Thursday, December 29, 2011

China's Growing Investment in South America

I never thought I would read an article from Aljazeera, let alone link to one (although I've linked to articles from the Huffington Post and Politico, so I guess I can't sink any lower), but I came across this one concerning Chinese investment in South America which seemed relevant in light of the recent article I linked to concerning the East India Company. Anyway, from the Aljazeera article:
"Across Latin America we are seeing that China is having an increasing importance in trade and investment," Ricardo Delgado, director of Analytica Consulting in Buenos Aires, told Al Jazeera.

"Brazil and Argentina produce and export many raw materials: soy, sugar, meat and corn… China is a very important driver of demand for these commodities."

Since 2005, China's development bank and other institutions have spent an estimated $75bn on financial investments in South America, said Boston University professor Kevin Gallagher. This is, he points out, "more [investment] than the World Bank, US Export Bank and the Inter-American Development Bank combined".

Chinese private investment, often coming from large state-supported firms that set-up operations in the region or buy local companies, has been about $60bn, Gallagher said.

In the past five years, Bilateral trade between China and South America jumped more than 160 per cent, rising from $68bn in 2006 to $178bn in 2010. In Peru, Chinese mining giant Chinalco spent $3bn buying "copper mountain" - an entire rock formation containing two billion tonnes of the precious metal. The firm expects a 2,000 per cent profit on its investment.

The Chinese state lent Petrobras, Brazil's national oil company, $10bn in 2009. And a plan from China's Beidahuang food company to lease more than 300,000 hectares of land to grow genetically modified soya, corn and other crops in Argentina's Patagonia region has locals furious about potential environmental damage.

As director of Mercampo, an agricultural consulting firm based in Rosario, Argentina, Gabriel Perez has seen the increase first hand. More trade delegations are coming from China, and tycoons from the world's second largest economy are eager to invest in agriculture and commodities.

"China has the strategic vision to ensure food security and energy in their country [as they worry] that long-term problems will be the supply of raw materials," Perez told Al Jazeera. "This is undoubtedly the primary reason for China's investments in South America."

Chinese firms often buy local assets or lock-in long term supply agreements, sometimes making deals in Chinese currency, rather than the US dollar which typically underpins international trade.
(Emphasis added).

As would be expected from Aljazeera, the article basically takes a pro-Chinese, anti-American tone. The authors do not seem to connect the dots, however. What they are describing is mercantilism engaged in by state-backed companies. That is, China purchasing the raw materials for export to China, while exporting finished goods back to the foreign "colony." (As implied by the reference to a "China town" in the article, China is not only importing raw materials from South America, but exporting its officials and managers to the South American nations).
Raul Prebish, an Argentinian economist and former director of the UN’s Economic Commission for Latin America (ECLAC), argued that nations on the "periphery" of world trade were doomed to be primary commodity exporters unless they developed by building a domestic manufacturing base and closing trade links.

"In Brazil, China is an important competitor in low labour cost industries. Chinese prices are low and problems of dumping and subsidised exports are common," Delgado said. "Our industries are not prepared very well for this competition." China is frequently accused of keeping its currency artificially low to boost exports.

Brazil's real and other South American currencies have risen drastically due to the commodities boom in recent years. Brazil’s former finance minister went so far as to warn of a "currency war" as countries around the world tried to lower their currencies to boost exports.

"You hear lots of complaints from the industrial sector that competition has become very hard, because the exchange rate is misplaced," Cardoso said, adding that she thinks such concerns are minor compared to the country's growth.

Plenty of economists who do not have strong positions in debates about dependency think it's wrong to worry about Chinese investment because the terms of trade are squarely in South America's favour, as countries maintain large trade surpluses with China.
It will be interesting to see how this plays out. If some of the trade deals are denominated in yuan, but the Chinese move ahead with devaluing their currency, as presently predicted, those deals are suddenly going to become worth a lot less. Also, the trade surplus is not necessarily to their advantage if the price of Chinese goods undercut domestic producers to the extent that the local South American manufacturers can't afford to compete. It must be remembered that one of the initial goals of British colonialism in India was to destroy local industry to make Indians dependent on British manufacturing. This appears to be what is happening here.

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