Monday, 7 April 2014

CHINA: China's clout in South America

When Brazil opened up its huge offshore petroleum discoveries to foreign developers in last October, after holding off on a decision for six years, government leaks indicated that Chinese state oil companies would dominate the bidding for the estimated reserve of eight to twelve billion barrels of oil.

When the bids were opened, however, the Chinese proved to be far more cautious than expected and took only a minority participation in the winning consortium dominated by Petrobras, the Brazilian state oil company, and two major Western multinationals, Royal Dutch Shell, the Anglo-Dutch giant, and Total, the largest French oil company.

The deal secured Chinese financing for twenty percent of the $180 billion needed to develop Libra, the largest oil and gas field ever found in Brazil, and retained for Brazil sixty-six percent of Libra’s oil production, which is estimated to reach a peak of 1.4 million barrels a day in ten years. This landmark deal showed that while China, and its government-run companies, will expand its global search for secure sources of oil in Latin America whenever opportunities arise, the Chinese are also exercising caution in investing in foreign lands where oil involves high political, as well as economic, risks.

In general, China has made a significant effort to be seen as a good partner in Latin American development, not a threatening outsider using its leverage to beat down the price of the natural resources it procures. This policy puts China into a soft-power role of providing financing for structural investments that improve infrastructure and expand energy sources. And it is part of a hemispheric policy. Chinese lending for development projects in Latin America since 2010 has been greater than the combined loans of the World Bank Group, the Inter-American Development Bank, and the Export-Import Bank of the United States. The $20 billion annual direct investment by Chinese companies in Latin America plays well politically.

Backed by China’s enormous dollar reserves, Chinese oil companies have the capital to develop oil fields that Brazil lacks because of Brazilians’ extravagant consumer habits. Petrobras, as an instrument of government policy, loses money subsidizing fuel-guzzling consumers and therefore doesn’t command the huge financial resources needed to develop Brazil’s bountiful hydrocarbon endowment. Brazilian oil for Chinese finance, therefore, seems a perfect match between a long-term saver and a short-term spendthrift.

China’s relentless quest for oil, minerals, and food is creating a geopolitical bond between Latin America and China that establishes the Asian giant as a powerful new presence in a region that has traditionally been more closely related to the United States and Western Europe. This is part of the new global dynamic in trade and investment that is reshaping world power relations. The meteoric rise of China’s trade with the world brought about a ten-fold increase in commercial exchanges with Latin America in little more than a decade.

Initially, the expansion was driven by China’s strategy of flooding world markets with cheap Chinese manufactures—an effort that later included Chinese automobiles, machine tools, and electronic and communications devices. This strategy initially produced large trade deficits in favor of China, but in a short time the trade relationship became balanced as China made a point of increasing imports of commodities produced in Latin America to pave what has become a two-way street.

By 2012, total trade had reached $260 billion, with Chinese exports of about $135 billion being almost matched by about $125 billion in Latin American exports to China. Brazil, by far Latin America’s largest country, traded $85 billion with China, and Mexico, the other economic powerhouse, added $42 billion to the total exchange. Many of the other thirty-two countries in Latin America are small Caribbean islands or underdeveloped economies that have little to export to China.

Most of the big traders have oil or metals as the basis for their trade with China, and a select few, mainly Brazil and Argentina, provide the agricultural products that totaled $28 billion in exports to China in 2012. There is a high level of synergy between the Chinese need for imported food, mainly soybeans and animal proteins like chicken and beef, and the fast-growing potential for increased production in the heartland of South America.

It is no surprise, therefore, that the Chinese are making major investments in Latin America to promote land productivity and improved logistics to transport agricultural cargoes to China. This is a strategic relationship because China’s lack of water limits its ability to produce food needed to feed its population of 1.3 billion.

A study of world agriculture by the Organization for Economic Cooperation and Development shows that China, with twenty percent of world population, has only eight percent of the globe’s agricultural land and seven percent of its potable water. This limited capacity is further constrained by the low productivity of China’s three hundred million village farmers. Although China is the world’s largest rice producer, its productivity in soybeans is only half of the production per hectare of Brazil and Argentina, which together now produce and export more soybeans than the United States. For the foreseeable future, China will be heavily dependent on imported foods.

The very rapid expansion of China’s commercial and financial relations with Latin America—a region with which China had virtually no prior contacts—brings new risks as well as high potential rewards.

The Chinese are now the largest international lender to countries like Venezuela and Argentina, which are passing through periods of economic crisis and potential political instability. The situation is particularly sensitive in Venezuela, where China has made advance payments of $30 billion for future oil deliveries from a government that is facing shortages of food, fuel, and energy supplies, as well as rising social protest. China’s decision to continue financial support for the regime after the death of President Hugo Chávez in March 2013 was clearly political.

