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Chinese Fdi in Latam 2010

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Chapter III

Direct investment by China in Latin America and the Caribbean

A. Introduction
Since 2008, China has become one of the world’s largest sources of direct investment. These flows first reached significant levels in Latin America in 2010, when it is estimated they surpassed US$ 15 billion. Chinese companies have in fact burst on the scene in the region so recently that several of the biggest projects were still being finalized in early 2011, or had only just been put into operation. Most investments have been made in natural resource extraction, but over the medium term this is expected to diversify into other sectors such as manufacturing and infrastructure construction.

Paradoxically, there is a lack of data on this extremely important phenomenon, which poses a constant problem for policymakers and analysts studying Chinese foreign direct investment (FDI). Appraisals of the possible opportunities and challenges presented by this increased investment flow therefore tend to lack supporting empirical evidence. The aim of this chapter is to make some progress on this issue, at least as far as investment in the region is concerned. A variety of sources have been consulted, including investment announcements in the media and interviews with Chinese company managers and Latin American and Caribbean government authorities. Despite the evident limitations of this kind of material in terms of data quality and reliability, this course of action does provide some data to work with.

From a substantive viewpoint, the main contention is that China’s FDI is governed by the level of development of the Chinese economy, its production structure, internal market conditions (which explain the development of large companies) and public policy incentives and restrictions, all of which form part of a clear long-term development strategy. Furthermore, China’s trade relationship with the rest of the world in general, and with Latin American and Caribbean countries in particular, dictates the kind of investment strategies pursued by Chinese companies. This chapter is divided into five sections. Section A examines the developments in production and trade that have given rise to the recent growth in Chinese FDI. Sections B, C and D analyse the investment flows to Latin America and the Caribbean and the main recipient

Economic Commission for Latin America and the Caribbean (ECLAC)

sectors. In reviewing the drivers of these investments and their functioning, particular attention has been paid to the differences between the policies that have driven Chinese growth and the prevailing situations in Latin America and the Caribbean, thus providing insights into development

strategy and policies for the region. Finally, section E presents conclusions and the medium-term outlook, outlines some of the reactions of countries receiving Chinese investment and makes suggestions for long-term policy.

B. China’s growth, industrialization and international integration

1.

Growth and export development
State-owned companies have much more influence in the Chinese economy than in any other Asian economy. The country’s size means in the first instance that China has a far greater impact on global markets for goods and factors of production than the Asian tigers had in their day. In addition, the huge domestic market has attracted foreign investors and has given national companies the chance to grow to a large size before embarking on international expansion, especially in industries protected from international competition, such as banking, hydrocarbons and telecommunications (see chapter IV).

China’s economic performance over the last 30 years has made it the world’s second-largest economy, second-largest manufacturer and the largest exporter of goods. This boom in production and exports has been accompanied by a rapid shift in the production structure towards activities requiring greater technological sophistication and by major advances in scientific, technological and innovation capacity. Although economic growth has brought greater income inequality, it has also significantly reduced poverty and improved the well-being of the population. During an initial phase, nutrition, life expectancy and absolute poverty indicators improved, while over the past decade an everincreasing proportion of the population gained access to new consumer goods and services (Goh et al., 2009; ADB, 2010). The Chinese economy has taken the same path forged some decades earlier by other Asian economies which also experienced high levels of economic growth, export expansion, poverty reduction and technological development. The Asian tigers (Republic of Korea, Singapore, Hong Kong Special Administrative Region of China and Taiwan Province of China) began to experience strong growth in equal to or better than those of industrialized countries. In Malaysia and Thailand, rapid growth began later but China is already catching up on some development indicators there as well (see figures III.1 and III.2). The development of the Chinese economy differs from that of the Asian tigers in two important respects. The first is the size of China’s population: the rest of the world lags far behind, with the exception of India.1 Second,
1

CHINA AND OTHER SELECTED ASIAN ECONOMIES: AVERAGE GDP GROWTH BY DECADE, 1961-2009 (Percentages)

10

8

6

4

2

0 1961-1970 1971-1980 1981-1990 1991-2000 2001-2009

Singapore

Republic of Korea

Malaysia

Thailand

China

In 2007, China had 1.325 billion inhabitants, versus 1.15 billion in India (United Nations, 2008). However, faster population growth in India will shortly make it the world’s most populous nation.

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of World Bank and Organization for Economic Cooperation and Development (OECD), World Development Indicators.

Foreign

CHINA AND OTHER SELECTED ASIAN ECONOMIES: PER CAPITA INCOME, 1980-2009 (Dollars, purchasing power parity)
30 000 25 000 20 000 15 000 10 000 5 000 0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

This contrasts sharply with other parts of the world, in particular Latin America and the Caribbean, where, in the context of the reforms of the 1980s and 1990s, the expectation is still that key decisions should be based on market forces alone (Davies, 2010; OECD, 2002).
Figure III.3 CHINA: INWARD FOREIGN DIRECT INVESTMENT, 1990-2010 (Billions of dollars)
120

100

80

60

Republic of Korea

Malaysia

Thailand

China
40

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of World Bank, International Comparison Program database.

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In short, China’s development strategy has consisted of developing its large domestic market, coupled with an aggressive and successful export strategy. Attracting FDI clearly formed part of the initial export promotion strategy. Special Economic Zones (SEZs) were created for this purpose in 1980, to test out the country’s economic reforms. They were primarily intended to boost exports, but the aim was also to link China to global manufacturing markets and modernize domestic industry, principally through the operation of the transnational corporations that had been set up there (WTO, 2001). In the first years following these reforms, FDI inflows were relatively modest, but they increased dramatically from 1990 onwards (see figure III.3). Since 1993, China has been the primary recipient among developing countries, but the relative importance of transnational companies in its economy has gradually declined as the economy has developed and Chinese companies have grown and acquired new capacities. Therefore, although FDI formed a very significant part of gross fixed capital formation in the mid-1990s, its importance has been in decline,

0 2005 2006 2007 2008 2009
2008

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the foreign direct investment database.

Figure III.4 CHINA: INWARD FOREIGN DIRECT INVESTMENT, 1990-2009 (As a percentage of gross fixed capital formation)
18 16 14 12 10 8 6 4 2 0
2005 2006 2007 2000 2004 2009 1998 2001 2002 1999 2003 1996 1994 1990 1995 1992 1993 1997 1991

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the foreign direct investment database.

In addition, China has placed restrictions on FDI in many key activities and, in manufacturing, has compelled foreign companies to form joint ventures with local companies and transfer technology. In fact, an integral part of China’s long-term development strategy has been the strong interventionism of its FDI attraction policy.2
2

This FDI attraction strategy has borne fruit in two ways. First, transnational corporations have made a substantial contribution to Chinese exports. In 1989, exports by subsidiaries of these companies represented

Following the establishment of the SEZs, FDI was permitted in the rest of the country in the first half of the 1990s to promote exports, transfer technology and boost productivity. Until it joined the World Trade Organization (WTO), China employed a multitude of devices to attract FDI, including substantial tax breaks compared with the treatment of national capital. These incentives are still applicable

(Kennedy, 2010). and are used, for example, to increase FDI in western China. They are contained in the Catalogue of Priority Industries for Foreign Investment in Central and Western China, implemented in 2008, and the Catalogue Guiding Foreign Investment in Industry.

2000

2004

2001

2002

1999

2003

1996

1994

1990

1998

1995

1992

1993

1997

1991

2010

Economic Commission for Latin America and the Caribbean (ECLAC)

Second, the Chinese authorities’ insistence on forcing transnational corporations to invest through strategic partnerships with domestic companies has opened up an important channel for transferring technology and has helped develop domestic capacity in many industries. This has occurred for example in the automotive industry, beginning with strategic partnerships between Chinese auto parts suppliers and transnational corporations in the 1970s and 1980s, and moving on to the mass production of cars for the domestic market. Today, the Chinese auto industry is made up of dozens of own-brand companies producing increasingly sophisticated cars (ECLAC, 2010a, chapter II). Export growth began at the start of the reform period and the initial focus was on basic products, with the aim of

gradually moving towards more sophisticated goods, in a process that is still ongoing today. In 1985, raw materials

now at almost insignificant levels. Low-tech non-naturalresource-based products increased in relative importance

intensive products. By 2008, the former had dropped

(see table III.1).

CHINA: EXPORTS BY TECHNOLOGY INTENSITY, 1996 AND 2008 (Percentages) 1996 Raw materials and derived products Labour-intensive products Products intensive in economies of scale Original equipment manufacturer (OEM) products R&D-intensive products
Source

2008 11.0 26.9 22.7 22.9 16.3 0.1

19.1 44.9 17.1 10.5 7.7 0.7

When assessing improvements in the quantity and quality of Chinese exports, their domestic value added must be taken into account, as this varies considerably depending on the company type (less with transnational corporations, more with Chinese companies). Exports of high-tech products tend to have less domestic value telecommunications equipment (OECD, 2010). This

may be changing as private Chinese companies increase

are clearly on the road to accumulating technological capacities, their R&D efforts are still far below the Organization for Economic Cooperation and Development (OECD) average, particularly in the high-tech industries (see table III.2).

CHINA AND OECD COUNTRIES: TECHNOLOGY INTENSITY LEVEL OF COMPANIES, BY TECHNOLOGY LEVEL, 2005 AND 2007 (As a percentage of R&D spending) OECD 2005 30.2 10.1 0.6 China 2005 3.9 2.7 0.7
OECD Economic Surveys: China 2010

High-tech companies Medium-tech companies Low-tech companies
Source

2007 5.0 2.7 0.8

2.

China’s trade relationship with Latin America and the Caribbean its exports and importing mainly natural resources. Today, China is the region’s third-biggest trading partner, behind the United States and the European Union. China is an

As in the rest of the world, China has been gaining ground as a source of imports for Latin America and the Caribbean, while also steadily increasing the technological content of

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important source of imports for all economies in the region, and for many of them it is also an important export market: exports go to China. It is predicted that this trend will continue to grow in the immediate future and that China will become the second-largest market for the region’s by 2015, overtaking the European Union in both instances and remaining second only to the United States (ECLAC, 2010c). Furthermore, the region is a more important trading partner for China than 10 years ago: its share of China’s
3

very positive. Between 2000 and 2009, the country

crude oil. By itself, the increased demand for copper from China compensated for the fall in the rest of the world. This upswing in global demand, led by China, has improved the terms of trade for most Latin American countries and the volume of their exports has expanded. A narrow range of products per country are exported

Growing trade with China is a more recent development than in other regions. In the mid-1990s, China’s share of

(ECLAC, 2008). With the exception of Costa Rica, China is not an important trading partner for Central America; however, it threatens the exports of almost every country in the Honduras fall into categories that are either wholly or partially threatened by China. The Dominican Republic, meanwhile, has seen its percentage of United States imports drop by half, in the same period that China’s has doubled (see chapter II). Like Central America, Mexico also competes with threat. This stems from China’s accession to the World Trade Organization (WTO) in 2001 (Gallagher and Porzecanski, 2010). One of the consequences has been a slowdown in Mexican exports to the United States. In the years following the introduction of the North American Free Trade Agreement (NAFTA), Mexican imports in 2002. Since then growth has stagnated, while aggregate figure conceals important differences between the value chains: while there has been a clear setback in the yarn-textile-garment chain, the automotive chain has managed to consolidate its position in the United States market. The trade relationship with China poses an inescapable problem for Mexico: in 2009 the import/export ratio with China was 15:1, creating a trade deficit of over US$ 30 billion and a trade problem of growing political dimensions (see box III.1). Mexican exports to China are becoming
Changes in market share were analysed based on the market shares of China and of Latin America and the Caribbean in world exports at the two-digit level (Lall and Weiss, 2005). Products are assigned to one of five categories based on the competition between China and the region in world markets: (i) partial threat: both increase their market share, but China’s increases more than the region’s; (ii) no threat: both increase their market share, but China’s increases less than the region’s; (iii) direct threat: the region’s share decreases and China’s increases; (iv) China under threat: China’s share decreases and the region’s increases; and (v) mutual retreat: market share decreases on both sides, and neither poses a threat.

