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Asia-PacificNovember 1 2021

China’s push into Latin America

China’s economic expansion into Latin America has raised questions about the motivation behind such investments and the contractual terms. The issue is complex and without a simple solution. 
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China’s push into Latin America

China’s international expansion has been making headlines since the country launched its Belt and Road Initiative (BRI) in 2013, and not always for the right reasons. 

Most recently, attention has moved to what is happening in Latin America. Since the 2007-09 financial crisis, as Western companies began to retrench to their home markets, China’s presence in the region has been steadily increasing and the expansion has accelerated in recent years. 

Rebecca Ray, senior researcher at Boston University Global Development Policy Center, says: “The big news over the past two years has been Chinese investment firms buying up electricity distribution assets that Western investors did not want any more. This started before the [Covid19] pandemic, when Western investors saw the region’s economic growth slow and decided to offload the assets. Chinese state-owned enterprises, which traditionally have a long-term decision-making process, were happy to buy when the market was low and hold on to those assets for a longer period.” 

[US president Joe] Biden is yet to pay as much attention to what is happening in Latin America as his predecessor

Alicia García Herrero, Natixis

Now there has been a shift in the investment patterns, with Chinese investors wanting to create their own projects. Ms Ray says that it is not a surprising trajectory for international investors that have started with mergers and acquisitions. However, not everyone sees the expansion as the natural course of events. 

These changes have caused unrest in the international community, especially within the US, with concerns ranging from expanding Chinese influence to the encroachment into what the US considers it’s ‘back yard’, and the nature and quality of the loans and projects being created in Latin America. 

In a bid to counter Chinese influence, the US sent a team of officials, headed by deputy national security advisor Daleep Singh, on a tour of Panama, Colombia and Ecuador in September 2021 to find potential infrastructure projects. Officials said they were looking to engage with projects exhibiting higher environmental and labour standards than those China was financing. But the position of the US in the region in recent years has been inconsistent, not least due to its change in president. 

Changing administrations 

President Donald Trump’s administration was hardly shy about voicing its opinions on China’s activity overseas, but it also had a very complex relationship with Latin America. While critical of China’s efforts, the administration did little to engage with the region, outside of alienating comments from Mr Trump about Mexico and immigration. During his four-year term as president, Mr Trump made just one trip to the region, visiting Argentina, and one trip to China. 

However, there were some attempts to engage with Latin America to lessen Chinese influence, which have been picked up by the new administration. Enrique Dussel Peters, professor at the Graduate School of Economics at the National Autonomous University of Mexico (UNAM) and director of the Center for Chinese-Mexican Studies at UNAM, says: “In Ecuador, the Trump administration had the intention of buying Chinese debt, particularly those related to infrastructure projects, for $3.5bn. This has been continued by the Biden administration, meaning that the US would become the owner of the Chinese infrastructure. The US would become the owner of huge hydroelectric power plants using Chinese technology.” 

Enrique Dussel Peters1

Enrique Dussel Peters, UNAM

Another bone of contention for the US is the extensive reach of telecommunications giant Huawei. The Trump administration approved a deal to extend financing to the government of Ecuador on the condition they did not allow Huawei into any future telecoms deals. But not every country is concerned with upsetting the US. Chile has been clear that it is allowing Huawei to participate in its next 5G auction, stating that it will not discriminate against any nationality as long as they meet the standards of the bid. 

Tellingly, the concerns expressed by the US about the expansion of an international power into the region does not seem to extend to other economies. 

Mr Dussel Peters says: “There has been much discussion about the US’s views on China’s influence in the region, but in most cases Chinese infrastructure projects have already been realised. And it is not the only country operating in the region; Germany, Japan, Spain, South Korea and the US are all developing infrastructure.” 

Even accounting for the recent US delegation visit to Latin America, the overall rhetoric towards China has tempered since Joe Biden took over the presidency at the beginning of 2021. Alicia García Herrero, chief economist for Asia-Pacific at Natixis, says: “The Biden administration is more appealing for the region than the Trump administration was, but Mr Biden is yet to pay as much attention to what is happening in Latin America as his predecessor.”  

Rather than pushing for change, the US may instead be choosing a softer method for holding its position. “Latin America has become more attractive because China is a threat, but it’s still not the core of the US’s interests,” Ms García Herrero says. “However, Mexico and Chile may be the exception, as they are in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and strategically they can block China’s entrance, as admission of new members is based on unanimity.” 

The green agenda 

Aside from the international discussion over power grabs and exerting influence, Chinese involvement in Latin America consists of several large infrastructure projects. These have frequently been in the form of green energy projects. In Brazil, China’s State Power Investment Corp has invested 4bn reais ($7.8bn) in wind and solar projects. The Export-Import Bank of China (Cexim) extended $331.5m for the construction of Argentina’s Cauchari Solar Plant, with green bonds being issued for the remaining 15% of the project cost. Built by Shanghai Electric Power Construction, the site’s 1.2 million solar panels were made by Talesun and used inverters from Huawei.

