China is an emerging power on the world stage, rapidly expanding its influence beyond Asia. Chinese firms are now zeroing in on Latin America, rebalancing the role of traditional partners in the region. China’s engagement abroad is not new, but the resources directed to this “going out strategy” have risen dramatically, increasing China’s global leadership role. This adds up to a major economic and political rebalancing from the West to the East, a phenomenon also known as “shifting wealth.”1
Chinese companies are moving rapidly into Latin America, and have invested over $110 billion since 2003, most of it in the last five years (Figure 1). Once the most favored nation for inflows of global foreign direct investment (FDI), China is now looking to acquire assets abroad. Traditionally, Chinese firms focused their investments in Latin America in the extractive sector. Now, more than half of all investments target the service sector, especially transport, finance, electricity, information and communications technology (ICT), and alternative energy, increasing China’s relevance in the region.
The increasing influence of China is also a result of reduced engagement by the United States, which is focused on other global engagements. Its recent exit from the Trans-Pacific Partnership (TPP) could suggest that the trend will continue.2
With the will to play an active part in the global economic order, China is providing economic and financial assistance to the region— also a way to open doors for Chinese firms to expand.3 By delivering loans, increasing FDI, and building stronger trade ties, China is ensuring its companies maintain market access for its export sector and open new markets for sectors with excess capacity, such as infrastructure.
Maintaining strong economic growth is also important for China’s social and political stability. Part of keeping the economy healthy is securing reasonably priced energy resources and other commodities. State-owned oil firms like China National Petroleum Corp. (CNPC) and Sinopec, China’s first and second largest oil firms, have quickly expanded their activities abroad. These firms are securing the long-term stability of oil exports to China, while also playing a growing role in the financial future of several governments in Latin America.
Soft Power Effects of FDI
In theory, the economic benefits of direct investment for the recipient country are clear: more jobs, higher wages, knowledge transfer, increased productivity, and increased trade. But there are strategic benefits for the investing country as well, and they are also significant. The soft power effects of FDI for the investing country can be substantial, and include improving its image abroad, persuading others to side with it in international organizations, and shaping friendly policies in other countries. As other actors in international investment, China’s firms, with a prevalence of state-owned companies, have the capacity to align economic trends with government priorities. At the same time, China has made explicit its principle of mutual respect and non-interference in countries’ internal affairs.4
China’s sudden spike in FDI can be understood as part of a strategy for relevance and collaboration with Latin America. China is also promoting a state-led policy of development in the region, where rising global investments could mean increasing influence in the international arena. Latin America will play an important role in China’s efforts to shape issues internationally. At the same time, Chinese FDI could give the region more leverage when negotiating with traditional partners, such as the United States and the European Union.5
New Reality: Chinese Firms Set Their Sights on Latin America
In the southeastern city of Campinas, Brazil, the Chinese company BYD (which stands for “build your dreams”) opened a solar panel factory using the latest technology. Called “double glass,” this new technology transfers solar power more efficiently, and increases the life of the panels to fifty years. BYD is a highly innovative global firm that has made several strategic investments in Latin America, including in the auto industry.
This example is just one of a number of across the region. Chinese companies have awakened to the many investment opportunities. And new data show that the service sector and industries like automotive and IT are growing targets, along with traditional investments in oil and mining.
Chinese companies are now controlling an increasing share of Latin America’s electricity generation and transmission. This kind of investment in critical infrastructure can help make Latin American economies more productive and competitive. Electric power will be increasingly generated by Chinese-built renewable energy sources such as hydro, wind, and solar. And a growing number of business transactions will go through Chinese-owned banks. This, increasingly, is the new face of Chinese FDI in Latin America.
Chinese companies will play a large role in connecting the next generation of Latin American middle class consumers to the Internet, with numerous deals in telecoms and network equipment confirmed in the past few years. China could play a growing role on the definition of unilateral or multistakeholder Internet governance, the latter being promoted regionally by countries like Brazil and Argentina.6
Prospects for Future Investment in Latin America
Latin America has faced several challenges to maintain the economy afloat. The main growth drivers have dissipated over the past several years, global trade growth has slowed considerably, and commodity prices have dropped. This caused two years of negative growth in 2015 and 2016, although growth prospects are slightly more positive for 2017, with an expected growth above 1 percent. With the prospects for Latin American growth turning around, FDI can play an important role in continuing the upward trajectory. Much of the region’s potential hinges on countries emerging from recession (Brazil, Venezuela), and their ability to pull themselves out of economic as well as institutional turmoil.
Latin America is in a prime position to continue receiving a large share of Chinese FDI, due to several external factors. The uncertainty of the relationship between China and the United States could, in theory, force a slowdown of major Chinese deals in the United States with some investments potentially diverted to the region. The United States is also considering reviews of investment from Chinese state-owned enterprises on national security grounds.7 A similar situation is occurring in Europe, where some in Germany argue that they should have more power to block transactions that may harm their national interests.8 Rising barriers to Chinese investment elsewhere may be to Latin America’s advantage—although other factors play a role in the surge of Chinese FDI flows.
Over the past ten years, governments in Latin America from across the political spectrum have lowered barriers to foreign investment. According to the Organisation for Economic Co-operation and Development’s (OECD) FDI Restrictiveness Index, several countries rank at or near the level of the United States, including Argentina, Chile, Colombia, and Brazil (Figure 2).
Chinese companies are also racing to get some of their cash out the door. China’s economy has slowed from double-digit growth rates to around 6.6 percent (OECD estimate for 2017),9 and many large Chinese firms are overly reliant on the domestic market for their revenue streams. In addition, and despite the economy’s impressive performance and unprecedented poverty reduction (nearly 700 million have been lifted out of poverty since 1980), economic imbalances have arisen.10 At the same time, while China’s growth has long been driven by investment, supported by high savings rates, the growth model has obvious financial risks, as well as excess capacity in heavy industry and real estate.11
Capital left the country at high rates in 2016, putting pressure on China’s currency, the renminbi, to devalue.12 Investors and even ordinary Chinese families looked to diversify their assets into other currencies, mainly the US dollar. Authorities enacted strict capital controls to stem the outflow.13 This had a noticeable impact on outward FDI flows, but these restrictions largely targeted financial market investors and consumers, and had less of an effect on large Chinese multinationals. Chinese firms are more likely to be targeted when they invest outside of their core competency, such as when an insurance firm enters the real estate sector.14 Investments from China’s firms in industries such as extractive, electricity, alternative energy, and automotive are unlikely to be significantly affected, which bodes well for future Chinese investment in Latin America. In 2017, there were already signs that outflow controls had subsided.