However, aggregate numbers conceal vast differences between what China buys and sells in its trade with Latin America and the Caribbean. China primarily exports

region exports raw materials to China and its trade pattern is made up of just a few products. Although trade with Latin America and the Caribbean is of secondary importance to China, in the two main categories (minerals, slag and ash; and oleaginous seeds and fruits) the region’s exports

as an oil supplier has grown significantly. China’s impact on the trade of Latin America and the Caribbean (which is greater than vice versa) covers three areas: as an exporter of manufactured goods to almost every country in the region; as a buyer of raw materials, principally from South American countries; and as a strong competitor in the export markets, in particular for Mexico and Central America. This is consistent with the patterns for international insertion in the region based on the different competitive advantages of the subregions. South American countries specialize in the extraction of natural resources and a certain amount of primary processing, while in Central America and Mexico, as in a number of Caribbean economies, the fastest-growing activities have been those associated with the assembly of parts and components for garments, electronic items and cars destined for the United States market (Reinhard and Peres, 2000). For countries exporting raw materials, located mainly in South America, China’s influence has been
3

China’s main trading partners in the region are Brazil, Chile and

Economic Commission for Latin America and the Caribbean (ECLAC)

increasingly similar in nature to those of South American countries as the demand for raw materials from China grows: electronics and the automotive sector, these had fallen to

only exceptions to this rule are Mexico and Costa Rica, countries with which China trades heavily in high-tech

The trade patterns are therefore well defined: China imports low-value-added and low-tech raw materials, and exports increasingly high-tech manufactured goods. The

proportion of these trade flows may be associated with trade between subsidiaries of the same company. In fact, China, Costa Rica and Mexico are all major contributors to the international systems of integrated production of many transnational corporations.

TRADE TENSIONS IN MEXICO

China’s impact as an expor ter of manufactured goods has been felt all over Latin America, as the country has begun producers. This has created social and in Mexico being a good example.

that year to block the elimination of tariffs of their advantages and disadvantages, given that no studies on their impact had been carried out.

levying on the import of various Chinese products. When China joined the World WTO member States, including Mexico, promised to eliminate tariffs on products of six years.

marched on the city of León to protest against the huge numbers of Chinese imports, an almost unprecedented event in Mexico’s recent history. The protest had been preceded by petitions and pressure from the business community

to reject the proposal to remove tariffs on Chinese products. It also asked for clarification on the apparently secret negotiations surrounding countervailing

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of E. Dussel Peters (coord.), Monitor de la manufactura mexicana 2009,

C. Growth of China’s direct investment in Latin America and the Caribbean

1.

China: now the fifth-largest foreign investor in the world
It is significant that Chinese FDI grew sharply at a time when world flows dropped because of the financial crisis. As the crisis had less of an impact on China than on developed economies, Chinese companies were able to use their financial capacity to undertake investment projects over the past three years, continuing with the country’s development strategy. As a result, China was the fifth-largest investor country in the world in 2009

Outward foreign direct investment flows from China began with the opening up of the country’s economy in the early 1980s. But as seen in other developing economies, FDI growth was much slower and occurred much later than export growth. Between 1985 and 2007, Chinese FDI increased at the same rate as elsewhere. It took off in 2008,

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operations that have recently been announced are not reflected in the official statistics for 2010. This would point to a considerable increase in Chinese FDI in 2011.
Figure III.5 CHINA: OUTWARD FOREIGN DIRECT INVESTMENT, 2002-2010 (Billions of dollars)
70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010

mainly from the United States. These reserves present clear risks and opportunity costs for the country; for this reason, diversification of these assets has been intensely debated both in and outside the country in recent years (McKinnon and Schnabl, 2009). The official statistics on FDI distribution by sector suggest a prevalence of a group of activities that support

suffer from the problems described in box III.2 and must be supplemented with data on mergers and acquisitions, which highlight the emphasis on natural resource extraction acquisitions involved companies producing raw materials in the energy and mining sectors.5 Although the largest amounts have been invested in the search for mining and energy resources, almost invariably by a small group of State-owned firms, Chinese FDI is in fact extremely varied. Over 12,000 Chinese companies have invested abroad, most setting up distribution subsidiaries which generated (MOFCOM, 2010). The fact that a significant proportion of Chinese companies’ FDI is channelled through subsidiaries in the Hong Kong Special Administrative Region of China, the Cayman Islands and the British Virgin Islands makes identifying it particularly difficult; however, the data available point to a strong presence in the rest of Asia and numerous investments in developed countries, and highlight the relative importance of Africa. Figure III.7 illustrates the distribution of cumulative Chinese FDI in the world in late 2009 according to official data provided by the Ministry of Commerce of China, excluding the Hong Kong Special Administrative Region of China, the Cayman Islands and the British Virgin Islands. As may be expected, given the geographical and historical distances, only a small proportion of Chinese FDI has ended up in Latin America. Although trade relations between the region and China reached significant levels in just 10 years, FDI flows between the two were still very small in 2009. Only US$ 255 million

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of China, Ministry of Commerce, 2009 Statistical Bulletin of China’s Outward Foreign Direct Investment

Figure III.6 MAIN INVESTOR COUNTRIES, 2009 (Billions of dollars)
United States

France

Japan

Germany

China
-

50

100

150

200

250

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the foreign direct investment database.

Despite this growth, accumulated Chinese FDI, which reflects the contribution of Chinese companies to economic activity in recipient countries, is still lower than that of the Russian Federation and many developed countries with medium-sized economies, such as Australia, Sweden and Switzerland. In addition, its position as a source of FDI remains far lower than its position as a source of portfolio investment. Its huge trade surplus has turned it into the world’s biggest saver. Most of these savings are held as government bonds,

to Latin America.

5

Based on data from Thomson Reuters on the top 33 cross-border acquisitions by Chinese companies. This figure excludes the (far larger) amounts which reached the financial centres in the Caribbean.

Economic Commission for Latin America and the Caribbean (ECLAC)

THE PARADOX OF DATA ON CHINESE FDI

The international expansion of Chinese almost undetectable in official FDI data, particularly in data disaggregated

by industry and recipient country. This applies to both data from China and the data from recipient countries.

DIRECT INVESTMENT BY CHINA IN SELECTED LATIN AMERICAN ECONOMIES, 1990-2010

(Millions of dollars)
Country Argentina Brazil Colombia Ecuador Mexico 8 58 59 5 65 3 ...

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information from the central banks and ministries of economic affairs of the respective countries.

In China, official data are compiled by the Ministry of Commerce (MOFCOM, phenomenon because not all companies register their investments. For example, Chinese FDI registered by OECD countries

Islands, the Cayman Islands or the Hong Kong Special Administrative Region (SAR) of China. In addition, some of the transactions destined for the Hong Kong SAR of China came back to China, in a

amount of resource control by Chinese companies, at least on a temporary basis.

companies produce and offer various services in the destination countries, but these are recorded as exports, not investments. Finally, given that the biggest

FDI data disaggregated by industry and by country as presented by the Ministry and recipient countries are distorted by the habit of many companies of channelling their investments through holdings in third financial or services firms. Four of the top ten Chinese foreign acquisitions

Chinese FDI in the Hong Kong SAR of Other limitations of the official statistics on FDI are not exclusive to China, but they do particularly affect investments made by Chinese companies. In the natural resources sector, “finance for assured supply” agreements have of this chapter). These do not constitute FDI but they often involve a certain

payments statistics for recipient countries Analysis of Chinese FDI in this chapter is therefore based on data collected from the companies themselves and on data provided in announcements of investments, mergers and acquisitions, more than on

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of Organization for Economic Cooperation and Development (OECD), OECD Investment Policy Review of China World Investment Report FDI Policies for Development: National and International Perspectives

Figure III.7 CHINA: DISTRIBUTION OF CUMULATIVE FDI, YEAR-END 2009 (Percentages)
Latin America (4) Africa (18) Asia (40)

In 2010, however, China became the third-largest investor in the region, behind the United States and the Netherlands. Table III.3 provides an estimate of the acquisitions and greenfield investments in the region up to 2010 and those expected from 2011 on, based on transactions in the financial markets and information from the companies themselves.7
7

Developed countries (38)

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of China, Ministry of Commerce, 2009 Statistical Bulletin of China’s Outward Foreign Direct Investment

These data do not necessarily coincide with those in the official balance-of-payments statistics. In addition to the methodological problems discussed in box III.2, half of the acquisitions by Chinese companies in Latin America involved subsidiaries of foreign companies which are not reflected in the net FDI of recipient countries. Moreover, some of these acquisitions were agreed in late 2010 and therefore have not been included in the balance-ofpayments statistics for that year. For this reason, the estimate of US$ 15.251 billion for 2010 is not comparable with the total figure of US$ 113 billion for FDI in the region.

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Table III.3 DIRECT INVESTMENT BY CHINA IN SELECTED ECONOMIES OF LATIN AMERICA AND THE CARIBBEAN (Millions of dollars) Investments announced Country 1990-2009 Argentina Brazil Colombia Costa Rica Ecuador Guyana Mexico Peru Venezuela (Bolivarian Republic of) Total
Source

2010 5 550 9 563 3 5 41 ... 5 84 ... 15 251

2011 onwards 3 530 9 870 ... 700 ... ... ... 8 640 ... 22 740

143 255 1 677 13 1 619 1 000 127 2 262 240 7 336

The main recipient countries are, in descending order, Brazil, Argentina and Peru, all of which have a close trading relationship with China. China is also sometimes an important source of investment for smaller economies, as has recently been seen in Ecuador and Guyana. With the possible exception of Costa Rica, Chinese investment has practically no relevance in Mexico of the confirmed investments were in the area of natural resource extraction, primarily in the hydrocarbons sector. market, mainly in infrastructure provision and, to a lesser extent, manufacturing. Investments designed to create platforms for export to other countries were very small

in the mining sector in Peru are among those announced but not yet carried out. These data will be examined more closely in sections D and E of this chapter. Investment in China by companies from Latin America and the Caribbean is even smaller and is not dealt with in this chapter. The reason for this is China’s selective openness to FDI. The principal trans-Latins engage in activities that are practically closed to FDI in China, such as oil, iron and steel production and telecommunications services. Very few manufacture medium-tech and high-tech products, which are the areas favoured by the Government of China in its FDI attraction policy.8

2.

Factors driving China’s foreign direct investment
1990s, the government stance on FDI grew increasingly positive, until, in 2000, the President in his report to the National People’s Congress introduced the “going global” strategy, which actively promotes these kinds of capital outflows. This policy has been consistently implemented through ongoing reforms and it is the reference for government activities in this area. Under the same policy, measures have been implemented
8

Recent trends in Chinese FDI have been influenced by a number of internal and external factors. One of the most important of these is the Chinese government’s policy of encouraging its companies to expand overseas. This policy has evolved since the start of the economic reforms, but there has been a consistent trend towards greater openness and support of FDI. In 1979, FDI was permitted for State-owned companies under the supervision of the Ministry of Foreign Trade (now the Ministry of Commerce). In 1985, the right to invest abroad was extended to all companies, both Stateowned and private, provided they had sufficient capital and the operational and technological capacity. In the

One exception is the Brazilian aircraft manufacturer Empresa Brasileira de Aeronáutica (Embraer), which has opened a factory in China, primarily to serve the local market. Others include the Mexican companies CEMEX and Bimbo and the Brazilian companies Votorantim and Marcopolo.

