New research and trends in China’s engagement with Latin America

A sign reading ‘risk of falling’ at the newly-operational Coca-codo Sinclair hydroelectric project in Ecuador, constructed by China’s Sinohydro. The project experienced many setbacks (image: Agencia de Noticias Andes)

New research and trends in China’s engagement with Latin America

The first months of 2016 saw three important works published on the economic interaction between the People’s Republic of China and Latin America and the Caribbean. In February, Boston University and the Washington DC-based think tank the Inter-American Dialogue issued a new version of its database on loans by Chinese banks to Latin America. The database, updated to provide data on China Development Bank and China Ex-Im Bank lending, is perhaps the most authoritative unofficial source on Chinese loans to the region.

In April, the EAFIT University of Medellín, Colombia, presented a new Spanish-language study, La Presencia de China en America Latina: Comercio, Inversión y Cooperación Económica (the presence of China in Latin America: trade, investment and economic cooperation). The work examines in great detail the patterns of increasing trade, investment and loans of Chinese entities in Latin America.

Also during April, the Latin America and the Caribbean Academic Network on China, based in the National Autonomous University of Mexico (UNAM), published an extensive database on PRC investment in the region, helping to address a notable weakness in reliable investment data that had existed in the studies of China commercial activities in Latin America.

The accumulation of these academic works is contributing to a more advanced understanding of the PRC in Latin America. Yet they also provide a glimpse of a new emerging strategic environment impacting PRC activities in the region, which presents challenges for both the Chinese government and its companies – and has the potential to profoundly reshape the dynamics of the relationship.

The challenges China faces in the region reflect two interacting factors: A decrease within Latin America in the perceived attractiveness of doing business with Chinese companies, and an evolving regional environment confronting Chinese government entities and companies which involves greater political uncertainty and more demanding partner regimes.

If there was ever a honeymoon period in the marriage sealed between Latin America and China in 2001 with the entrance by the latter into the World Trade Organization, it has ended. While the quantity of products exported from Latin America to China continues to grow, the fall of commodity prices has pushed down the remuneration received by the region for these by approximately 38% over the past year. The region has increasingly questioned the benefits of prioritising the export of such goods to the PRC.

Although Chinese firms have produced many quality products, and have been successful with many ventures, there is a growing wariness in the region of Chinese products and projects. Poor performance by certain Chinese firms on environmental compliance and corruption has become increasingly visible. High profile Chinese projects announced, yet delayed or unrealised, include the Recope refinery in Costa Rica, Cienfuegos in Cuba, and the Pacific refinery in Ecuador. They also include “dry canal” projects connecting the Atlantic and Pacific coasts across southern Mexico, Guatemala, Honduras, and Colombia, as well as the proposed bi-oceanic railroad between Peru and Brazil (possibly including a segment through Bolivia). Although there are several multilateral Chinese loan funds in the works, the $35 billion in loans for the region announced by President Xi during his visit to Brazil in July 2014 has not yet come to fruition.

Beyond postponed or unrealised projects, the public image of Chinese firms in the region is being negatively impacted by a stream of problems with high-profile projects. Examples include the failure of the $3.5 billion Baha Mar resort project in the Bahamas, accusations of misconduct against the Chinese lumber company Bai Shan Lin in Guyana, environmental problems involving the mining companies Chinese Minmetals and Chinalco in Peru, and Jungie in Bolivia, as well as labor unrest, such as five strikes against the Chinese company Sinohydro in the Construction of the road Ivirgarzama-Ichilo in Bolivia. Other examples include fatalities in a serious accident during the Construction of the Coca Coda Sinclair dam in Ecuador by the Chinese firm Sinohydro, as well as the Bolivian government’s cancellation of the contracts with Chinese Railroad Road and CAMCE, for their inability to perform Work on a railway from Montero to Bulo Bulo for which they were contracted.

While many governments and businessmen in the region are overcoming the challenges of doing business with Chinese firms in order to reap the benefits, the PRC increasingly faces more pragmatic and demanding partners in Latin America, which will require them to engage in a new way in order to be successful.

If evaluating and managing risks in environments has been a weakness of Chinese businesses, the environment in the region in recent years has become even more complicated.  Many of China’s closest partners in the region are experiencing profound economic and political crises, including Venezuela and Brazil. In addition, Peru, one of China’s most important mining partners in the region, is in the midst of an election that will replace the relatively China-friendly government of Ollanta Humala, with either a right-wing government or a neoliberal one, depending on which candidate wins.  In a similar fashion, Nicaragua, a possible partner in the construction of a new trans-oceanic canal (despite the lack of formal diplomatic relations) will also hold elections this year, while the presidents of the three other (pro-China) ALBA countries Ecuador, Bolivia, and Cuba, will leave power when their present terms expire.

The recent trend has been the election of governments which more critically monitor business practices, strengthen institutions and pro-market policies which require Chinese firms to compete in open public bidding to win projects, rather than securing them through the government-to-government arrangements they have grown accustomed to.  In Guyana, since the election of the government of David Granger in 2015, Chinese companies with special relations with the previous administration, such as Bai Shan Lin and China Harbor, have received particularly scrutiny with respect to their compliance with laws and regulations. In Argentina, the election of Mauricio Macri has prompted a review of public contracts signed by the previous Government with Chinese entities, including those for the modernisation of the Belgrano-Cargas railroad system, the building of two hydroelectric facilities on the Santa Cruz River, and the construction of two nuclear reactors in the Atucha complex.

Despite such difficulties, Chinese firms have demonstrated their ability to learn and successfully compete in countries with strong institutions and market economies. In Peru, despite the overflow of a tailings pond in March 2014 contaminating local groundwater and forcing the shutdown of the Toromocho mine, China Aluminum Corporation (Chinalco) has generally been successful in operating the facility, including convincing 5,000 people to relocate from their village, Morococha, which was located on top of the area to be mined.

If Chinese companies have shown that they can operate successfully in the challenging Latin American business environment, there is still much to be done.  Specifically, Chinese companies have to improve their capacity to analyse risks in a politically pluralistic environment, as well as to give more latitude to their operations in the region to adapt to local conditions, as well as working in an intelligent fashion with consulting companies and local associates.  On the other hand, Chinese companies could also do a better job of preparing the management and technical personnel that they send to the region, including familiarity with the local language and culture and better integrating their company and employees with the local community.

Chinese companies are not inherently less capable than international counterparts from succeeding in this more demanding new environment. State owned enterprises benefit from financial backing from deep-pocketed financial partners and the political support of their government and can compliment this by embracing international norms and practices.

While the new Latin American environment will present difficulties for Chinese firms, in the long term, it may yield important benefits, particularly if the new governments with whom they work have better-functioning institutions.  In that fashion, China’s Latin American partners will have a greater ability to be transparent in the negotiation and execution of agreements. This will give rise to less concern in the West, and within a legal and institutional framework that gives China greater confidence that their partners will honor the agreements they have made, independent of the ideological orientation of the party in power.

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