects, which consolidates development processes underway [in Latin America]. What is particular is that the bank is distinct from the functioning of traditional organizations like the IMF and the World Bank, which historically have encroached on the domestic politics of countries and imposed as a condition the implementation of orthodox adjustment policies that have led to the worst economic results,” says Fernanda Vallejos, Advisor in Argentina’s Ministry of Economy and Finance.

Chinese hefty loans, in contrast, do not carry political or moral conditions. “We did not find another country offering such long financial terms and low prices,” says Mr. Taboada.

Bone of contention

China’s drive for Latin America’s raw materials has led to environmental degradation as Chinese companies lack experience in compliance with environmental regulations.

“Environmental guidelines are present in Chinese financing, although its standards are not has high as Western’s,” says Mr. Pfeifer.

Cases of environmental degradations include deforestation, agrochemical contamination of lakes, rivers and ground water, loss of genetic diversity and depletion of aquifers, according to a Seattle University report[6].

For instance, Chinese companies in Ecuador have sparked controversy and angered environmentalists because they will divert water from the country’s highest waterfall to building hydroelectric dams.

Yet, although Latin American countries have adopted a comprehensive framework of laws to protect the environment in the past few years, it is likely that Chinese interests will take advantage of the lack of institutional management and capacity to implement and enforce the laws.

 

 This piece was published in Buenos Aires Herald on August 4, 2014. Click here.


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