Economic Commission for Latin America and the Caribbean (ECLAC)

facilitating the approval of outward FDI and explicitly supporting Chinese transnational companies. Among other reforms, procedures have been streamlined, capital controls for transnational companies have been relaxed, and the process for issuing permits for smaller investments has been decentralized and handed over to local governments. These reforms were implemented gradually over the course of a decade and aimed to make the process of investing abroad more transparent. Currently, company investment projects have to be approved by the National Development and Reform Commission (NDRC), which reports to the State Council, or the Ministry of Commerce, and by the State Administration of Foreign Exchange (SAFE).9 The complexity of the approval process depends on the amount to be invested.10 The other factors taken into account are (a) the presence of State-owned companies; (b) whether the aim of the investment is to obtain natural resources; and (c) whether the destination of the investment is an entity with which China does not have diplomatic relations (Taiwan Province of China and countries that recognize it, in the main). The process does not usually take more than 25 working days; in some instances the NDRC has given its approval in two days. The NDRC itself states that it has no interest in taking part in the negotiations or in the price of the operation; rather it is interested in checking the strategic relevance of the project and whether it is at odds with national policies on reducing energy consumption or cutting down pollution (RBS, 2009). Measures to encourage outward FDI include tax breaks and, more significantly, public financing of FDI subsidized credit to companies investing abroad in certain priority areas: the acquisition of natural resources scarce in China, manufacturing and infrastructure projects that involve the export of Chinese technology, and R&D projects and acquisitions that strengthen the global competitiveness of Chinese companies. China Development Bank and the Export-Import Bank of China (China Eximbank) are the two key instruments of this policy, although other public banks have also collaborated.11 The company in
9

for its project; the rest may be obtained from the banks mentioned above at preferential rates, terms or amounts (RBS, 2009). Official assistance from the Chinese government is also used to support the international expansion of Chinese companies, in cases where the involvement of Chinese companies is made a condition of financing for infrastructure-building projects. In keeping with its burgeoning foreign direct investment, China has concluded 127 bilateral investment treaties and 112 double taxation agreements (Davies, 2010). Besides the permits required by the NDRC and by the Ministry, and the substantial incentives offered by State-owned banks for these projects, the Government of China exerts control over foreign direct investment through State ownership of the main transnational companies. Currently, some 122 non-financial companies are owned by the State, and are the responsibility of the State-owned Assets Supervision and Administration Commission (SASAC). These companies, which are all extremely large, underwent a transformation in the 1990s, cutting back on staff and ending the direct provision of social insurance benefits to their workers. Following these reforms, results improved and in 2005 these companies began showing a profit. Thanks to a virtual monopoly in many major sectors, they have made sizeable profits, which are expected to time in 2010.12 State-owned companies are prominent in sectors protected from international competition, such as hydrocarbons, energy distribution, banking, and iron and steel production. Almost all Chinese companies listed in the Fortune Global 500 are State-owned (see investment projects overseas. All companies not controlled by the SASAC consider themselves to be privately owned, and, although not of traditional activities: receiving deposits and lending money at the official interest rates (mainly to State-owned companies). of economic policy, a role increasingly being abandoned by the aforementioned banks. The new banks are the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China. The last two are those most commonly used to support outward FDI. In 2005 the State began receiving a proportion of these companies’ profits. In 2011 the government decided to increase public services and reduce the pace of investment. This will also curb or slow the FDI carried out by these companies, compared with the strong growth seen over the past few years.

10

11

In May 2009 the Ministry of Commerce delegated responsibility for assessing and approving outward FDI to the provincial authorities; for projects that are larger scale and more politically sensitive, the Ministry must issue its assessment within 30 working days and the provincial authorities must take a final decision within 20 working days. Projects worth over US$ 200 million also require the approval of the NDRC. There are four large banks in China, and all are controlled by the State despite being listed on the stock exchange: Industrial and Commercial Bank of China, Bank of China, China Construction Bank and Agricultural Bank of China. Their main business consists

12

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particularly large individually, as a group they dominate the Chinese economy.13 Their shareholders in any case often still include public institutions. Lenovo is a case Chinese Academy of Sciences. Often, they were created as municipal companies that later opened up to private shareholders, but retained the link with the local government
13

as a means of facilitating the company’s operations in its home municipality. Taking into account the shares held by local governments and government-controlled organizations minority holdings in many cases very few Chinese transnational companies are entirely private, though the government only has direct control over those managed by the SASAC.

These companies (including subsidiaries of transnational companies) Table III.4 the case of State-owned companies.
Company 1 2 3 4 5 6 7 8 9 Sinopec State Grid China National Petroleum China Mobile Communications Industrial & Commercial Bank of China China Construction Bank China Life Insurance China Railway Construction China Railway Group Agricultural Bank of China Bank of China China Southern Power Grid Dongfeng Motor China State Construction Engineering Sinochem Group China Telecommunications Shanghai Automotive China Communications Construction China National Offshore Oil CITIC Group China FAW Group China South Industries Group Baosteel Group COFCO China Huaneng Group Hebei Iron & Steel Group China Metallurgical Group Aviation Industry Corporation of China China Minmetals China North Industries Group

TOP 30 CHINESE COMPANIES LISTED IN THE FORTUNE GLOBAL 500, BASED ON 2009 SALES (Millions of dollars)
World ranking 7 8 10 77 87 116 118 133 137 141 143 156 182 187 203 204 223 224 252 254 258 275 276 312 313 314 315 330 332 348 Sales 187 518 184 496 165 496 71 749 69 295 58 361 57 019 52 044 50 704 49 742 49 682 45 735 39 402 38 117 35 577 35 557 33 629 33 465 30 680 30 605 30 237 28 757 28 591 26 098 26 019 25 924 25 868 25 189 24 956 24 150 Manufacturing Manufacturing Steel Food Electricity Steel Steel Manufacturing Mining Manufacturing Sector Hydrocarbons Electricity Hydrocarbons Telecommunications Finance Finance Finance Infrastructure Infrastructure Finance Finance Electricity Manufacturing Infrastructure Hydrocarbons Telecommunications Manufacturing Infrastructure Hydrocarbons

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Source: Fortune Global 500. Note: Highlighted companies have invested in Latin America.

Nevertheless, even in the case of State-owned companies, Chinese FDI cannot be explained solely as a response to government policy. As in other countries, these outflows of capital are driven by a combination of official policies, indications from world markets and internal economic conditions in the recipient country. Aside from the importance of the State sector, which has already been mentioned, the following characteristics of the Chinese economy have the greatest impact on the investment strategy adopted by transnational companies: fast growth, extremely high saving levels, an export trend
13

These companies (including subsidiaries of transnational companies) the case of State-owned companies.

within the manufacturing sector, strong domestic investment in infrastructure and a focus on science, technology and innovation. As a result, many Chinese companies have acquired financial, technological and operational capacities that have turned them into major foreign investors. Many companies operating in an economy with high rates of growth, especially in the sectors enjoying the most protection from international competition have grown, expanded their capacity and accumulated profits over the past few years. Oil companies, for example, have benefited as well from a production structure tailored to energy-intensive sectors, and companies specialized in building infrastructure have also had unique opportunities for expansion thanks to the fast pace of construction in China in recent years.

Economic Commission for Latin America and the Caribbean (ECLAC)

The export trend within the Chinese manufacturing sector has encouraged companies to invest in certain countries and industries in order to sidestep trade barriers, as will be seen later in the Brazilian case study. It has also generated considerable investment in activities supporting overseas trade, such as selected kinds of financial services, logistics and transport services, and overseas sales offices. Lastly, recent technological advances in certain industries have created technological capacity in some companies, which is beginning to be exploited in other markets through direct investment. Companies specializing in telecommunications infrastructure (such as Huawei) and railway equipment (such as China South Locomotive & Rolling Stock) exemplify this trend. Paradoxically, the shortcomings of the business environment in China when compared with the main investor countries in the world may also be an incentive for companies to invest abroad. There have been instances in the past of companies in emerging economies investing overseas to make it more difficult for their governments to expropriate their assets or to gain access to public services of a better quality than those available in their domestic markets (Sauvant and McAllister, 2010). Acquiring key assets has been an important factor behind Chinese FDI (Deng, 2009; Child and Rodrigues, 2005).

Many Chinese firms have acquired foreign companies to obtain technology or brands that would take years to acquire in China, the most well-known examples being Lenovo-IBM and Geely-Volvo (ECLAC, 2010a, chapter II). This is a characteristic shared with other developing economies, such as India (Fortanier and Tulder, 2008; Athreye and Kapur, 2009). The above-mentioned expansion strategy is reflected in the marked preference within Chinese FDI for mergers and acquisitions, with the corresponding absorption of brands and tacit knowledge, rather than greenfield through mergers and acquisitions and various surveys indicate that this mode of entry will become even more common in the future (OECD, 2008). All major operations in Latin America have been effected through mergers and acquisitions, with the exception of those governed by State agreements, as in the oil sector (see table III.5). In some cases, Chinese companies invest abroad because of obstacles to national expansion, such as explicit regulations or business practices that protect some markets from competition. For these reasons, companies such as Sinopec and State Grid that would typically seek to expand into other regions of China have chosen FDI.

Table III.5 CHINA: MAIN OVERSEAS ACQUISITIONS BY VALUE These shortcomings are apparent in the quality and depth of the (Millions financial markets, the rule of law and protection against expropriation, of dollars) regulations governing competition, physical infrastructure, protection Target company Ranking Year Acquiring enterprise Sector Country of intellectual (percentagehuman capital and trade transparency property, acquired) (OECD, 2010).Rio Tinto PLC (9%) a Chinalco Mining United Kingdom 1 2008
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 2009 2010 2008 2010 2005 2008 2006 2010 2008 2010 2006 2009 2009 2006 2008 2005 2010 2010 2010 2006 2009 Addax Petroleum Corporation Repsol YPF Brasil SA (40%) Standard Bank Group Ltd (20%) Syncrude Canada Ltd (9%) a PetroKazakhstan Inc Awilco Offshore ASA OAO Udmurtneft Bridas Corporation (50%) Tuas Power Ltd Album Resources Private Ltd NNPC-OML 130 (45%) OAO MangistauMunaiGaz Felix Resources Ltd Nations Energy Company Ltd Tanganyika Oil Company Ltd IBM Corporation (Personal Computing) Athabasca Oil Sands (assets) Expansión Transmissão Itumbiara Volvo Car Corporation EnCana Corporation (Ecuador assets) OZ Minerals Ltd (certain assets) Sinopec Sinopec ICBC Sinopec CNPC CNOOC Sinopec CNOOC Huaneng Minmetals CNOOC CNPC Yankuang CITIC Sinopec Lenovo CNPC State Grid Geely Sinopec Minmetals Oil Oil Finance Oil Oil Oil Oil Oil Electricity Mining Oil Oil Mining Oil Oil Manufacturing Oil Electricity Manufacturing Oil Mining Switzerland Brazil South Africa Canada United Kingdom Norway Russian Federation Argentina Singapore Australia Nigeria Kazakhstan Australia Canada Canada United States Canada Brazil Sweden Ecuador Australia

Value 14 284 7 157 7 111 5 617 4 650 4 141 2 501 3 500 3 100 3 072 2 818 2 692 2 604 2 807 1 956 2 028 1 750 1 737 1 702 1 500 1 420 1 386

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by Thomson Reuters. Abbreviations a These shortcomings are apparent in the quality and depth of the financial markets, the rule of law and protection against expropriation, regulations governing competition, physical

infrastructure, protection of intellectual property, human capital and trade transparency (OECD, 2010).

Foreign

3.

Forms of Chinese foreign direct investment
(ii) Manufacturing companies that choose FDI as a way to serve certain markets, as an alternative to exporting from China. Within this category, original equipment manufacturers that have become independent from their original partners play a prominent role. In Latin America, this kind of investment is mainly found in Brazil (see section E.2); (iii) Smaller manufacturers with very idiosyncratic strategies. These kinds of investment do not tend to be made in Latin America. They are generally concentrated in Asia, and rely a great deal on personal contacts. The smallest firms (“briefcase transnationals”) target the nearest and poorest countries such as the Lao People’s Democratic Republic and Cambodia (Yeung and Liu, 2008). (d) Diversification Over and above simply seeking markets, some Chinese companies are forced to invest abroad in order to diversify, having found this impossible in China. The oil company Sinopec is an example of this: it invests in extracting oil outside China rather than within the country, as this sector is already occupied by other companies. (e) Efficiency-seeking As production costs in China go up, more companies are choosing to move production outside the country to reduce costs. In less sophisticated industries, companies are turning to other Asian countries with lower labour costs, such as Viet Nam. Companies with greater technological content sometimes include Latin American countries in their investment plans, as Lenovo did with Mexico (see section E.2). The Chinese government openly supports diversification and the acquisition of natural resources and key assets, while market-seeking and efficiency-seeking strategies are supported to a lesser degree or not explicitly.

