Francisco A. Laguna & Jennie Linder Cunningham
Last week, we discussed China’s economic activities in Africa and saw a definite pattern of investments and projects aimed at securing natural resources and potential new markets. We also found that Chinese companies are willing (and able) to conduct business in countries that are characterized by political and economic corruption and instability, giving China a unique advantage in international business. This week, we explore China’s activities in Latin America to analyze whether the investment pattern is similar in the region.
Resource security also plays a major role in Chinese investments in Latin America. However, the political dynamic may differ in that Latin American nations tend, to a greater degree, to prioritize control over their own resources rather than remaining appealing / open to foreign investment. Today’s Latin American states tend to be stronger both politically and economically than their African counterparts.
Nevertheless, certain parts of Latin America can present challenges for any foreign investor, including drug violence, internal/terrorist political risk, expropriation and regulatory / legal bureaucracies. The return of “resource nationalism” throughout the region, especially in OPEC states like Venezuela and Ecuador, also poses significant risk to foreign companies.
In December 2012, China reportedly surpassed the U.S. as the world’s largest net oil importer, having turned decades ago to foreign oil sources to fuel a growing and diversifying economy. Estimates vary greatly, but Latin America holds approximately the same percentage of world oil reserves as Africa (between 8-9%). Comparatively speaking, however, Chinese oil interests (COIs) in Latin America are low.
Chinese national oil companies (NOCs) have invested heavily in Venezuela, often following a “loans-for-oil” deal pattern. Reports indicate that the Chinese Development Bank (CDB) has now become the country’s primary foreign source of financing. China currently reports 230,000 barrels imported per day, although official PDVSA (Venezuela’s state oil company) reports ~ 319,000 exported barrels. This discrepancy indicates that China is not only importing oil from Latin America for domestic “energy security”, but that Chinese NOCs are simultaneously reselling their “equity oil” on the global market. With an almost 100,000 barrel-per-day disparity, it appears that Chinese NOCs (which are heavily state-supported) have entered the international oil trade, not just the import business.
China is a top investor in Brazil, and Chinese NOCs have made other significant moves in the region. In 2011, China Petrochemical Corp. (Sinopec) acquired a 30% stake in Brazil’s Galp Energia. In 2010, it entered into $7 billion deal with Spanish petroleum firm, Repsol, for a 40% stake of its Brazilian division. In 2010, Sinopec bought the Argentina unit of U.S.-owned Occidental Petroleum Corp, and reported, in February 2013, that the takeover was complete.
Chinese economic activities in the region are not limited to oil and gas. The CDB typically finances projects in sectors that fall under China’s Five-Year Plan “areas of development”: electric power; road construction; railroads; petroleum and petrochemical; coal; postal and telecommunications; agriculture and related industries; and public infrastructure. In addition, the Export-Import Bank of China focuses on exports and imports, particularly of technology products.
China is predicted to become the region’s second largest trading partner (surpassing the EU) in the near future, with bilateral trade nearing $250 billion. Latin America has become a massive marketplace for Chinese-made consumer products as well as the recipient of loans that far exceed Western loans. President Xi Jinping’s recent trip to Mexico, Costa Rica and Trinidad & Tobago underscores China’s interest in the region.
TransLegal assists clients with foreign direct investments and all questions related to regulatory matters in Latin America. Call us with your questions.