In exchange for seven hundred thousand barrels a day of cheap oil from Venezuela, China’s loans help to prop up Venezuela’s Cuban-style socialist regime, including the health services provided by Cuban doctors. It is not clear whether China’s appetite for oil also involves an aim to reduce US influence in Latin America. But its involvement in Venezuela, America’s chief antagonist in the region, seems to transcend the merely commercial, and may become a major test of Beijing’s intentions.

When Chinese relations with Latin America began to thicken just ten years ago, there came a rash of books and periodical publications in the West that cast the emerging Asian giant as a threatening dragon. With titles like The Dragon in the Room and Enter the Dragon? China’s Presence in Latin America, some of these publications generated alarm, from a US perspective, over Chinese “intrusion” into what has traditionally been its own geopolitical backyard. This view was balanced, however, by numerous other assessments that argue that China’s expansion has created only economic advantages for Latin America, not peril for the US. From this perspective, China is more like a jolly green giant than a fire-breathing dragon.

When global food security is debated in international forums, it is assumed that food production will have to increase fifty percent by 2050 to meet the demand of a world population growing to nine billion in the coming years. The tropical flatlands of South America and sub-Saharan Africa are considered to be the most promising areas in the world for this growth of production to take place.

Brazil is the outstanding example because of its fortuitous combination of land, water, and climate, and modern farmers who know how to apply the technology of high-yield agriculture created by research in agricultural sciences. China knows this, which is why it is investing in infrastructure in Brazil. Reducing dramatically the cost of shipping food is one objective. Conserving foods that require storage and processing food products to retain nutritional levels and reduce waste are also areas for intensified research. China is well aware that food is much more than just a raw material.

The mining sector is also important for future relations between China and Latin America. As long as world industry demands iron ore for steel mills and non-ferrous metals like copper for electrical wiring and metal alloys, Brazil and the Andean countries along South America’s Pacific coast will be vital for China. Prices may fluctuate with variations in world demand, but high-grade ore bodies in Latin America will continue to provide major sources of foreign income and investments in mining under any scenario.

When China’s annual rate of growth slowed from the breakneck pace of more than twelve percent annually, for instance, some analysts predicted that this would cripple iron ore purchases, with depressive consequences in Brazil. The reaction of Vale, a privately owned company, was to double down on investment in its major mining properties, the world’s largest high-grade iron mine at Carajás, in the Brazilian Amazon state of Pará, and a new coal mine in Mozambique that is also expected to supply China and India.

The expansion of Carajás, which also produces gold, nickel, copper, and niobium, will require an investment by Vale of some $19 billion dollars to increase annual production by ninety million tons by 2018, doubling present output. Where will all this ore go? It will be shipped in supercargo ships, carrying three hundred and fifty thousand tons, from deepwater ports on Brazil’s northeastern coast to China and other Asian ports. This shipping is so efficient in cost that Brazil’s high-grade iron ore can compete with sources in Australia.

In 2000, Vale produced one hundred million tons at various mines but sold only seven million tons to China. After Carajás came onstream and began to export, Brazil’s share of the Chinese market soared to one hundred and fifty million tons. “With the expansion now under way, Vale expects to gain a twenty-percent share of the Chinese market, with another hundred and fifty million tons annually,” said José Carlos Martins, Vale’s executive director for planning. With trading volumes of this scale, commercial relations between China and Brazil can be expected to mature into more long-term investments in many areas, including transportation, local industry supplying mining, agricultural, energy equipment, and even banking.

The China Construction Bank, one of China’s most powerful financial institutions, and the National Bank of China have already opened agencies in Brazil, and the China Development Bank is negotiating with its Brazilian counterpart on joint ventures.

In the latest of a succession of top-level meetings, President Xi Jinping is scheduled to come to Brazil in this month, April, leading a cohort of economic officials and Chinese businessmen who are anxious to expand investments in Brazil. This visit reciprocates a trip to China by President Dilma Rousseff in July, last year, which advanced strategic planning and diplomatic cooperation between the two powerful BRIC partners. Brazilian officials have high expectations that the Chinese are going to move ahead toward a working partnership that will make Brazil the centerpiece of Chinese interests in Latin America.

If the US does not see this expanded Chinese presence as an inconvenience, it is only because the Obama administration does not have an active policy for Latin America. With the Obama administration’s so-called pivot to Asia, it is not clear whether the US considers China as an adversary to be contained, or as a potential partner for cooperation on global issues, such as nuclear nonproliferation, climate change, food security, and poverty reduction in the most impoverished regions.

In either case, the old pan-American concepts on which the US based its special relations with Latin America need to be updated to consider the possibilities of working with new players in the region. And now China is chief among them.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist

Photo-Credit: AFP-Photo: Chinese President Xi Jinping & Venezuelan President Nicolás Maduro-Photo- Jerome Piquier-AFP