All the above-mentioned factors, sometimes at work within the same company, result in fairly diverse forms of FDI, as described below. Some drivers are more important than others, and not all are present in Latin America and the Caribbean. (a) Acquisition of natural resources This has been the reason behind the largest Chinese investments in the world to date, particularly in Latin America. It has primarily been carried out by State-owned companies (see section D). (b) Acquisition of other key assets The company Lenovo is perhaps the most famous example of this. When IBM made the strategic decision to stop producing computers and concentrate on services, Lenovo seized the opportunity to acquire this area of the business both the technology and the brand. In a very short space of time it had become a company with an international presence and a recognized brand, a process that would have taken a decade through organic growth. This kind of investment occurs naturally in developed countries, although it has indirect implications for Latin America too. Companies in this segment tend not to be State-owned. (c) Market-seeking This is always an important driver of FDI for many kinds of companies, including: (i) Companies contracted to build public works and industrial infrastructure that have developed their capacities in the Chinese market and are looking to expand internationally. Some are already highly developed technologically, such as manufacturers of telecommunications networks, and others specialize in works funded by the Chinese government (see section E.1);

4.

Reactions among recipient economies innovation systems in recipient countries as may be expected because of the emphasis on acquiring natural resources or other key assets such as technology or brands. When it comes to acquisitions seeking key

To date, Chinese FDI has focused on acquiring natural resources and other key assets, and the potential benefits of this for recipient economies are debatable. Chinese FDI does not contribute as much to national

Economic Commission for Latin America and the Caribbean (ECLAC)

assets, mainly technology, the relationship between the recipient country and the transnational company is reversed: rather than the investment bringing new technology, technology developed locally is absorbed by the foreign company. To put the expansion of asset-seeking Chinese companies into perspective, the circumstances and strategy of the companies selling these strategic assets must be taken into account. In the main, they consist of groups that are restructuring their business through an expansion plan or in response to a crisis, and feel that a large part of their assets no longer add value to the group. The sale of Volvo to Geely, for example, meets these criteria, and may be seen as part of a worldwide tendency for car production capacity to decrease in North America

and Europe and increase in China (ECLAC, 2010a, chapter II). However, transferring ownership of these assets does allow these changes in world industry to take place in a less destructive manner than the closure of Volvo’s production factories would. Besides its meagre contribution to local innovation capacity, Chinese FDI has suffered criticism in recent years for being under the control of the State, for being driven by State strategy more than by business considerations and for constituting unfair competition in cases where private companies in other countries have shown interest in the same acquisition. These criticisms have been put forward in a number of noteworthy cases, mainly in developed countries, where some large acquisitions have

Table III.6 CHINA: MAIN FAILED ACQUISITION ATTEMPTS OVERSEAS BY VALUE (Millions of dollars)
Year 2005 2009 2007 2009 2009 2008 2004 2004 2010 2009 MG Rover CSR-Sucrogen Block 32 Offshore Target company Unocal Rio Tinto Barclays Hamersley Iron Nufarm Fortis Investment Management Target percentage 100 18 6 50 100 50 100 70 100 20 Country United States United Kingdom United Kingdom Australia Australia Belgium Republic of Korea United Kingdom Australia Angola Buyer CNOOC Chinalco China Development Bank Chinalco Sinochem Ping An Insurance Sinochem Shanghai Automotive Industry and Nanjing Motor Bright Food CNOOC Sinopec Sector Oil Mining Finance Mining Manufacturing Finance Manufacturing Manufacturing Manufacturing Oil Value 19 519 19 500 5 594 5 150 3 484 3 362 1 965 1 908 1 610 1 300

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of information provided by Thomson Reuters. Abbreviations

The first and most important case was Unocal, the United States oil company which went on sale in 2005. The Chinese State-owned company China National Offshore Oil Corporation (CNOOC) made a hostile takeover bid of US$ 19 billion. The United States government opposed it on national security grounds and because it considered that an offer by a State-owned company constituted unfair competition. In the end, CNOOC withdrew its offer and Unocal shareholders accepted a lower offer from Chevron. Chinalco and Rio Tinto, the Australian-British mining giant, have had a more complex relationship. Having Chinese company made a complex offer in 2009 to increase directors following opposition from a significant number of the shareholders, although the Australian government’s approval was also needed and its position was uncertain. Later, the two companies began working together again on joint projects in Guinea and in China itself. In the case of Huawei, the company’s attempted acquisitions in the United States were vetoed outright, for

national security reasons. The company (which is not listed on the stock exchange and does not publish statistics on its shareholders) maintains that the bulk of its shares are held by its employees, but the United States government suspects that the company has ties to the Chinese army. In 2008, the Committee on Foreign Investment in the United States blocked Huawei’s acquisition of 3M, because 3M manufactures equipment for the United States army. In 2010, another two offers (for 2Wire and a unit of Motorola) were rejected for the same reason. Chinese companies are not the only ones to see their acquisitions blocked. There have recently been other significant cases in which recipient governments have blocked cross-border acquisitions using the national security argument,15 but there is no doubt that Chinese companies experience much higher numbers of failed

(Financial Times, 2011a).
15

Two important examples are the attempts by Dubai World to acquire the assets of P&O in the United States and those of Potash in Canada.

Foreign

D. Chinese companies and natural resource extraction in Latin America and the Caribbean

1.

Strategies for supplying China with raw materials
China Development Bank, have played a prominent role. In 2009, the bank lent US$ 10 billion to the Brazilian company Petrobras, in exchange for 200,000 barrels a day. It also lent the Government of the Bolivarian Republic of Venezuela US$ 10 billion in 2010, and made available a similar sum in yuan. This loan will be repaid in the form of oil exports of between 200,000 and 300,000 barrels a the country’s current oil exports. In 2005, the Chinese State-owned company Minmetals signed a US$ 550 million agreement with the Chilean State-owned company CODELCO to purchase a long-term supply of copper ore (see section D.3). Although these loans do not constitute FDI, they often include clauses favouring the involvement of Chinese companies. In the agreement with the Bolivarian Republic of Venezuela, there are clauses expressly tying part of the loan to infrastructure development projects that Chinese companies will work on. The Minmetals agreement included an option to purchase shares, which ultimately was not exercised. The Petrobras loan has no terms of this kind, although the Chinese companies Sinopec and Sinochem did make investments shortly after the loan signing.

The growth and development of the Chinese economy has had a huge impact on the consumption and trade of raw materials worldwide. Although China produces considerable and increasing amounts of these materials, the massive surge in domestic demand has rapidly turned the Asian giant from a net exporter of raw materials into the largest net importer in the world. Between 2000 and

consumption of copper compensated for the drop in the rest of the world). Other developing economies have also fuelled the increase in consumption, but to a much lesser degree: comparable percentages for India, for example, Rising prices of raw materials over the past six years have prompted many governments in importing countries to adopt overt or not-so-overt strategies to ensure they have sufficient supplies. China has taken diplomatic and trade measures with this objective in mind, including long-term purchasing contracts, direct investment and donations to exporting countries. In Latin America and the Caribbean, “finance for assured supply” agreements, normally channelled through

2.

Investment in hydrocarbons
Sinochem and China National Offshore Oil Corporation (CNOOC). These firms have experienced strong growth in the past decade and are now among the largest oil companies in the world (see table III.7).

In China, the extraction and distribution of minerals and hydrocarbons is dominated by State-owned companies, and inward FDI is highly restricted. The hydrocarbons sector is completely controlled by four companies: Sinopec, China National Petroleum Corporation (CNPC),

Economic Commission for Latin America and the Caribbean (ECLAC)

Table III.7 TOP CHINESE AND GLOBAL OIL COMPANIES, 2009 Company Royal Dutch Shell ExxonMobil BP Sinopec China National Petroleum Corporation Sinochem China National Offshore Oil Corporation Fortune Global 500 ranking 2 3 4 7 10 257 409 Hydrocarbons production (millions of barrels/day) 3.3 4.2 3.8 0.7 3.7 0.02 0.8 (billions of dollars) 13 19 17 4 15 0.6 4

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of the Fortune Global 500 and company annual reports.

All are State-owned, although they are also listed on stock exchanges in China and overseas through subsidiaries. They have different characteristics depending on their origin and the business strategy adopted over the past decade. CNPC, for example, is the successor to the former Ministry of Petroleum and has traditionally focused on extraction. Sinopec specializes in processing and distribution while CNOOC, a newer company, specializes in exploiting off-shore wells. Sinochem was responsible for exporting oil from China and hence is the most international of the four. All these firms have diversified in recent years, becoming large energy groups and sometimes conducting activities in other sectors, such as the chemical industry, agriculture and finance. However, company origins continue to have a bearing on the strategies adopted. Of the four, CNPC is still the company that focuses most on production and is the first to look overseas, where it tends to join forces with governments and State-owned enterprises. CNOOC operates in a segment requiring state-of-the-art technology and therefore has a longer tradition of forming partnerships with foreign companies. Sinopec and Sinochem have both frequently opted for partnerships with private companies. All four are now truly global companies, although the percentage of their assets outside China continues to be small: (VCC, 2010). They may or may not act as operator; they may operate alone or buy a stake in a strategic partnership with a State-owned enterprise or a transnational company. Also, like other large corporations in the industry, they participate in the international market for oilfield services, as both suppliers and customers (Shankleman, 2009). For
Oilfields are usually controlled by consortia of companies. One company is the operator and is responsible for deciding the mode of production and managing relations with the authorities and local communities. The other companies in the consortium have a much more passive role. Other oilfields are exploited through joint ventures. The partners nominate individuals to manage the new company in accordance with their proportion of company shares.

example, Sinopec constructed a gas pipeline in Brazil in 2010 under a contract for US$ 1.25 billion. Soaring consumption in China (which has doubled in the past decade, compared with an increase of only the four companies’ refining and distribution activities and has exposed their relatively scant reserves. Sinopec, refineries from other producers in 2009 (Sinopec, 2009). This business rationale, coupled with pressure from the government to secure sufficient supplies of energy, led to a raft of acquisitions in 2010. According to estimates, a fifth of all acquisitions within the industry in 2010 were made by Chinese companies (Financial Times, 2010). The growth in China’s acquisition of oil assets can be explained by the resources at its disposal (both those generated internally and bank loans) and also by unusual levels of supply in the market, following the decision by many large companies to sell off non-essential assets to fund new exploration.17 In contrast to other Chinese transnational corporations, companies in this sector have been keen to invest in Latin America and the Caribbean and the largest acquisitions thus far have been made in this industry. As elsewhere in the world, Chinese oil investments in the region have gone through two stages: the first mainly involved individual exploration and production concessions tied to agreements between States, while in the second, more recent, stage, Chinese companies have opened up to partnerships with private international companies (see table III.8). In Latin America and the Caribbean, CNPC was the main player during the first stage, and began by acquiring concessions to exploit oilfields in the Bolivarian Republic of Venezuela, Ecuador and Peru. The company later increased its assets in Ecuador and Peru by purchasing small oil companies with assets in these countries.
17

The consultancy firm Derrick Petroleum Services estimates that in late 2010 US$ 90 billion in oil assets was on the market.

