World - Chinese Investors Are Coming to Latin America

Chinese Investors Are Coming to Latin America
Andres Oppenheimer

May 16, 2011

It's no secret that China's trade with the Americas has soared in recent years, but we are likely to see a major new phenomenon in coming years -- an avalanche of Chinese foreign investments.

It has already started in Latin America, where China's foreign investment more than doubled in 2010. And it's beginning to take off in the United States, although in a smaller scale because of U.S. concerns over the potential national security threats of selling major corporations to Chinese investors.

According to several new studies, we will soon see Chinese firms buying increasingly more companies throughout the Americas, ranging from oil, minerals and other natural resources firms in Latin America to manufacturing plants in the United States. As China's companies grow, so does their need to expand abroad, they say.

A newly released study by the Asia Society and the Woodrow Wilson International Center, entitled "An American open door?," estimates that China's worldwide direct foreign investments will rise from an accumulated $230 billion today to between $1 and $2 trillion by 2020. The figure does not include China's purchases of government bonds, or passive investments in stocks and bonds.

Until now, China was virtually non-existent as a global foreign investor. While China accounts for 8 percent of global trade, it only accounts for 1.2 percent of the global stock of foreign investments. Its current foreign investments pale in comparison with the $4 trillion in U.S. investments abroad.

But that's changing very fast. Unlike six years ago, when China's Lenovo raised eyebrows worldwide when it bought IBM's Personal Computers Division, such purchases are becoming increasingly common. Last year, China's Sinopec oil company bought Brazil's Repsol-YPF for $7.1 billion, and China's CNOOC oil firm bought Argentina's Bridas Corp. for $3.1 billion.

A study released last week by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) shows that China's foreign direct investments in Latin America reached $15 billion last year, doubling the total of China's accumulated investments in the region of the past 20 years.

In addition, China has announced it will invest $22.7 billion in Latin America and the Caribbean starting this year, the study says.

China's investments in the United States have been much smaller, of about $5 billion last year, according to the Asia Society study. But that was a 130 percent increase over 2009, it says.

What's moving China to invest in the Americas? I asked Alicia Barcena, head of the Santiago, Chile-based ECLAC.

First and foremost, the need to secure its supplies of oil, minerals, soybeans and other raw materials, she said. China is a major importer of Latin American primary products and wants to protect itself from big price increases or potential disruptions in the supply chain. So Chinese companies want to make the transition from importers to part-owners of the Latin American firms that produce the goods they are now buying.

Second, China's companies are increasingly behaving like profit-driven Western firms: When faced with tariff barriers in big markets they want to get access, such as Brazil's, they buy local companies to sell their goods within those countries.

Third, China's labor costs are rising, as Chinese firms are raising wages. Just as Chinese companies have been going to Vietnam and other Asian countries to lower their production costs, they may soon do the same in Latin America.

"This trend of growing Chinese foreign investments in Latin America is likely to continue," Barcena told me. "There has clearly been a policy change there, and the Chinese government is now encouraging foreign investments by Chinese firms."

My opinion: China's eruption as a major foreign investor in the Americas is a positive development, but brings along several problems that countries in the region will have to face.

China buys majority stakes in foreign companies, but makes it difficult for foreigners to buy Chinese companies, and sell in China. Also, China's nearly exclusive focus on raw materials in Latin America threatens to turn countries in the region into extraction economies, delaying the development of high-tech industries.

And Chinese companies are not known to follow strict environmental or anti-corruption rules. Their arrival in the region will be a welcome phenomenon, but it will pose many challenges that countries should begin to prepare for as they roll out their red carpets to Chinese investors.