Where’s the party?

Investing in Latin America offers tremendous rewards – if you can dance to regulatory rhythms that change quickly, writes John Church

On the face of it, Chinese investment in Latin America is still low-hanging fruit for both sides. Latin American countries are ripe with the raw materials China needs to continue its strong growth. Deals have remained reasonably strong these past 12 months (see table, page 32), and infrastructure projects and opportunities in other sectors such as financial services are abundant for Chinese investors hungry for profit.

But the relationship enjoyed for years appears to be at a crossroad. A world economic crisis-induced decrease in demand for Chinese goods will, in the very near future, analysts warn, mean less produced and therefore less raw materials required from Latin America’s mineral garden. Bank of America Merrill Lynch has been more succinct – should China growth fall to 7.5%, the bank predicts commodity prices would plummet 10% and Latin American exports to China would drop by up to 3%.

The region itself appears split on how to do business with China. While some nations are lifting restrictions, others, notably the most powerful, are keen to reinforce them to protect fledgling industries that they believe might just move their economies beyond mining holes for China’s own monstrous manufacturing and export machine.

The Financial Times, quoting the Inter-American Development Bank, recently pointed to a growing dependence on commodity exports and a dangerously high exposure to Spanish banks as weak spots in the region’s growth chart.

Despite this, the potential for new deals and investment is overwhelming. “South America needs to build infrastructure in terms of roads, ports, airports, power plants, telecoms, railroads and the like,” says George Mencio, the co-leader of the international and cross-border transactions practice group at Holland & Knight. “Chinese service providers are now eligible to participate in all RFPs [requests for proposals] issued by countries in any contract financed by the Inter-American Development Bank, since China is now a member of the bank and companies from member countries are eligible to provide services.”

China accounts for 10% of Latin America’s exports and is the leading export destination for Brazil and Chile. Its foreign direct investment (FDI) in Latin America totalled US$15.3 billion in 2010 and US$22.7 billion in 2011. Chinese investors have shown greatest interest in mining, oil and gas, energy, telecommunications, agriculture, real estate, infrastructure and manufacturing.

In addition to trade and investment, China is vying with the World Bank and the Inter-American Development Bank to become a major lender in Latin America, according to Carmen Gonzalez, a Professor of Law at Seattle University in the US and author of Natural Resources and the Green Economy: Redefining the Challenges for People, States and Corporations, to be published later this year. In the chapter entitled ‘China’s Engagement with Latin America: Partnership or Plunder?’ she states that between 2009 and 2011, China announced loans of US$10 billion to Brazil’s national oil company, US$10 billion to Argentina, US$24 billion to Venezuela, US$4.7 billion to Ecuador and US$138 million to Jamaica, ostensibly to cultivate good will, secure long-term contracts for natural resources at favourable rates, and to help finance imports from China.

But while China’s economic rise may offer benefits to Latin America, Gonzalez says it “ultimately threatens to reinforce Latin America’s economically disadvantageous and ecologically unsustainable specialisation in the production of primary commodities … and to retard the evolution of more dynamic economic sectors that promise higher wages and revenues”.