Foreign

CNPC’s largest operations have been in the Bolivarian Republic of Venezuela. In line with new government policy, the concessions CNPC was exploiting as sole operator the State-owned company, Petróleos de Venezuela SA (PDVSA). In total, CNPC controls approximately 3 million tons of production annually in the Bolivarian Republic of In Ecuador, the company (along with other foreign operators) also had to agree to new government terms in 2010, meaning the State would be the sole beneficiary

of any profits and companies would be compensated for production at a flat rate. As for investments in processing, CNPC currently has two major projects that have yet to get under way. Working with the government and PDVSA, the company is planning to expand the Cienfuegos refinery in Cuba by building a regasification plant and a combined-cycle thermoelectric which will be guaranteed in full by the Government of the Bolivarian Republic of Venezuela in the form of crude oil

Table III.8 CHINA: MAIN INVESTMENTS IN HYDROCARBONS IN LATIN AMERICA AND THE CARIBBEAN, 1994-2010 (Millions of dollars) Investment projects Country by company Extraction CNPC CNPC CNPC CNPC CNPC CNPC CNPC (55%) and Sinopec (45%) Sinopec Sinochem Sinopec Sinochem Sinopec CNOOC CNOOC Peru Venezuela (Bolivarian Republic of) Venezuela (Bolivarian Republic of) Ecuador Peru Peru Ecuador Colombia Colombia Brazil Brazil Argentina Argentina Argentina 1994 1998 1998 2003 2004 2005 2006 2006 2009 2010 2010 2010 2010 2010 46 > 240 … 199 200 80 1 420 800 877 7 111 3 070 2 450 3 100 3 500 Licence Licence Licence Licence Mergers and acquisitions Licence Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions In joint production with PDVSA, amounts invested unknown In joint production with PDVSA Withdrew in 2010 owing to the regulatory changes In production; 45% of Plus Petrol Norte In production; blocks 111 and 113 in Madre de Dios In production; purchased the assets of Canadian company Encana in Ecuador In production; acquired 50% of Orimex In production, acquired 100% of Emerald Energy (United Kingdom) 40% of Repsol Brasil 40% of Statoil Brasil, pending approval by the Chinese and Brazilian governments 100% of Occidental Argentina, which belonged to Oxy, a United States company 50% of Bridas, national oil company 100% of Pan American Energy, owned by BP, jointly with Bridas, not yet carried out Announced, not yet carried out Announced, not yet carried out Year Estimated Mode investment of entry Notes

CNPC CNPC Total

Costa Rica Cuba

2009 2010

700 ... 23 553

Source: Economic Commission for Latin America and the Caribbean (ECLAC). Abbreviations

In Costa Rica, CNPC reached an agreement in 2009 with the State-owned company Refinadora Costarricense de Petróleo (RECOPE) to build and operate a large refinery on the Atlantic coast. Although investment figures of close to US$ 700 million have been quoted, a feasibility study to be completed in October 2011 will set out in detail the amounts of oil to be refined and the respective investments. This project forms part of China’s cooperation with Costa Rica since diplomatic relations were established in 2007 in the Bolivarian Republic of Venezuela and in Ecuador

are all governed by agreements between the Chinese government and these countries. The second phase of oil investment in Latin America and the Caribbean, in which Sinopec, Sinochem and CNOOC have also participated, has been characterized by the acquisition of private companies already in production and strategic partnerships with Western companies. These investments accelerated spectacularly in 2010 and have centred on relatively new oil-producing countries. The most important of these is Brazil, where millions in investment will be needed to exploit the vast

Economic Commission for Latin America and the Caribbean (ECLAC)

pre-salt oilfields. Petrobras will be the main operator, but transnationals will also be allowed to participate. In Brazil, Sinopec and Sinochem have both entered into partnerships with European companies that have been granted concessions in the new pre-salt oilfields (Repsol and Statoil). The capital inflow from the Chinese companies will help these affiliates raise the huge sums required to exploit the oilfields. Sinopec will have oil as a result.18
18

In Argentina, the regulatory framework does not look favourably on FDI in this sector. There has been very little investment over the past decade. In fact, the Chinese acquisitions were the biggest foreign investments in the Argentine hydrocarbons industry since Repsol bought Yacimientos Petrolíferos Fiscales (YPF) over 10 years ago. CNOOC, after joining forces with Bridas and buying up BP’s assets in the country, increased its oil barrels to its reserves.

3.

Since this involves the purchase of a share in a foreign subsidiary, this acquisition will not increase net inward FDI in Brazil, because the capital inflow from China will be cancelled out by a capital outflow to Norway. However, China’s weight as an investor will increase considerably. Recent investments in

metal mining by acquiring assets in other countries, Chinese steel firms are keen to reduce their exposure to the iron ore market. use on the international market, which leaves them very vulnerable to price increases of the kind seen in recent years. In contrast, the world’s biggest iron and steel and the Brazilian firm Companhia Siderúrgica Nacional (CSN) is an iron ore exporter (ECLAC, 2010a, chapter III). Until 2007, the steel firm Shougang had been the only Chinese company to invest in mining in Latin America and the Caribbean (in Peru). The company very quickly found itself embroiled in a serious employment and environmental dispute with the local community (see box III.3), but continued to increase its iron production to 5 million tons a year and its exports to nearly US$ 300 million. The Peruvian subsidiary is managed almost exclusively by Chinese executives and its operations are incorporated into the group: it exports the ore via its own port and sends it to subsidiaries in China (Sanborn and Torres, 2009).

In addition to the large iron and steel producers which are investing in iron ore and coal mining, some 20 Chinese companies have made overseas investments in mining (Shankleman, 2009). Like oil companies, they have experienced strong growth in recent years and now have a major international presence, in particular the Stateowned companies Minmetals and Chinalco, which are the first- and second-largest mining companies in China respectively (see table III.9). Other Chinese companies with large investments in Latin America and the Caribbean are the State-owned iron and steel producers Wuhan and Shougang, fourth- and twelfth-largest in the world respectively; Zijin and partners Tongling and Xiamen (Wall Street Journal, 2010), which are controlled by local governments; and the privately owned iron and steel producer Nanjinzhao. Like the oil companies, a relatively small proportion

mining companies are looking to boost their production

Table III.9 TOP CHINESE AND GLOBAL MINING COMPANIES, 2009 (Billions of dollars) Company BHP Billiton Rio Tinto China Metallurgical Group China Minmetals Vale Chinalco Fortune Global 500 ranking 139 173 315 332 363 436 Sales 50 42 26 25 23 20 6 5 0.4 0.3 5 -0.6 Country Australia United Kingdom China China Brazil China

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of the Fortune Global 500.

18

Since this involves the purchase of a share in a foreign subsidiary, this acquisition will not increase net inward FDI in Brazil, because the capital inflow from China will be cancelled out by a capital outflow to Norway. However, China’s weight as an investor will increase considerably.

Foreign

Box III.3 SHOUGANG IN MARCONA: TALE OF A DISPUTE

In one of the earliest privatizations in

pay and conditions and has laid off trade union leaders, refusing to reinstate them even after a court declared the dismissals null and void. A health inspection revealed from pneumoconiosis (dust in the lungs) or deafness. While these problems are not exclusive to Shougang, it has been more severely affected than other mining companies in the country. The company,

regard, but the municipality of Marcona continued to denounce it for dumping

to settle debts, although the latter amount addition, the company agreed to invest

privatization had not been carried out in the best interests of the Peruvian State goods and services that should have been transferred to the State) and that management had been inadequate, leading to the labour and environmental disputes.

reported to the Peruvian authorities on several occasions for environmental labour dispute that is still unresolved. The company has faced repeated strikes over of a “cultural problem”. to have fulfilled all its obligations in this

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of C. Sanborn and V. Torres, La economía china y las industrias extractivas: desafíos para el Perú,

international engineering firm. export iron ore or copper concentrate to subsidiaries in China, They bought mines from the junior enterprises that had developed them, intending to entrust construction of the mine to a major the country’s production structure and its emerging national innovation system.

CHINA: PRINCIPAL MINING INVESTMENTS IN LATIN AMERICA AND THE CARIBBEAN, 1992-2010 (Millions of dollars) Company Peru Shougang Chinalco Zijin (45%), Tongling (35%) and Xiamen (20%) Minmetals (60%) and Jiangxi (40%) Nanjinzhao Brazil Wuhan Steel ECE Guyana Bosai Minerals Bauxite 2008 1 000 In operation Iron Iron 2010 2010 400 5 000 1 200 Extraction of iron ore under way; iron and steel plant announced, no operational start date Iron Copper Copper Copper Iron 1992 2007 2007 2008 2009 253 830 190 543 100 1 000 2 200 1 440 2 500 1 500 In operation, expansion announced Environmental impact study under way, production to begin in 2013 Feasibility study under way, no production date Environmental impact study under way, production to begin in 2014 Exploration phase Line of business Year of entry Investments Investments completed announced Status

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

One fundamental characteristic distinguishing these four groups from Shougang is that they are aware of the social and environmental responsibilities their operations entail. Until only a few years ago Chinese companies in this industry rarely considered their social and environmental responsibilities, since they were used to operating in an environment where all external costs were taken care of by the State. As these companies have expanded into

countries where governments and civil society have certain expectations of mining companies, they have learned to incorporate these considerations into their way of operating, following the example of Western companies.
19

As all the junior enterprises were foreign (many of them Canadian), the US$ 1.52 billion spent between 2007 and 2009 does not appear in the net FDI flows to Peru, although the assets of Chinese companies in the country have increased by this amount.

Economic Commission for Latin America and the Caribbean (ECLAC)

Recent experiences in Peru, a country with a highly active civil society where the mining industry is concerned, reflect this new attitude among Chinese companies. Both Chinalco and Minmetals have entrusted their subsidiaries’ operations in Peru to an international management team, and plan to strengthen where possible economic ties with the local communities. Before beginning to construct the mine, Chinalco carried our major wastewater treatment works (to resolve a problem originating from earlier mine exploitation) and began to build a new town to resettle approximately 5,000 people living close to the mine. The (Sanborn and Torres, 2009). The project run by Zijin poses particular difficulties, and the price to acquire it was accordingly much lower than normal for a mine of its size.20 The feasibility of the project is still under review, and the company is endeavouring to win the trust of the communities involved. It is estimated that US$ 30 million has been invested thus far in exploration and in small local projects covering a three-year period. Chinese mining companies have focused on Peru because the country is open to FDI in this sector, and because the country had significant mining assets to develop at a time when those companies were looking to step up the pace of their overseas expansion. The main Chinese investments in Peru were all made around the same time, meaning that these companies entered the market at a point when prices were at a historic high. The Toromocho project, for example, had twice previously been declared void when copper prices were low, in 2001 and 2002; when Chinalco took it over in 2007, it paid US$ 800 million. Many of these projects could be very sensitive to an abrupt change in the copper cycle and, if this were to happen in the next few years, some may not go ahead. The situation in Chile, the world’s largest copper producer, is different because the biggest mining assets are already shared among long-established companies. Moreover, Chinese investment prospects in Chile have suffered as a result of Minmetals’ failure to acquire the
20

Gaby mine. This was part of an advance purchase agreement Cobre de Chile (CODELCO), a Chilean State-owned company and the largest copper producer in the world. The agreement was signed at a time when metal prices were low and CODELCO had an ambitious investment plan but lacked the funds to carry it out. Under the terms of the agreement, Minmetals would pay US$ 500 million and CODELCO would supply 55,750 tons of copper annually over a 15-year period. When the agreement was signed, the prevailing market price of copper was used as a reference, which was approximately one dollar for one pound of copper. This was a particularly good deal for Minmetals because, apart from a brief period in late 2008, The agreement included an option to buy a stake tons of copper a year (with the capacity to produce up to 150,000 tons). The agreement was strongly criticized within Chilean society, particularly among those working at the facility, who feared that any privatization, even partial, would result in erosion of their labour rights. Coming under political and social pressure, CODELCO and Minmetals gave up on the purchase and the mine remained the sole property of CODELCO. Minmetals received no compensation; it could have insisted on its right to buy, but it preferred to avoid a confrontation with the Chilean government. Outside Peru, the biggest mining investments to date have been made in Brazil in the iron sector, although the amounts involved have been smaller as the country’s resources are already largely controlled by domestic companies. Wuhan joined forces in 2010 with MMX, a mining subsidiary of the Brazilian company EBX. It has no operational responsibilities but receives some of the production, which it exports to China. MMX plans to increase its capacity from 8.7 million to 33.7 million tons by 2013. Wuhan has expressed its intention to invest up to US$ 5 billion in an integrated plant to produce semi-finished steel (slabs) in Brazil, through a strategic partnership with EBX.21 This project was announced in late 2009 but has not yet been carried out. Although Wuhan still has these plans, the project is on hold because of major bottlenecks affecting infrastructure in the area, particularly the train line for transporting the ore to the factory. The Chinese iron and steel company Baosteel was similarly unable to execute its planned project. In collaboration with the Brazilian company Vale, it was planning to build an integrated plant with a five million
21

The controversy over this project dates from 2003, when the Peruvian government declared it to be a matter of “public necessity”, thereby allowing foreign investment despite the fact that the project’s location near the border meant this was prohibited by the Constitution. The communities affected claim that the project is illegal and that it could harm the environment and agriculture in the area. The company was accused of being responsible for the death of a leading agricultural worker following a protest march, and a group of nine demonstrators reported having been tortured and held by the police for three days in company facilities. The conflict attracted the attention of several national and international non-governmental organizations, who asked the foreign investors to withdraw from the project (Sanborn and Torres, 2009). The British owner company finally agreed to sell it to the Chinese consortium in 2007.

