Latin Finance - November/December 2009 - 22

latam-china flows the notion that Chinese lenders lean towards investment in the region’s leftist governments that arises from deals with Ecuador and Venezuela. “We don’t put much consideration into political issues,” says Eximbank’s Zhu. “Our direction depends on where there are local projects, instead of paying too much attention to policies.” Corporate players echo this sentiment. The Chinese government’s 2008 policy paper on Latin America stresses a strategic relationship between the two based on cooperation and understanding. The only explicit political consideration mentioned is an appreciation for nations supporting its stance on reunification with Taiwan. “As we explore the markets in Latin America, our main purpose is to expand scale, to make a healthy sustained development,” says Chen Zhong, deputy general manager at builder China Harbor Engineering. “Many countries say we are only interested in profits instead of people’s interests. We are not like this. We care about both.” China Harbor Engineering is active in 10 LatAm countries including Mexico and Brazil, and has just committed to a $70 million project in Santiago, Cuba, with expected China Eximbank financing. “We are open-minded with our targets. It depends on the project itself and the returns,” Chen says. It has not engaged in M&A yet in the region, though it plans to look. There are also signs that LatAm policy may differ from that deployed by Chinese entities in Africa. The wait is longer for things like government approvals and sovereign guarantees than in Africa, says George Qixue Fang, general manager at miner China Minmetals. He explains there needs to be more cooperation to lessen such entry hurdles facing Chinese companies and banks. “We don’t always understand the local politics and social issues,” Fang explains. Principal areas of misunderstanding include environmental affairs and labor relations. “In Peru we have workers unions, and in China we have workers unions,” Fang says. “But the union in Peru is a totally different union.” He says better understanding is critical, and improving with time. “We got a very good lesson from Shougang,” says Fang, referring to the one of the earliest and most publicized Chinese investments in LatAm mining. Shougang, or Shoudu Iron and Steel Group, bought Hierro Peru in 1993, and has been criticized at various times since for poor labor and environmental standards. In late September, workers staged a two-week strike over wage demands. This year, China’s Chinalco has been hedging itself following the purchase two years ago of the Toromocho copper deposit in Junin from Canada’s Peru Copper. Chinalco is running a PR campaign, including television commercials, to paint a rosy picture of the $2.4 billion project, which involves moving a town of 5,000 people. “The Chinese government has noticed the criticism and has asked the enterprises to take up more social responsibility and ‘do as the Romans do’ in Latin America and Africa,” says CASS’ Jiang. “So I am sure that this kind of criticism will become less and less.” “LatAm is still new, and far away, but China is coming,” says Bethel. LatAm is likely to be easier for Chinese entities in many respects, he explains, given the fact that you are dealing with just two languages and a relatively homogenous system, versus more varied cultures in Africa. Still, he notes it is farther along in its relationship with Africa. In building its relationship with Latin America, political and strategic considerations, as well as carefully developed relationships with local entities, are just as important as asset valuations. The China Risk Whether Latin America benefits only by enlarging its commodities marketplace, or by getting much needed infrastructure investment, the arrival of increased Chinese money in the region depends on China’s continued growth. “The environment is very much there,” says Doug Smith, chief economist for the Americas at Standard Chartered. “The tremendous wealth of natural resources in Latin America should keep Chinese investment quite robust for as long as the eye can see.” Despite overall bullishness about growing trade links driving LatAm growth, he adds that many countries in the region are not wholly dependent. “For the most part, [Latin American] countries are much more reliant on their own growth than on China’s,” says Smith. He explains that a slowdown in China means commodity prices could suffer, and there would be less reserve accumulation, but most of the region’s countries are net creditors. Brazilian growth is especially tied to domestic consumption, which would shield it from any drop in Chinese demand, he adds. Others doubt the government’s top-down aggressive growth strategy is sustainable. “There could be a speed bump,” says Michael Pettis, professor at Beijing University. “It could be difficult for a few years.” The current export boom is not sustainable, he argues as the government subsidy driving production is paid for largely by household income. Therefore consumption is growing more slowly than it should, forcing more exports and pushing up a trade surplus. The rest of the world – the US in particular – is not as able to balance this anymore with trade deficits. As these trade balances readjust in the deleveraging following the crisis, Pettis says the current investment boom is unsustainable. Though concerned about the next few years, Pettis still expects China to become the world’s second largest economy by 2030. Even if the likely bumps ahead mean Chinese GDP growth of 5%-6% per year instead of 8%-9%, that is still better than most economies, he says. There may be a few such bumps ahead, but the potential flows to Latin America and development are dizzying. The billions invested by China so far through policy banks and governmentbacked entities are to many in the region a clear signal of more to come from a broader cross-section of Chinese entities. In the 2008 policy paper, the Chinese government lists among its goals to “build and develop a comprehensive and cooperative partnership featuring equality, mutual benefit and common development with Latin American countries.” It is up to Latin America’s leaders to hold them to this promise. LF 22 LatinFinance November/December 2009

Latin Finance - November/December 2009

Table of Contents for the Digital Edition of Latin Finance - November/December 2009