Meanwhile in Peru, China Three Gorges (CTG) stepped forward to purchase the Chaglla mega-dam for $1.4bn when its previous owner, Brazil’s Odebrecht, was forced to sell assets as part of a corruption case. As CTG also held Peru’s San Gabán III hydropower plant, there were some concerns when it purchased the country’s largest power distribution company, Luz del Sur. Peru went through a judicial review before approval to ensure there was no self-dealing, and with the condition that Luz del Sur purchase its energy through open auction like other distributors, to prevent price fixing. 

The involvement in renewables projects appeared to receive a boost when China’s president Xi Jinping pledged that the country would no longer finance coal-fired plants abroad. However, the pledge is not likely to make much difference for recent investments.  

“The announcement that China will not fund any coal plants is irrelevant — they have not funded any plants since 2020, as no one wants them now,” Ms García Herrero says. “The cost of funding coal plants now is so huge that it is not economical. China prefers renewables, as the risk is lower, and it has 80% of solar production in the world. China’s shift to renewable energy projects in Latin America is really a move to sell its renewables products to Latin America.” 

To make enough renewable products requires ample supplies of lithium, which is used in batteries. Incidentally, around 60% of the world’s lithium reserves are found in Latin America — particularly in Bolivia, which is one of the region’s poorest countries. 

[China] is not the only country operating in the region; Germany, Japan, Spain, South Korea and the US are all developing infrastructure

Enrique Dussel Peters, UNAM

However, Chinese involvement in energy projects often derives from the country’s deep experience in developing them. The Three Gorges Dam on the Yangtze River in Hubei province was the largest dam in the world on completion in 2006. During 2020, the hydroelectric plant produced 111.88 kilowatt hours, setting a new world record for annual power generation. 

“Once the Three Gorges Dam project was completed, there was a tremendous amount of excess capacity and know-how that could easily be exported, and countries in Latin America were interested in moving away from a reliance on fossil fuels for power,” Ms Ray says. 

For countries as huge and geographically diverse as those in Latin America, distributing power can be a difficult process. Having partners with experience in addressing these problems can be essential. Ms Ray says: “China has internal mega-projects for electricity generation that may be geographically very far from the substations and the end consumer, and so has developed a technological advantage in high tension, long-distance power lines which are able to transfer power long distances without too much energy loss. This kind of technology can make remote projects in Latin America possible, including hydro and solar panel projects.”  

Chinese importance 

The presence of China in Latin America is not a new phenomenon, and China has been an essential trading partner for many countries. Between 2000 and 2020, trade between China and Latin America grew 26-fold, from $12bn to $315bn, according to the World Economic Forum. It is predicted that trade will more than double by 2035, to a value of $700bn. It is possible China will surpass the US as the region’s top trading partner. 

Ernesto Revilla, Latin America chief economist at Citi, says the expansion in trade had real-world impacts. “The very high growth rates in Latin America in the early 2000s was almost completely due to the emergence of China, and that helped with the successes in poverty reduction throughout the decade,” he says. 

The development of infrastructure projects is also creating benefits in the long-term, with increased employment rates. CTG reports that the San Gabán III project has created 500 jobs for local people across the construction and service sectors since its inception in 2016. 

Ernesto Revilla

Ernesto Revilla, Citi

Mr Dussel Peters says: “In some cases it is easy to overemphasise the importance of China’s infrastructure projects, but they are growing in size and generating employment.” 

Not all changes come as part of construction projects. The arrival of ride-hailing apps has also increased employment opportunities. Mr Dussel Peters adds: “Didi has been investing a few million dollars in Brazil, Colombia and Mexico, and has generated almost 160,000 jobs through a relatively low investment. This contrasts to the capital-intensive foreign direct investment (FDI) into the petrochemical, metals and mining sectors.” 

However, being so tightly aligned to the prospects of China can come at a cost, as seen in the economic shocks experienced during the Covid-19 pandemic. 

“The fortunes of China are very important for the economic prospects of the Latin American region,” Mr Revilla says. “Citi’s China economists downgraded Chinese growth for 2022 to 4.9%, and this will be a significant headwind for the region. The main channel of influence is through commodity prices. Chinese demand is important for determining these prices, and commodity prices have traditionally been one of the main determinants of Latin American currencies and prospects.”  

Discrepancies in lending 

Despite the significant role played by Chinese investment, there are still concerns about what China is gaining through its relationships in Latin America. A significant portion of Chinese financing into Latin America comes from the country’s two policy banks, namely China Development Bank (CDB) and Cexim. Inter-American Dialogue tracks the funds that have gone into Latin America from China and, since 2005, the two banks have provided more than $137bn in loan commitments into Latin American and the Caribbean. 

These numbers break down to a total of $93.5bn from 35 loans into the energy sector and $25bn from 38 loans into infrastructure projects. The lending had been on a decline since 2016 onwards, following the trend of the declining investment into the BRI. However, according to 2020’s figures, the lending ended abruptly and not a single cent was loaned during the year. 