Slabs are the first stage in the production of flat-rolled steel. Brazil has specialized in this segment of the iron and steel industry, given the abundance of iron ore in the country (ECLAC, 2010a).

Foreign

ton capacity. The agreement was signed in 2007 but the Chinese company abandoned the project when the financial crisis brought the industry’s expansion plans to a halt (ECLAC, 2010a). In the end, Vale bought out Baosteel’s stake in April 2009. In total, Chinese mining and hydrocarbons companies have invested almost US$ 27 billion in the region, 2010. China now has considerable influence in certain countries and sectors, such as mining in Peru. While production by Shougang (the only Chinese company in country’s mining exports, the portfolio of projects run by the five Chinese companies examined here accounts

In small economies, a single investment can make a big difference: the Bosai bauxite mine in Guyana is a case in point. Around US$ 1 billion is to be invested, to increase
22

The biggest acquisitions overall have been made in the Brazilian oil sector. The reserves controlled by Sinopec and Sinochem are estimated to amount to 1 billion barrels, compared with around 50 billion controlled by Petrobras. China has brought US$ 20 billion in capital to the industry, including the loan from China Development Bank. This figure is nevertheless still lower than the US$ 70 billion Petrobras obtained

and through debt-issuing.23

4.

Investment in agriculture, fisheries and forestry resources
US$ 103 million in a local fishing company, and has Sugar cane is another important sector. Following a privatization in Jamaica, the Chinese trader Complant Sugar bought assets worth US$ 92 million. The operation includes the lease of 30,000 hectares of land for 50 years to cultivate sugar cane, improvements in sugar cane fields and mills for US$ 127 million during the first phase, and a possible expansion to include a refinery and an ethanol plant for US$ 221 million. In addition, one of China’s top food import companies (COFCO) bought a stake in Viña Bisquertt in Chile for US$ 18 million in 2010. There are major plans to invest in agriculture, but none appear to have come to fruition so far: the Chinese province of Heilongjiang has expressed an intention to invest US$ 100 million in Argentina to produce soybean for export, while the Chinese-owned company Sol hopes to invest US$ 30 million in Brazil to produce rice and soybean. Although FDI flows in this sector are small in comparison with the investments in oil exploration, the capital inflow from China for agricultural production may have a major impact on the development of this sector, and as a consequence, on livelihoods in rural areas. A study of
22

Investment in the agricultural, fisheries and forestry sectors is driven by the same factors as in the mining and hydrocarbons industries: soaring consumption of these products in China has prompted companies acting as distributors there to seek backward (vertical) integration through overseas investment. In addition, there has been an upward trend in the prices of many agricultural products, similar to or steeper than that of oil and metals. FDI has therefore become a means for the companies to protect themselves against these rises. Chinese companies able to invest in these sectors are generally much smaller than those in the mining or hydrocarbons sectors, and have less financial capacity and less weight in diplomatic relations. The agricultural sector has traditionally been characterized by fragmentation in both production and distribution, and is fairly unreceptive to FDI. In many cases there are formal restrictions on inward FDI, in particular regarding the purchase of land. As a result, investment projects in this sector are frequently not publicized and are difficult to trace. Nevertheless, there is evidence of some major operations, and indications are that the strong demand from China and the (relative) abundance of natural resources in Latin America and the Caribbean will together create great potential for FDI in sectors such as crops, livestock and forestry. The biggest investment projects are found in sectors that are more formalized and regularized. For example, fishing quotas make the Peruvian fishing industry a closed sector. China Fisheries Group, a Chinese distributor, invested

fDi Markets estimates. For further information, see [online] http:// www.nanchuanminerals.com/. US$ 28 billion in cash, it will raise US$ 155 billion internally (taking a price of US$ 80 a barrel as a reference) and it will issue Financial Times (2011b).

23

Economic Commission for Latin America and the Caribbean (ECLAC)

the timber industry in the Peruvian Amazon suggests that Chinese FDI may affect the domestic industry significantly as it becomes incorporated into the value chain in China and reduces the value added in Peru (Putzel, 2009).25 The thorny subject of foreign land ownership is even more important. The threat of a massive influx of Chinese investors has prompted a review of the current, relatively lenient policies. In Brazil, the government has had to pass a decree to clarify the existing regulation, restricting the purchase of land by foreigners and setting a limit of
25

50 exploitation units per foreign person or company. may be owned by foreigners, and only a quarter of those foreigners may be of the same nationality. While technically this constitutes a clarification of an existing rule rather than something new, it will undoubtedly have an impact on potential Chinese investment in agriculture, probably persuading Chinese companies that have been investing on an individual basis to seek alliances with Brazilian partners.
The exploitation unit (módulo de exploração) has been established by the Brazilian government as the amount of land needed to support a family; its size varies from region to region (Attorney General’s Opinion LA-01 of 19 of August 2010).

Chinese companies have a huge presence in the export of wood from the Peruvian Amazon (compared with exports from the Brazilian Amazon, where they have a limited presence). The main reason for this is that companies have been able to establish personal contacts through the Chinese community in Peru. Another important point raised by this study is the trend towards a value chain increasingly led by Chinese transnationals that export wood from Peru and process it in China, reducing the domestic value added.

E. Diversification of Chinese investment into infrastructure and manufacturing are sales offices or similar. While the amounts invested are very small and add virtually no domestic value, in many instances this provides an opportunity to get to know the local market and invest in productive activities; this has been the case for the Chinese company Gree, a manufacturer of air conditioning units, in Brazil, and could also apply to the automobile manufacturer Chery, also in Brazil. Given the scale of trade in goods between China and Latin America and the Caribbean, it is not surprising that investments designed to facilitate this trade may become moderately important. These include investments in transport infrastructure (discussed below) and possibly shipping companies. There are two large Chinese subsidiaries in Brazil: COSCO and China Shipping. In addition, the second-largest bank in China, the Stateowned Bank of China, recently opened a subsidiary in Brazil to finance bilateral trade. This is the only example to date of investment in finance in Latin America and the Caribbean, although large investments were made in this sector in the United States and other countries, especially in the months following the 2008 financial crisis.28 Besides facilitating trade, Chinese FDI has begun to reach the region in two other sectors, both of which offer strong development potential: infrastructure-building and manufacturing.

Although the vast majority of Chinese investment in Latin America and the Caribbean has consisted of natural resource acquisition, there is great potential for diversification into other sectors. As the Chinese economy grows and its lead industries develop, the number and variety of firms with the resources and motivation to invest abroad, including in Latin America and the Caribbean, will gradually increase. In addition, steadily rising domestic production costs, a trend towards geographical diversification of production to sidestep trade barriers and the Government of China’s proactive policy will all drive FDI in manufacturing and services (Yeung and Liu, 2008). The Chinese companies investing in natural resources are quite small in number and almost all are State-owned. However, in other sectors there are many companies investing abroad, of varying sizes and types. Many are majority privately owned and are more representative of the Chinese economy as a whole. Based on a number of surveys of small and medium-sized companies in China, it is clear that FDI is often a way for firms to facilitate the export of their products (or those of Chinese companies they work with).27 In fact, most subsidiaries of Chinese companies in Latin America and the Caribbean
25 27

Chinese companies have a huge presence and China Council for the See Asia Pacific Foundation of Canada in the export of wood from the Peruvian Amazon (compared with exports from the Brazilian Promotion of International Trade (2009) and China Council for Amazon, whereof International Trade (2010). The main reason for the Promotion they have a limited presence). this is that companies have been able to establish personal contacts through the Chinese community in Peru. Another important point raised by this study is the trend towards a value chain increasingly led by Chinese transnationals that export wood from Peru and process it in China, reducing the domestic value added. The exploitation unit (módulo de exploração) has been established by the Brazilian government as the amount of land needed to support a family; its size varies from region to region (Attorney General’s Opinion LA-01 of 19 of August 2010).

27

28

See Asia Pacific Foundation of Canada and China Council for the Promotion of International Trade (2009) and China Council for the Promotion of International Trade (2010). By late 2009, Chinese banks had established 50 offices and 18 affiliated institutions in 28 countries, with a total of 30,000 employees (MOFCOM, 2010).

Foreign

1.

Infrastructure this table and analysed in this section cannot be counted as FDI, even though these Chinese companies are contributing to economic activity in the region.29 A variety of Chinese companies operate in this sector: some are large public companies that dominate the local market, such as State Grid or Sinohydro; others are somewhat smaller but have demonstrated remarkable technological development and conquered a major portion of world markets in a short space of time, such as Huawei and ZTE in telecommunications infrastructure, and companies building railway equipment. Finally, there are numerous small and medium-sized companies building civil and industrial infrastructure.

Almost every country in the region believes that infrastructure is vital for its development and would like to see more FDI in construction. The level of FDI in this sector varies considerably by line of business and by country, usually depending on the existing regulatory framework. Generally speaking, transnational companies dominate telecommunications infrastructure and have a significant presence in energy production and distribution, less so in transport infrastructure and very little in water and sanitation. Infrastructure is undoubtedly the sector that has received the most Chinese investment in Latin America and the Caribbean after hydrocarbons and mining (see table III.11). However, many of the investments shown in

CHINA: MAIN INVESTMENTS IN INFRASTRUCTURE IN LATIN AMERICA AND THE CARIBBEAN, 2009-2010 (Millions of dollars) Chinese investor by country of investment Brazil State Grid Corporation Zhejiang Insigma Ecuador Sinohydro Hydroelectric power 2009 2 000 Construction work for the Government of government loan Venezuela (Bolivarian Republic of) Sinohydro Thermoelectric gas 2010 1 600 Construction work for the Government of the a Chinese government loan
Source: Economic Commission for Latin America and the Caribbean (ECLAC).

Line of business

Year of entry

Estimated investment

Notes

Electricity distribution Electricity distribution

2010 2010

1 700 100

Acquisition of several foreign companies Competitive bidding

With the possible exception of Huawei, which has grown more overseas than in China, all of these companies have developed their capacities thanks to the huge amounts China has invested in infrastructure in the past 10 years. Investment in railways, for example, billion in 2010. It is predicted that this trend will end in 2013, and growth will begin to slow, forcing many sector companies to continue their expansion overseas. from outside China, even though they are working on major railway projects in the Lao People’s Democratic Republic, Myanmar and Thailand and are competing for tenders in Brazil, the United States and other countries (Financial Times, 2011c).

In addition to technological and logistical capacities developed at home, China boasts a very competitive cost structure and strong financial support for international expansion. According to a survey carried out by the China Council for the Promotion of International Trade (2010), construction companies are currently the least internationalized but have the most plans to increase their FDI in the near future. There are three access routes to infrastructure investment in Latin America and the Caribbean: acquiring existing assets, infrastructure-building under binational agreements and channelling investment through public tenders.
29

International companies that build infrastructure then hand it over to be operated by others count their activity as exports. All Sinohydro and Huawei operations in Latin America, for example, are counted in this way.

