That China is not shy about securing its natural resources needs is well established. The country’s economy continues to grow at a jaw-dropping pace, and with it the demands of its population and businesses, but China is dependent on foreign lands for many of its requirements. It is estimated that soy bean import demand will rise from 37 million tonnes in 2008 to 83 million tonnes in 2020, and that crude oil imports will rocket from 179 million tonnes to an expected 1.74 billion tonnes in the same period – an increase of almost 1000%.
Luckily for China, many of the commodity rich countries of the world have welcomed it with open arms. However, the response to China’s growing appetite for the world's resources is not always positive, and the country is beginning to discover that not every country is willing to hand over its riches easily.
The country’s corporates and state owned entities have for many years worked on a plethora of investment projects in Africa. In Angola, a staggering 300,000 Chinese people are employed in oil and infrastructure projects, says experts. China's relationship with Africa is deep-rooted and long-standing, despite some accusations of its colonial-style acquisition of resources.
LatAm is not Africa
But Africa is not the only natural resource-rich continent that China has its eye on. Central and South America are blessed with abundant resources, along with vast, fertile tracts of land. Unlike Africa, however, China does not have an established presence in Latin America – the country's policy paper on investment plans in Latin America was only completed in November 2008 - and where the Americas are concerned, the relationship still needs fine-tuning.
While Latin America is reliant on foreign investments, it is unlikely to allow the huge influxes of capital and people that have characterised China's presence in Africa. “To the Chinese, Latin America is more difficult [than Africa] to deal with,” says Erik Bethel, CEO of SinoLatin, a consultancy that advises Chinese firms on investing in Latin America. “Keep in mind that China has been in Africa for 40 years, initially for different reasons, helping the Africans with communism and socialism [programmes]. And for the past 40 years, China has invited African students to come to Beijing and to other cities to study. They learn Chinese and about petroleum engineering. The relationship between China and Latin America is still very new.”
A tense friendship
The relationship may be relatively new, but it is already causing tension. Growing interest in the purchase of agricultural land in Brazil, for example, has generated a wave of public resentment in the country, and has prompted the government to impose limits on such deals. Public officials point out, however, that this is not just a direct response to Chinese investments.
“[Land purchase] is sensitive in Brazil because there was a large movement of investments, but not only Chinese investments, it came also from the Gulf region, from Qatar and Saudi Arabia,” says Rodrigo de Azeredo Santos, the new head of UK commercial affairs for Brazil's ministry of external relations, and its former head of investment promotion. “They were looking for opportunities to buy land and produce food for their countries. Although we still have lots of land, the increased interest turned on the [warning] lights.”
In August 2010, the interpretation of the current legislation that deals with foreign direct investment was altered to restrict single purchases of land to a maximum of 5000 hectares and no more than 25% of the territory of a single municipality. To put this into perspective, China National Agricultural Development Group Corporation initially intended to buy 100,000 hectares in Brazil to produce soy and corn in a $300m investment, and to then purchase an additional 250,000 hectares, according to Mr de Azeredo Santos.
“We are not against these investments but we would like to see more joint ventures with Brazilian companies in the agricultural business,” he says. “The new interpretation of the legislation was passed in August last year, so it is very new. Some new investment intentions might be revealed now, so we will see how [Chinese companies] plan to do them.”
Some other limitations might be introduced in the near future. Marcelo Junqueira, director for international promotion of agribusiness at Brazil's Ministry of Agriculture says that one of the issues is attracting investments without damaging the local economy. “The Ministry of Agriculture is expected to submit a paper [on this matter] to the cabinet soon,” he says.
M&A activity, China into Latin America (Dec 2003-March 2011)
Restrictions necessary
The prospect of a Chinese investment spree can be unsettling for any country on the receiving end. Many expect that if no limitations are introduced, China will keep on trying to buy as much as it needs to meet its requirements. And that is a lot. The majority of the country’s 1.3 billion people still live in rural areas but it is forecasted that 300 million people will move from the countryside to the cities over the next 10 years, bringing with them higher demands for food, electrical goods and cars. “If the doors are left wide open, China will go in and buy as much as possible,” says Mr Bethel. And the country certainly has a lot of cash to spend. It is expected that in the next 10 years, China will have domestic savings worth more than $16,000bn.
To guarantee the amount of resources it needs, the country's strategy is to buy the mine that produces iron ore or the land on which to grow the soy beans. But how much have Chinese companies bought so far in Latin America?
Looking at greenfield foreign direct investment deals from 2003 to date, a total in excess of $31bn was spent, according to data provider fDi intelligence – and about 56% of this went to Brazil. In addition, mergers and acquisitions by Chinese companies of Latin American businesses have to-date totalled more than $32bn, according to MergerMarket, and various sources indicate that the value of additional investments, including joint ventures in the commodities and energy sectors, are worth a further $19bn.
While other countries are eyeing Latin America and its natural resources, unlike most investors China wants the commodities more than it wants the returns. “The difference between a Chinese investor and a hedge fund is that the hedge fund is looking for yield, it wants the highest return possible,” says Mr Bethel. “China is looking for that too, but what it really needs is the material.”
Getting in early
And because the more attractive mines and oil fields are already taken by large local or multinational companies, Chinese investors are increasingly looking to do deals at an earlier stage. An example of this is the acquisition of Monterrico, a copper miner largely based in Peru, by a consortium lead by Zijin Mining, China’s second largest gold mining company. At the time the deal was agreed, in 2007, Monterrico had completed a feasibility study on its Rio Blanco copper project in Peru, considered one of the largest copper projects in the world not owned by a major firm. The acquisition consideration was $168m. Zijin Mining had already invested about $1m to open an office in Peru the previous year.
Chinese companies looking at early-stage deals to secure access to sufficiently big quantities of commodities have also realised that they must look beyond the more 'obvious' countries such as Chile and Brazil, which have generous and well-managed natural resources, but also focus upon less-explored countries such as Colombia. Chinese companies have also begun to realise that they must modify their approach to takeovers of local firms.
When investing abroad, Chinese companies have tended to bring with them not just capital, but also entire workforces. This approach, allowed in Africa, has not been welcomed in Latin America, where governments wish to attract investment but also have very clear objectives that such investment also promotes local employment. Mr de Azeredo Santos remembers how, a few years ago, early negotiations over a large port investment in the north of Brazil stalled because of a Chinese company's request to bring over thousands of workers. "This is, of course, not in the interests of [Brazil] because we want to generate jobs for Brazilians and there is a legislation that promotes this,” he says.
Chinese firms seem to have got the message, and the negotiations over the project in north Brazil are now progressing, says Mr de Azeredo Santos. The structure of acquisitions is changing too. While as recently as three years ago Chinese companies would have demanded a controlling stake, now they are lowering expectations, becoming more willing to accept the so-called 'Japanese model', by which the key element of the deal is not having seats on the board or even managing the operations, but securing the products they require.
“Chinese companies are changing because many have encountered problems when doing business in Latin America,” says Mr Bethel. “They are starting to realise it is complex to do business [there]. And there really is not that many managers in China that are capable of running a Latin American operation. That’s a reality. They are now saying, let’s let the Latin Americans run the business, we want the copper.”
Foreign direct investment from China into Latin America and Caribbean (June 2009-March 2011)
