27 July 2017
China's Investment in Latin America
By David Dollar, John L. Thornton China Center, Brookings Institution
For the five-year period between 2015 and 2019, China’s President Xi Jinping set an ambitious goal of $500 billion in trade with the Latin American and Caribbean region (LAC) and $250 billion of direct investment. The pledge was made at the first ministerial meeting of the Forum of China and the Community of Latin American and Caribbean States, held in Beijing in January 2015. China has set some large investment targets in Southeast Asia and Africa that it has not always met, so it remains to be seen if this degree of integration can be achieved. But the investment numbers are certainly plausible, as China is likely to emerge in the next few years as the world’s largest supplier of capital.
The outflow of capital from China takes two main forms. These are direct investment, which consists of greenfield investments plus mergers and acquisitions, and lending by China’s policy banks, which are the Export-Import Bank of China (China EXIM Bank) and China Development Bank (CDB). China’s Ministry of Commerce (MOFCOM) reports the allocation of China’s overseas direct investment (ODI) among recipient countries. Specifically, MOFCOM reports the annual flow of ODI and the accumulating stock of China’s outward investment. In recent years, China’s ODI has amounted to somewhat more than $100 billion per year, accelerating to above $200 billion in 2014. The cumulative stock tripled between 2010 and the end of 2014, reaching nearly $900 billion. Of this total, $106 billion was direct investment to Latin American and Caribbean countries.
One problem with China’s reporting of the ODI to individual economies is that about half of China’s global ODI goes to Hong Kong. And within Latin America and the Caribbean, large amounts of China’s ODI go to the Virgin Islands and the Cayman Islands. These money centers are certainly not the ultimate destination for all of this investment. China should work to improve its statistics to reflect the ultimate destination of its overseas investments so that publics everywhere have more-accurate information. In general, direct investment is welcome, so it would be in China’s interest to produce better data that more accurately reflects its growing role in global investment.
How is Chinese investment likely to evolve?
To the extent that Chinese investment differs from global norms and practices, there are three possible paths forward: (1) Chinese investment could become more typical; (2) global practices could shift in the direction of China; or (3) China could remain at odds. This section speculates that in Latin America we are likely to see some combination of all three possible outcomes.
First, when it comes to investment in poor-governance environments, China is likely to evolve in the direction of current investment norms—that is, to favor better governance environments. Part of China’s motivation for investing in countries such as Venezuela and Ecuador was to gain access to natural resources. In the 2000s, China’s growth model was highly resource-intensive and global prices for most commodities were rising. That made it tempting to look for resources even in risky environments. That has all changed this decade, however. A lot of new supply has come online in sectors such as oil and gas, iron, and copper. Meanwhile, China’s growth model is shifting away from resource-intensive investment towards more reliance on consumption.20 Consumption primarily consists of services, which are less resource-intensive. As a result of these shifts in supply and demand, commodity prices have come down, and China’s import needs have diminished.
Also, as noted earlier, the investments in poor governance countries are not working out well. A study concludes that the relatively strong Chinese involvement in poor-governance states such as Venezuela represents “Beijing filling the ‘void’ left by a declining American presence in Washington’s own ‘backyard.’” The fact that China has stopped funding Venezuela suggests, instead, that it has a more practical and economic attitude to these countries. As Chinese people demand a better return on state-backed investments abroad, it is likely that China will pull back on the resource investments in countries with poor governance. At the same time, many Chinese private firms are looking to invest abroad in a wide range of sectors, and those investments are heading to the United States, other advanced economies, and emerging markets with relatively good governance, as is the case with global investment in general. How much of a concern should this be for the United States? In a companion paper to this one, Harold Trinkunas finds that “the scope for Chinese leverage on Latin American governments is limited to a small set of countries.” Ted Piccone analogously concludes that “for now… China’s rise has generally not impinged on core U.S. national security interests but requires careful monitoring.” My finding of rather indiscriminate investment by China across the continent is consistent with these more benign assessments of China’s activity in Latin America and its potential to generate U.S.-China conflict.
Concerning environmental and social safeguards for infrastructure projects, China has identified an issue that resonates with other developing countries. The World Bank and other multilateral development banks have been imposing environmental and social standards that reflect the preferences of rich-country electorates. Developing countries have been voting with their feet and have turned away from those banks as important sources of infrastructure financing. In general, they welcome Chinese financing of infrastructure. The response among developing countries to China’s proposal for a new infrastructure bank, AIIB, was especially strong. Asian countries that are not particular friends of China, such as India, Indonesia, and Vietnam, were quick to sign up for the effort. AIIB’s attempt to develop workable safeguards to address environmental and social risks without the long delays and high costs of practices at existing multilateral development banks is an important innovation. Latin American countries have indicated their preference by borrowing more from Chinese banks for infrastructure than from the World Bank and IADB. The Chinese-financed projects, however, do carry significant environmental and social risks and it will take strong oversight from Latin American governments and civil society to ensure that benefits exceed costs. Environmental and social safeguards are examples of areas where China may end up modifying global norms to make them align better with developing country preferences.
The third issue identified in this essay, reciprocity, should be an easy one for China to address. There is ample evidence that big state enterprises are less productive than private firms in China. Many of the sectors that remain closed in China are service sectors such as finance, telecommunications, transportation, and media—all of which are dominated by large state enterprises. With the shift in China’s growth model, these service sectors have now become the fast-growing part of the economy, while industry is in relative decline. It will be easier for China to maintain a healthy growth rate if it opens these sectors to international competition, in the same way that it opened manufacturing in an earlier era. And talk of opening these sectors can be found throughout party documents, such as the recent Third Plenum resolution. However, actual progress with opening up under the new leadership has been slow. It may be difficult for China to commit to any bold opening up in the next few years as it grapples with adjustment of its growth model and as it prepares for a political transition in 2017. It is likely that China will remain more closed to inward investment than its partners, which creates a dilemma for them. However, Latin American governments will probably continue to welcome Chinese investment despite the lack of reciprocity.
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