Economic Commission for Latin America and the Caribbean (ECLAC)

(a) Acquiring existing assets This is the fastest way to increase size and market share, and it is the most appropriate method for more heavily regulated industries. The biggest investment to date has been carried out in this way. In 2010, State Grid, the second-largest company in China and one of only two distributors in the country, acquired several electricity distribution companies in Brazil for US$ 1.7 billion. Approval from the regulatory authority is still pending. (b) Infrastructure-building under binational agreements This is a fairly widespread practice among Chinese companies worldwide. Usually the Chinese government offers financing in the form of a loan (or a grant) to the partner government, on condition that the work is carried out by a Chinese company. The leading projects of this nature have been run by the Chinese firm Sinohydro. It is a State-owned company with over 130,000 employees, a sales volume of generation in China. It is also the main contractor and operator of the largest dam in the world, the Three Gorges Dam. Its domination of the domestic market has led it to overseas and has built hydroelectric power stations in a number of countries, including Ethiopia, Pakistan, the Sudan and Thailand. It is building two electric power plants in the region (Bolivarian Republic of Venezuela and Ecuador). The company’s core strengths lie in its ability to execute large-scale projects and its skill in obtaining financing from the Chinese banking system. This category also includes numerous small and medium-sized projects to build facilities, such as the National Stadium in Costa Rica, and similar projects in the sector import labour from China. For construction of the National Stadium in the Bahamas, a medium-sized project, over 170 Chinese workers were employed.30 Although this ensures the work is completed quickly, it has a negative impact on the local economy since it fails to generate new jobs or develop capacity among local providers.

Box III.4 COOPERATION AND INVESTMENT IN CENTRAL AMERICA AND THE CARIBBEAN

To date, Chinese investments in Central America and the Caribbean have been modest but they have had a significant impact on smaller economies. Apart from an oil refinery in Costa Rica, bauxite extraction in Guyana and sugar cane in been made in infrastructure construction, usually through cooperative arrangements. Central America and the Caribbean are of strategic importance to China because

million). In Barbados, several projects for some products that are exported by El China has countered this situation Polyclinic, Sherbourne Conference Centre and Empire Theatre, and renovation main construction companies on the island are Chinese subsidiaries: China Construction Barbados Co. Ltd. and ChinaDOS Construction Limited. Finally, received a soft loan from China for terminal. All these projects are being normally import both the materials and components and the labour. Chinese construction companies have also operated in Trinidad and Tobago. To date, no investments have been made Petroleum Corporation and Sinopec have been involved in negotiations.

investing in the Caribbean and offered government employees and promote of the capital, the Government of China is one of the main shareholders of the Caribbean Development Bank and is a major contributor to its projects. A number of loans and grants have in recent years. In the Bahamas, funding

located in Central America (El Salvador, Panama) and six in the Caribbean (Belize, Dominican Republic, Haiti, Saint Kitts and

Source: Economic Commission for Latin America and the Caribbean (ECLAC), on the basis of “Caribbean Analysis Government and Chinese Investors” [online] investors/

region” [online] [online]

.

30

According to official data (MOFCOM, 2010), 970,000 people were employed by foreign subsidiaries of Chinese companies in late 2009, and most (532,000) were Chinese citizens.

Foreign

Projects explicitly linked to natural resource extraction constitute one particular kind of infrastructure-building governed by binational agreements. These projects have already been run in Africa, but not yet in Latin America or the Caribbean. Nevertheless, in Peru almost all mining companies, whatever their country of origin, have to invest in infrastructure in order to be able to carry out their activities. (c) Channelling investment through public tenders Huawei and ZTE are the most prominent Chinese companies working in telecommunications infrastructure. Both have a presence in the region’s largest countries and have been awarded contracts to build telephone networks (see chapter IV). Although the equipment is manufactured in

China, they have built up a strong customer service capacity in several Latin American and Caribbean countries and Huawei has set up a research and development centre in Brazil. Other companies showing strong international expansion in recent years are those specializing in highspeed rail equipment. They are currently among the main bidders for the only high-speed rail line planned for the region, linking São Paulo and Rio de Janeiro in Brazil. One Chinese company that has successfully bid in Brazil is Zhejiang Insigma, which specializes in infrastructure with other companies, it won a concession for five small transmission lines extending for 102 kilometres and four make an investment on the order of US$ 100 million.31

2.

Manufacturing there (see table III.12). No significant investments in export platforms in Central America or the Caribbean have been recorded thus far. (a) Manufacturing for the domestic market Brazil has been the main destination for Chinese investment in manufacturing in Latin America and the Caribbean, and in almost every case products are made exclusively for the domestic market, not export to other countries in the region. Gree was one of the first companies to adopt this strategy (see box III.5).

As explained in section B.1, many Chinese manufacturers started out as joint ventures with transnational corporations in China and have since grown, accumulated capacities and developed their own technology. While Asia has been the main focus of their international expansion, some companies have looked to Latin America and the Caribbean. The main investments in this sector have been made in countries of the Common Market of the South (MERCOSUR) in order to exploit the growing domestic market, above all in Brazil, although there has been some investment in Mexico with a view to establishing an export platform

CHINA: MAIN INVESTMENTS IN MANUFACTURING IN LATIN AMERICA AND THE CARIBBEAN, 1998-2011 (Millions of dollars) Chinese investor by country of investment Brazil CR Zongshen Gree Chery Motorcycles Electrical appliances Automotive 2009 1998 2011 2007 2011 2009 2007 2009 19 43 400 190 200 100 40 50
31

Line of business

Year of entry

Estimated investment

Direct jobs Notes

278 500 0 181 0 300 1 000 960

100 000 units Sales of over 200 million reais Investment announced but not yet carried out 100 000 units Investment announced but not yet carried out Capacity for 250 units a month 3 000 indirect jobs and 5 million computers a year 60 000 tons of production

China South Industries Motorcycles Group (CSIG) Sany Machinery Uruguay Chery Mexico Lenovo Golden Dragon Information and communications technology Metallurgy (tubes) Automotive

Source: Economic Commission for Latin America and the Caribbean (ECLAC).

The total amount invested by the companies granted concessions is estimated to be US$ 468 million. See [online] http://www. larepublica.net/app/cms/www/index.php?pk_articulo=41855.

Economic Commission for Latin America and the Caribbean (ECLAC)

Box III.5 GREE: ORGANIC GROWTH IN BRAZIL

perhaps the first big Chinese manufacturer to begin producing in Latin America and the Caribbean. Having imported its machines from China for several years, free trade zone of Manaus (Brazil) in investment abroad, making it an exception usually start their expansion in Asia. It is

the factory. The company produces locally the bare minimum required in order to benefit from the tax breaks in the free trade zone, and imports the rest from its factories in China. Gree is under municipal control and a large number of its shares are traded on the stock market. In contrast to most Chinese transnationals, Gree has a in air conditioning units and has no plans to enter other sectors. Although it started

finances almost all its investments from bank loans. Its investments in Brazil have been financed by reinvesting the profits of As part of its expansion strategy, Gree hopes to increase production in Brazil in a very important market for the company, although the factory in Brazil serves only the domestic market.

Source

One of the few local industries Chinese manufacturers have managed to penetrate to a significant degree is motorcycle production. Several Chinese companies operate in the free trade zone of Manaus: the main ones are Zongshen, which has acquired the Brazilian firm Kasinski, and China South Industries Group. Both produce around 100,000 units a year. However, for Chinese companies, the sector showing the most promise in Latin America and the Caribbean is the automotive industry. Chinese companies are naturally attracted to the one of the biggest and most dynamic markets in the world (ECLAC, 2010, chapter II). Many have expressed an interest in investing, but the only one to make a start is Chery, which has opened a small factory in Uruguay in partnership with the Argentine company Socma, to produce for the Argentine and Brazilian markets. This initial investment has allowed the company to begin to explore the Brazilian market, and it has announced that it While Chery pursues a cautious strategy in Brazil, the entry of Chinese automobile manufacturers in Mexico has ground to a halt following the failed investment by First Automobile Works (FAW). The FAW Group, China’s second-largest producer, established a strategic partnership in 2007 with Grupo Salinas to manufacture 50,000 units a year with an investment of US$ 150 million. However, the investment was ultimately not concluded for various reasons, the most important ones being that FAW was poorly prepared to interpret the Mexican market and meet the requirements for local content and that sales in this market had dropped because of the economic crisis.32 The stalled investment then became embroiled in accusations of fraud. Companies manufacturing in Mexico are allowed to
32

import up to 5,000 cars a year into the country, and FAW took advantage of this allowance between 2007 and 2009. However, when its plans were withdrawn, the legal status of FAW cars circulating in the country became uncertain and no maintenance services whatsoever were available. This will undoubtedly affect the image of Chinese cars on the Mexican market (ECLAC, 2010a, chapter II). (b) Manufacturing for export Export-driven investments are even rarer, but they represent an opportunity for many Latin American economies, in particular Mexico, which is home to the two highest-profile cases: Lenovo and Golden Dragon. Lenovo is the fourth-largest computer manufacturer in the world, behind Hewlett-Packard, Acer and Toshiba. Among Chinese companies, it has made the most progress towards internationalization. The biggest milestone was the purchase of the desktop and portable computer segments of a key assets purchase. Apart from this acquisition, its largest investment outside China involved building a factory in Monterrey, destined for the United States market and the rest for other countries on the American continent, such as Argentina, the Bolivarian Republic of Venezuela, Chile, Colombia and Peru. The company also has centres in the Chinese cities of Beijing, Shanghai, Huiyang and Shenzhen, and other factories in India and Poland. Golden Dragon is a major copper tubing producer. It has over 5,000 employees and a production capacity of 220,000 tons a year. It opened a factory in Mexico in Monclova (state of Coahuila), with the aim of supplying companies in the United States such as Mabe and Whirlpool. However, the company was affected by a fall in sales in 2008 and 2009 owing to the financial crisis and

Separately from this failed transaction, FAW Trucks bought the former DINA truck factory in Ciudad Sahagún (state of Hidalgo) and manufactures between 20 and 25 buses a month for the domestic

Foreign

by anti-dumping measures imposed by the United States Department of Commerce in May 2010, corresponding to two large-scale robberies in February and April 2010. It is therefore considering whether or not to implement the second phase of the investment. An alternative route into the Mexican automotive industry is to buy subsidiaries of European or United States companies. Here, Chinese company strategy (acquire

technology and brands) and Western company strategy (dispose of peripheral assets) complement one another. The only example of this to date has been Nexteer, an auto parts supplier sold by General Motors in 2010 to Pacific Century Motors (owned by the Municipality of Querétaro, Sabinas Hidalgo and Ciudad Juárez, making Pacific Century Motors probably the biggest Chinese company in the Mexican automotive industry.

F. Conclusions

1.

Chinese direct investment in Latin America and the Caribbean today by their own growth, diversification strategies and technological development. Two business considerations in particular have driven investment in Latin America and the Caribbean: a need to reduce exposure to raw material price rises and a desire to continue expanding into new markets. China’s rapid integration into world trade has had a major influence on economic and trade patterns in the region. On the one hand, as China and other emerging economies have begun to import increasing amounts of raw materials, this has had a very positive impact on the terms of trade for countries in the region that are net exporters of these products, thus contributing to the region’s exceptionally good economic performance in recent years (ECLAC, 2010b). On the other hand, the region exports a very limited number of products, all of them raw materials, which has reopened the old debate on industrialization processes, the advantages and disadvantages of primary specialization, and the long-term sustainability of these production and trade processes in Latin America and the Caribbean (Katz and Dussel Peters, 2002). Chinese FDI has highlighted this specialization because Chinese companies have mainly invested in the countries and sectors with the most exports. Not only is China now a major buyer of Latin American copper, iron and oil; it also contributes to production through its direct investment in the region. The entry of Chinese mining and hydrocarbons firms, which are some of the largest and most capitalrich companies in the world, undeniably increases the

Having previously been a marginal investor, in 2010 China became a country with a significant presence in several countries and industries in the region. Moreover, in the medium term Chinese companies are expected to continue to invest in the region and diversify into infrastructure development and manufacturing. The fact that these investments come from a country where the State plays a major role in the economy and per capita income is still half that of Latin America and the Caribbean33 endows them with some unusual characteristics. This chapter’s review of the main investment projects shows that the activity of Chinese companies in Latin America and the Caribbean (and in the rest of the world) is normalizing. In other words, Chinese transnational companies no longer rely solely on State agreements for their investments, and their FDI often includes joint ventures with other companies. As in the rest of the world, the surge in Chinese FDI in Latin America and the Caribbean has been driven by a number of factors. One of these is the Government of China’s policy of encouraging its companies to expand overseas, mainly through financial incentives. Chinese companies have also been persuaded to invest abroad
33

China’s per capita GDP (measured in 2000 constant dollars) increased 11 times more than that of Latin America and the Caribbean between 1980 and 2009. However, while per capita income in China has overtaken that of some Central American countries such as Guatemala, Honduras and Nicaragua, it is still less than half that of Latin America (World Bank, World Development Indicators database).