Ms García Herrero says: “The latest data is showing zero lending. It is not credible — so it seems the policy banks do not want to share the data.” 

While she does not believe the number to have hit zero, Ms García Herrero says there was a decline. “The main form of strategic investment from China has been in energy and utilities. But there has been a move towards being more cautious. Policy banks have been less present in the region, as China looks to invest more money into its own territory. There have also been fears of defaults, and worsening sentiment about China in the region, making it harder to get the good deals,” she says. 

Mr Dussel Peters says he has also seen discrepancies. “We have conducted detailed analysis on Chinese outward FDI of 480 transactions in 2020 and come up with very different numbers to the official statistics. In some cases, where we have found negatives of up to $50m or $60m, we have seen these being reported as a positive number,” he says. 

The concerns around hidden debt were brought out in a report by international development research lab AidData. In the ‘Global Chinese Development Finance Dataset, Version 2.0’, it tracks 13,427 Chinese development projects worth $843bn across 165 countries recorded between 2000 to 2021. AidData believes that, globally, there is $385bn in hidden debt. This has been caused by the move away from lending to sovereign borrowers, towards state-owned banks and companies, joint-ventures and special purpose vehicles. 

These numbers have led to the concern that many companies have been pushed into the position whereby China could seize assets should debts not be repaid. 

Contract details 

Chinese institutions’ lending contracts and their repayment terms have been a matter of debate for some time. 

To assess the issue, the Peterson Institute for International Economics issued the ‘How China Lends’ report in June 2021. Assessing 100 debt contracts across 24 countries, signed from 2000 to 2020 and totalling $36.6bn, many of the contracts refer to the borrower’s promise not to disclose the terms, or indeed the contract’s existence. 

The bulk of the confidentiality obligations in Chinese contracts falls on the debtor, when in commercial contracts it is on the creditor

Anna Gelpern, Peterson Institute

Anna Gelpern, who co-authored the report and is a Georgetown law professor and Peterson Institute fellow, says of the contracts assessed that the only clause unique to China was a ‘no Paris Club’ clause, where the borrower promises to exclude the contract from a coordinated debt restructuring. 

“What is more subtle is the clause types that are fairly common in other private or official contracts, but that are formulated differently in Chinese lenders’ forms,” says Ms Gelpern. “For instance, the bulk of the confidentiality obligations in Chinese contracts falls on the debtor, when in commercial contracts it is on the creditor.”  

The most complex aspect of the contracts is the cross-default clauses. Ms Gelpern explains: “Cexim uses a standard, if creditor-friendly, version of cross defaults: if the borrower is in default under any other agreement involving the borrowing of money or guarantee with any other bank or financial institution, Cexim could pull the acceleration trigger. It is creditor-friendly because, for example, there is no grace period and no minimum amount threshold for default.” 

For CDB, there are much bigger sums involved, with the eight loans in the dataset exceeding the 76 Cexim loans combined, and so the terms are different. The report highlights a $1bn facility agreement signed with Ecuador’s Ministry of Finance in 2010, which, Ms Gelpern explains, “allows CDB to invoke default reminders if any Ecuadorian government entity harms any [Chinese] entity in a targeted way”. 

anna-gelpern_0

Anna Gelpern, Peterson Institute

Another example of a cross-default clause is when Argentina attempted to cancel a project and was told by CDB there was a cross-default provision if the default exceeds $25m. “What is interesting is it has what was missing in the Cexim agreement of a de minimis amount,” says Ms Gelpern. “It won’t trigger on any default, but $25m is actually quite low.” 

Overall, the contracts create interconnected relationships, whereby it only takes upsetting one investor or institution to trigger defaults. With confidentiality clauses, they form a tight network. 

While this might be enough to raise concerns, Ms Gelpern says there is not enough known about what is happening in contracts globally to conclude China is doing anything exceptional. She says: “Others may have similar terms in their contracts — though our benchmark sample suggests that Chinese lenders use more muscular versions of the terms, and do so more often than other official or private creditors. But we have to be careful with sounding the alarm on China when we don’t have a full picture of what everyone else is doing.” 

The question on China’s influence in Latin America remains complex, and one which is not as simple as swapping out for another lender. If countries wish to lessen the influence of China, there will have to be on-the-ground work to provide projects and lending terms which are as plentiful and competitive as what China has to offer. 

“It is not as simple as getting countries to borrow from the US or Europe rather than China,” Ms Gelpern says. “There is not the level of coordination between creditors at this time to ensure a sustainable debt profile for vulnerable countries. With more robust creditor coordination and greater debt transparency, we can reduce some of the distrust that could lead to an asset grab that strips resources from already-distressed countries.” 

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Read more about:  Americas , Asia-Pacific , China , Regulations
Kimberley Long is the Asia editor at The Banker. She joined from Euromoney, where she spent four years as transaction services editor. She has a BA in English Language and Literature from the University of Liverpool, and an MA in Print Journalism from the University of Sheffield. Between degrees she spent a year teaching English in Japan as part of the JET Programme.
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