Latin Finance - November/December 2011 - 28

china investment

Bankers cite examples of Chinese car between the two countries. manufactures JAC and Chery Motors, Moving beyond resource-based as well as air conditioner manufacturer investment makes sense from a Gree, which expects to benefit from high diversification perspective, and Chinese demand during the World Cup and the banks are following such companies Olympic Games. Both JAC and Chery are into the region, with Industrial and building cars in Brazil after reportedly Commercial Bank of China’s (ICBC) investing close to $1 billion between purchase of Standard Bank Argentina them this year to set up new plants in the being the most high-profile example of country. this trend. “The idea for these car companies is Surplus capital is waiting to be deployed and LatAm is seen as one of the to move their supply chain to have local sourcing of parts,” says a banker. “Import regions where Chinese companies can invest in a stable political environment and achieve BRL-CNY Spot Rate the returns they require, FX volatility concerns Chinese firms bankers say.

A Brazil-based operation has other advantages, namely the opportunity to ask for financing from the country’s development bank BNDES. Up until now Chinese companies have typically accessed dollar funding from a policy bank or from their parent at home, but some may soon seek financing in reais to offset FX mismatches once they start generating revenues in local currency. High interest rates in Brazil may be a stumbling block for some Chinese borrowers used to accessing dollar funding in the single digits, though bankers argue that such a strategy makes 4.5 sense in the context of recent Buying Power volatile FX movements and Beyond strategic buys, the long-term nature of their 4 however, Chinese companies investments. like investors the world over “If they take on dollar 3.5 see enormous potential in funding and the real Latin America’s burgeoning depreciates it is naked middle class and would like 3 currency exposure if they to exploit the spending power don’t do anything to hedge,” they bring to the table. says Charles Ho, head of the 2.5 Persio Arida, a managing China desk at Standard Bank partner at BTG Pactual’s in Brazil. 2 asset management group A derivative instrument and Brazil’s former central may be one option as bank governor, emphasizes protection against currency 1.5 the strength of LatAm’s Oct-2002 Feb-2004 Jun-2005 Oct-2006 Feb-2008 Jun-2009 Nov-2010 exposure, but many Chinese domestic demand as a driver companies are wary of such Source : Bloomberg, Standard Chartered Research of the region’s economy, a instruments and heavily fact that Chinese investors are regulated in what they can or cannot do. increasingly heeding. taxes in Brazil are prohibitive so if they It also isn’t the most efficient way to “People see [LatAm] as an export want to make money they will have to hedge if a company has made a longoriented economy, but that is not true,” start producing there.” term investment in a plant and wishes to Arida told an audience of Chinese Gree has established a plant in cover its exposure to local currencies over investors in Beijing. “With the exception Manaus, northern Brazil, but according to a 30-year period. “The challenge with of Mexico, domestic demand is growing Standard Chartered transportation costs derivatives instruments is that they go up faster than GDP. It is a process China will make it uneconomical to use it as a base to and down in costs; it is not a linear cost,” go through, but it is already happening [in export to other LatAm countries. Ho argues. LatAm]. This does not mean commodities However, it is a different story Instead, Ho has been trying to persuade are not important, but LatAm is less for electric vehicle manufacturer CR Chinese companies to tap financing in affected by trade than most people Zongshen do Brasil, a joint venture with local reais, so that they can better match imagine.” Brazil’s Claudio Rosa Group that was currencies revenues and debt payments. An increasing number of Chinese established in 2008. Tenors on loans may be too short, but companies have set up shop and made “Our strategy was to purchase a local bonds may be another story, he says. LF substantial investments in Brazil and Brazilian brand called Kasinski, and we other parts of Latin America. This all have tried to make Brazil our base for > UPDATE makes sense given the high import taxes South America,” said Ying Zuo, senior vice imposed by the Brazilian government president, overseas business, at Zongshen For the full story and daily news on China/ and the difficulties in transporting Industrial Group, at LatinFinance’s Beijing Latin investments, see www.latinfinance.com products over long distances. event.

Funding Growth

28 LatinFinance

November/December 2011

http://www.latinfinance.com

Latin Finance - November/December 2011

Table of Contents for the Digital Edition of Latin Finance - November/December 2011