Economic Commission for Latin America and the Caribbean (ECLAC)

sector’s production capacity in many Latin American and Caribbean countries and helps develop new areas of exploitation, such as copper mining in Peru, the pre-salt oilfields in Brazil and the hydrocarbons sector

in Argentina. The potential for development, however, may be limited if measures are not taken to counter the negative effects of specialization in low-tech activities in the region (ECLAC, 2010d).

2.

Outlook will reduce the potential for growth in the domestic market for Chinese construction companies, and they will undoubtedly begin seeking markets abroad. They will also maintain their current competitive advantages, such as low costs, technological development and the financing they are able to offer to their customers. The regulatory framework in each country in the region will determine the scale of this kind of investment over the next few years. Most investments in manufacturing are designed to access markets protected to some degree by trade barriers. As in other kinds of Chinese FDI, this is driven by both business strategy and government policy. Companies aspiring to be world leaders in their industry are keen to diversify their production base to sidestep real or potential trade barriers, while the Government of China looks favourably on measures that help to reduce its foreign exchange surplus. Cost-cutting has never been the main goal of investments in manufacturing. Nonetheless, in the future it will be impossible to ignore the narrowing of the salary gap that existed until recently between China and Latin America and the Caribbean (Mexico in particular). Between 2002 and 2008, Mexican salaries in dollars increased calculations by the Government of Mexico, Chinese Mexican salaries. This long-term trend also ties in with the Government of China’s policies, whose priority is to boost domestic consumption and tackle rising inequality. and is expected to continue to climb from its current level Despite the salary hikes, China will undoubtedly retain its competitive advantage in most products thanks to economies of scale, infrastructure and cluster externalities. However, the Asian giant’s advantage in terms of production costs for labour-intensive work has dwindled to the point that it has practically disappeared, at least in the most developed areas of the country. For Mexico and the countries of the Caribbean Basin that have specialized in export platforms, and whose products have

China has a sizeable trade surplus, making it a major exporter of capital. Despite government plans to gradually raise domestic consumption, this situation is unlikely to change in the medium term (Ma and Haiwen, 2009). To date, this surplus has mainly been reflected in swelling foreign exchange reserves, a small proportion of which have been channelled into FDI. This proportion is likely to increase as the country’s companies continue to grow and develop technological capacities. Moreover, the government’s consistent support of FDI over the last 10 years is expected to continue, since it forms part of the strategy to reduce the trade surplus and diversify the use of foreign exchange reserves. This general trend will also be observed in FDI in Latin America and the Caribbean. Chinese FDI in the region will probably continue to be dominated by companies specializing in natural resources, given the ambitious expansion plans they have announced. In any event, the pace of investment in this industry will always be dependent on raw material prices. Having invested large amounts in the region in 2010, a year of exceptionally high prices, Chinese companies could see the profitability of their projects plummet should there be an abrupt change in the cycle. If this were to happen as a result of a cooling of the Chinese economy, it would harm these companies through a drop in domestic demand and the declining profitability of their portfolio of projects in Latin America and the Caribbean and elsewhere. Chinese FDI in the region will diversify beyond natural resources into other activities, such as building infrastructure. The rapid pace of investment in all kinds of infrastructure in China, which has gained momentum in recent years because of the countercyclical policy, will be difficult to sustain in the future, particularly if the government wishes to fulfil its objective of increasing consumption. A slowdown in domestic consumption
In 2010 the Chinese government agency responsible for administrating foreign exchange reserves (SAFE) signed an agreement with China Development Bank, authorizing it to lend money to Chinese companies wishing to invest abroad in its name. The total amount this may involve has not been disclosed.

Foreign

suffered from competition from Chinese factories, this dynamic offers an opportunity to capitalize on competitive advantages such as proximity to and trade agreements with the United States and attract segments of production chains that have until now been concentrated in China. This may include investments by Chinese companies wishing to diversify their cost structure and find sites with easy access to the United States market, as they conquer markets and develop their capacities. Examples of this have so far been anecdotal, and have mainly concerned the most globalized Chinese companies such as Lenovo and Pacific Century that invested in Mexico after acquiring key assets in the United States.

When Japan and the Republic of Korea began to invest overseas, they did so mainly to obtain natural resources (ECLAC, 2001 and 2007). As their domestic production base grew less competitive, they began diversifying into other sectors. There are huge differences between these countries and China, mainly in the size of the country, meaning that Chinese companies have greater possibilities for expansion nationally. But they also serve to remind us that a country’s FDI patterns change as its economy develops. Japan, despite its importance in the world economy, never became a big investor in Latin America and the Caribbean, and in particular, its companies have had very little presence in the services sector.

3.

Local reactions to Chinese investment

Chinese direct investment has arrived at a time when some Latin American and Caribbean countries are beginning to take a more critical and selective look at the activities of transnational companies. The fact that large sums of money have been invested by Chinese companies in a short span of time has been criticized by some governments, business communities and civil society representatives in the region (El País, 2011). The following concerns have been raised: (a) investment in natural resource extraction holds back industrial development and technological upgrading in the countries in the region; (b) the extent of the Government of China’s control over these investments; and (c) Chinese companies’ activities and their attitudes towards social and environmental issues. Many authors (Dussel Peters, 2010; Gallagher and Porzecanski, 2010) maintain that China’s economic influence is putting pressure on Latin America and the Caribbean to specialize in exporting natural resources, resulting in deindustrialization. It is debatable, however, whether the main mechanism in this relationship is trade or investment. Whatever the case, the region’s new economic relations with China make it more urgent for countries specializing in the export of natural resources to adopt policies enabling them to receive all the expected benefits from extraction and to balance this with development of other sectors of the economy. The second criticism is that Chinese transnational companies are often State-owned, meaning that assets acquired in separate business transactions are ultimately centrally controlled. In contrast to the barriers erected by the United States to investments by Chinese Stateowned companies, no country in Latin America or the

Caribbean has put forward national security arguments to block transactions of this kind. Chinese companies are not monopolizing the supply of resources in any sector studied in this chapter, but countries in the region could start to look at placing restrictions on these investments, to prevent excessive market concentration. This has recently happened in the agricultural sector in Brazil. In some cases, such as CNPC’s investments in Costa Rica, the secret nature of the negotiations between the partner government and the Chinese State-owned company has been criticized. It is true that it is difficult for civil society to evaluate the terms under which natural resources are being sold in some of the agreements. However, fewer Chinese investment projects based on agreements between States are being identified as Chinese companies normalize their modes of investment and increasingly operate in the same way as other transnational companies. Nor does experience seem to indicate that they are being treated differently to other companies because they are publicly owned. In the Bolivarian Republic of Venezuela and in Ecuador, Chinese companies have been just as affected by important regulatory changes as companies from other countries. Thirdly, civil society in particular has opposed Chinese FDI because Chinese transnational companies are perceived to be less sensitive to environmental and social issues. Here also, Chinese companies have become more similar to transnational companies from other countries in their mode of operation. Having started with a very low level of awareness, based on their experience in China, where any negative externalities of their activities were managed by the government and reactions from civil society were

Economic Commission for Latin America and the Caribbean (ECLAC)

rare, Chinese companies have quickly learned to respect social and environmental considerations as a condition of operating overseas (Shankleman, 2009). Some members of the business community have also commented on the lack of reciprocity where foreign investment is concerned. Chinese transnationals can invest in almost any sector in Latin America and the Caribbean,

while FDI in China is formally or informally restricted in many industries in which the trans-Latins operate.35 This reflects the huge differences between FDI regulatory frameworks in China and the region and, in particular, it highlights the Chinese authorities’ vision of FDI as part of a long-term development strategy that helps domestic companies accumulate capacity.

4.

Policy considerations opposition to any economic intervention from the State, it is far from being accepted in every country. These different roles of the State automatically translate into very different approaches to financing the expansion of national companies. Whereas in China public banks are directly furthering the growth and overseas expansion of national companies that wish to become more international, in almost every Latin American and Caribbean country, development banks have disappeared or have become noticeably weaker, and discussions are in fact under way as to whether there is any need for a development banking system with a remit that extends beyond short-term profitability. Finally, China has continuously sought to accumulate technological and human resource capacities, to the point of resorting to trade protection and placing restrictions on certain investments by transnational companies, similar to those imposed by the Republic of Korea in its time. In contrast, in many Latin American and Caribbean countries there is no consensus on protection of emerging industries, and accumulating capacity simply by expanding education is of little use in a production structure that does not need highly skilled or highly educated human resources. Despite its dynamism and technological progress, China’s development process still suffers from unresolved issues that may affect its own growth and that of its investments overseas. The reform process in the country is following its course and it is still too early to say how
35

Among other factors, China’s size and rate of growth have enabled the country to maintain its restrictive and interventionist policy while continuing to attract significant flows of FDI, which have been key to its development. Although conditions in Latin American and Caribbean countries are very different, China’s advent as a major investor country broadens the possibilities for attracting capital to industries considered appropriate by the countries in the region. The governments of Latin America and the Caribbean may be able to take advantage of this investment impetus to create new paths to development, by, for instance, tying the exploitation of raw materials to the construction of public infrastructure or by offering incentives to establish processing industries. To capitalize on these opportunities, policies need to be formulated and implemented that reshape the industrialization pattern of the Latin American and Caribbean countries, promoting structural change in favour of sectors that are more knowledge- and technologyintensive. However, the first step must be to recognize that there are huge differences between the strategic vision that has guided China and the prevailing view in the region regarding the way forward in the process of economic development. China has implemented highly proactive policies in four key areas, in contrast to the market-oriented approach that has prevailed in Latin America and the Caribbean since the reforms characterized by the Washington Consensus. In the first place, China has followed welldefined long-term strategies since its own economic reform, while countries in the region have followed no strategy or have adopted whatever the market proposes. A second difference is immediately apparent: in China the State has played a fundamental role in formulating and implementing national strategy, especially during the early stages of development, while in Latin America and the Caribbean, although this role has been revived somewhat in the last 10 years after over two decades of

Paolo Rocca, managing director of Techint, an Argentine engineering and construction group, observed that Latin America had become the main destination for Chinese companies investing in the primary sector. In his view, China was not a democracy, it was not a market economy; it was an authoritarian, highly centralized and tightly controlled system, and CNOOC/Sinopec was a State-owned company; and this State prevented Techint from going to China to purchase a Chinese company. 15 December 2010. See [online] sobre-la-inflacion.html.

Foreign

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economic agents will react to a possible slowdown in growth in a context where income distribution inequality is rising. Moreover, there are doubts about the stability of its corporate governance systems and the functioning of the financial system in the medium term. The path to development taken by Latin America and the Caribbean will not be the same as the one that

enabled China to grow so rapidly, or the Asian tigers in their time, but there are lessons to be learned from the Asian experience: clear and sustained strategies for structural change are needed, driven by proactive States able to support national companies in the two spheres of their financing needs and the creation and accumulation of technological and human resource capacities.

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