China Entices South America with Investment

(International Relations and Security Network, 04/08/2005)

With Ben Bain in Washington, DC


Brazil's state oil company, Petrobras, announced in late July that it would supply China's oil company, Sinochem International Oil, with 12 million barrels of crude oil, a deal worth US$600 million. Petrobras said it expected Chinese energy demand to contribute to some US$1 billion a year in revenue. Chile's state-owned mining company, Codelco, entered into a joint venture with China's Minmetals mining company to develop a mine that is expected to supply China with copper for the next 20 years. Chinese companies also invest in telecommunications in Argentina. And the region's recently launched news and information channel, TeleSur, is broadcast via Chinese satellites in a partnership with Venezuelan officials. From Washington to Buenos Aires, recent Chinese business acquisitions and promises of big investment in the Western Hemisphere have spurred speculation about how this burgeoning global player will affect security, economics, and traditional balances of power in the Western Hemisphere.


Those rolling out the red carpet to China are hoping that Beijing represents an ideologically neutral partner for trade and a willing sponsor for infrastructure improvements. Others see China as a threat. They worry that "Communist China's" march on South America may have political motives laden with challenges for Latin America's fledgling democracies and US hegemony in the region. Rhetoric from both camps has sizzled since last November when Chinese President Hu Jintao swept through South American capitals armed with pledges of future investment and signing agreements with Chile, Argentina, Peru, Brazil, and Venezuela.


The debate is focused on two issues: Chinese promises versus actual Chinese investment, and the extent to which Chinese interest is strictly economic and not political.


Counselor Cai Runguo, the alternate Chinese observer to the Organization of American States (OAS), notes that while the Chinese are planning to step-up investment in the region, they are cautious. "Interest is different than an agreement," he told ISN Security Watch, adding, "When the President of China visited South America he spoke of many things, but much of it was unofficial."


The Chinese hold billions of dollars in savings and US Treasury Notes, and they face an impending energy shortage. South America is arguably the most resource-rich continent on the planet; it needs both foreign direct investment (FDI) and infrastructure investment. The two are a perfect match and make pragmatic sense. The questions that swirl around what Chinese investment in South America indicates, in terms of hemispheric security and hegemony, do not stem from the economics of the relationship, but rather the possible ulterior political motives of the suitor.


Net FDI in Latin America has fallen from US$78 billion in 2000 to US$36 billion in 2003, according to the US-based Congressional Research Service. With little promise of increased investment from the US outside the normal package of "drug war" money, South America's leaders are more than enthusiastic to listen when the Chinese talk of investing in infrastructure, which is a major block to trade here.


Last year's visit by President Hu Jintao fulfilled China's intentions of exciting populations throughout South America about the possibilities of doing business together, as well as ensuring that Argentina, Brazil, and Chile agree to classify China as a "market economy". This past November, President Hu Jintao gave a speech in front of the Brazilian Congress, vowing that China would invest up to US$100 billion in the region over the next decade, and he made a good-will offer of up to US$20 billion in investment in Argentina.


Figures published by the Inter-American Dialogue (IAD), a center for policy analysis on Western Hemisphere issues, indicate that Chinese trade with Latin America has jumped from US$200 million in 1975 to US$40 billion in 2004. Trade with Brazil alone totaled US$8 billion in 2003. Yet Chinese trade still only accounts for 3.9 per cent of total Latin American trade, while in 2003 the US accounted for 48 per cent.


Trade and investment are two very different indicators. While trade has proliferated, Beijing remains reticent to hastily spend the billions of promised investment in a region that is wholly foreign and culturally distinct to the Chinese. A good deal of Chinese FDI now goes to countries in East Asia, such as Indonesia, whose customs and business practices are far more familiar.


Meanwhile, there is growing concern in the US Congress over the ideological nature of Chinese investment in South America. Representative Dan Burton (R-IN) told the Subcommittee on the Western Hemisphere Committee on International Relations in an April introductory speech that, "I believe we should be cautious and view the rise of Chinese power as something to be counterbalanced or contained, and perhaps go so far as to consider China's actions in Latin America as the movement of a hegemonic power into our hemisphere." Representative Burton is especially wary of how the Chinese currency negatively affects trade. "The monetary policy of the People's Republic of China needs to change immediately and for the long-haul, so China does not yield an unfair and undue economic advantage in dealings with the United States, South America, the Caribbean, and elsewhere," he told ISN Security Watch.


Future hemispheric security


For some observers in Washington, the issue is not whether China will outwardly advocate revolution and instability in the South America, but rather what Chinese investment in Latin America might indicate for future hemispheric security. "A lot of what the Chinese are doing is for optics - the propaganda value of the prestige in presenting Latin Americans with a sort of alternative to Big Brother," John Tkacik, Jr. of the Heritage Foundation told ISN Security Watch.


Dr. Loser of IAD, who has also served as head of the International Monetary Fund (IMF) Western Hemisphere department and is a native of Argentina, also noted: "Somebody like Chavez sees China as the counterpart to the US. It is the balance, the young, big country or power. [People like Chavez] see it as a way to diversify their sources of influence."


Loser added that some in South America fear that the Chinese have a master plan for a kind of economic invasion, a view that he says is largely exaggerated. Inflated or not, there is evidence of a concerted move by Chinese investors to look to South America to fulfill their resource needs - from soy in Brazil and petroleum in Venezuela to copper in Chile.


According to Tkacik, US credibility in the hemisphere is at issue. "Since [President] Carter, the prestige of the United States as the world's greatest democracy has been used to undermine dictatorships [in Latin America].El Salvador, Guatemala, and Nicaragua... These were very effective and strategically important moves by the US to demonstrate its moral leadership in the hemisphere," he told ISN Security Watch. Such leadership appears to be less moral than opportunistic to many in the region.


Sanho Tree, a fellow at the Institute for Policy Studies (IPS) in DC, sees Chinese involvement in South America as a logical result of US neglect and policy. "[China is] a potential trading partner and benefactor who is willing to invest US$100 billion that doesn't come with the usual strings attached and humiliating lectures from Washington," Tree told ISN Security Watch.


"There is little understanding of the reality of China," Counselor Cai told ISN Security Watch, adding, "Many people speak of the rise of China, but they don't know it well.I don't think the power of China is what some foreign people make it out to be."


Clearly, the debate is far from over. Chinese interest and investment in South America has only recently begun. While many in Washington fear the worst, the fact remains that the US continues to be a major influence in the region. Yet it is hard to ignore a growing Chinese influence. "China does not want to interfere in the internal matters of another state," Cai said, adding, "Economics is economics and you can't mix it with politics."