The dragon goes shopping in South America
China is buying commodities and fuelling economic growth, but some worry the communist giant is creating dependency.
Chris Arsenault Last Modified: 21 Dec 2011 18:41
China has more than $75bn in financial investments across South America [Chris Arsenault/Al Jazeera]
The small restaurants and shops selling plastic sandals, tacky umbrellas, kitchen wares and paper lanterns in Buenos Aires' Chinatown do not give the impression of impending economic dominance.
Away from this small urban area, however, China has been not-so-quietly buying up agricultural products, companies and minerals around South America.
Some analysts consider this aggressive drive for resources as a new form of imperialism, in which a big power wrangles raw materials from weaker states. Others believe China's push gives South Americans an alternative to the US, which critics say has attempted to control Latin economies through debt and support for dictators. Regardless of how it is seen, China's economic footprint in the region is growing dramatically.
"Across Latin America we are seeing that China is having an increasing importance in trade and investment," Ricardo Delgado, director of Analytica Consulting in Buenos Aires, told Al Jazeera.
"Brazil and Argentina produce and export many raw materials: soy, sugar, meat and corn… China is a very important driver of demand for these commodities."
Since 2005, China's development bank and other institutions have spent an estimated $75bn on financial investments in South America, said Boston University professor Kevin Gallagher. This is, he points out, "more [investment] than the World Bank, US Export Bank and the Inter-American Development Bank combined".
Chinese private investment, often coming from large state-supported firms that set-up operations in the region or buy local companies, has been about $60bn, Gallagher said.
In the past five years, Bilateral trade between China and South America jumped more than 160 per cent, rising from $68bn in 2006 to $178bn in 2010. In Peru, Chinese mining giant Chinalco spent $3bn buying "copper mountain" - an entire rock formation containing two billion tonnes of the precious metal. The firm expects a 2,000 per cent profit on its investment.
The Chinese state lent Petrobras, Brazil's national oil company, $10bn in 2009. And a plan from China's Beidahuang food company to lease more than 300,000 hectares of land to grow genetically modified soya, corn and other crops in Argentina's Patagonia region has locals furious about potential environmental damage.
Food and fuel
As director of Mercampo, an agricultural consulting firm based in Rosario, Argentina, Gabriel Perez has seen the increase first hand. More trade delegations are coming from China, and tycoons from the world's second largest economy are eager to invest in agriculture and commodities.
"China has the strategic vision to ensure food security and energy in their country [as they worry] that long-term problems will be the supply of raw materials," Perez told Al Jazeera. "This is undoubtedly the primary reason for China's investments in South America."
Foreign firms eye Argentina's land
Chinese firms often buy local assets or lock-in long term supply agreements, sometimes making deals in Chinese currency, rather than the US dollar which typically underpins international trade.
China's expanding relationship with South America has global repercussions far from Argentinian soy farms or Brazilian beaches. Unlike most Americans, regular working-class Chinese people save money. Instead, China maintains a large surplus in its foreign trade.
These factors allowed the Chinese government to amass more than $3tn worth of foreign exchange reserves by the end of March 2011, according to China's national statistics bureau.
Most of that money, nearly $2tn, has been invested in US treasury bonds. For years, they provided a low-risk, low- reward, but stable place to put surplus capital. Now China has a conundrum: The US is living beyond its means and has, according to Standard and Poor's, lost its AAA credit rating.
Yet, if China starts selling its US bond holdings, the debt will lose value. China, the largest holder of the debt, will be shooting itself in the foot. The country, therefore, is trying to quietly move its reserves into assets in emerging economies such as those in South America.
South America became the "primary focus" of Chinese non-bond investments in 2009, according to the Heritage Foundation, a conservative US think-tank that has tracked the communist giant's overseas purchases.
China is now Brazil's largest trading partner. Beijing owns $18.3bn worth of assets in South America's largest country, according to the Heritage Foundation.
"The most important contribution of China’s growth has been trade," Eliana Cardoso, a World Bank economist and former MIT economics professor based in Sao Paulo, told Al Jazeera. "It has contributed to the increase of commodity prices."
Debt and dependency
Throughout South America's history, economists and politicians have worried about dependency created by countries exporting raw materials and then depending on industrialised nations for high-end manufactured goods and technology.
"An economy organised around the export of resources often dampens economic diversification and the development of value-added industries, so there is a way in which China could be as much of a problem as the US," said Greg Grandin, professor of history at New York University and author of Empire's Workshop: Latin America, the United States and the rise the new imperialism.
China has, however, given Latin American countries a "more diversified set of options to negotiate prices and interest rates" than what the US would offer, Grandin told Al Jazeera.
Raul Prebish, an Argentinian economist and former director of the UN’s Economic Commission for Latin America (ECLAC), argued that nations on the "periphery" of world trade were doomed to be primary commodity exporters unless they developed by building a domestic manufacturing base and closing trade links.
"Unlike the Americans, the Chinese do not have all sorts of draconian policy conditions on their finance "
- Kevin Gallagher, Boston University
"In Brazil, China is an important competitor in low labour cost industries. Chinese prices are low and problems of dumping and subsidised exports are common," Delgado said. "Our industries are not prepared very well for this competition." China is frequently accused of keeping its currency artificially low to boost exports.
Brazil's real and other South American currencies have risen drastically due to the commodities boom in recent years. Brazil’s former finance minister went so far as to warn of a "currency war" as countries around the world tried to lower their currencies to boost exports.
"You hear lots of complaints from the industrial sector that competition has become very hard, because the exchange rate is misplaced," Cardoso said, adding that she thinks such concerns are minor compared to the country's growth.
Plenty of economists who do not have strong positions in debates about dependency think it's wrong to worry about Chinese investment because the terms of trade are squarely in South America's favour, as countries maintain large trade surpluses with China.
The values of basic products have changed dramatically since the 1960s when "dependency" became a fashionable topic of discussion.
High prices
"In the last decade, the price of commodities that Latin America exports have doubled and tripled, while the industrial goods it imports from China have become cheaper," Aldo Pignanelli, Argentina’s former Central Bank president, told Al Jazeera's Lucia Newman. "This has allowed Latin America to have a positive trade balance, a strong accumulation of reserves in its central banks and a growth rate that will surpass six per cent this year."
More importantly, Chinese loans, representing the bulk of investment, do not come with the same strings as aid from the International Monetary Fund (IMF) or Inter- American development Bank, which are seen as Washington's fiscal agents.
Through the IMF and World Bank, US policy makers demanded privitisation and low inflation rates, often at the expense of growth, on Latin America through the 1970s and 80s.
IN depth
More from Chris Arsenault:
China buys gold, challenges US dollar
Fighting Brazil's 'currency war'
Invest in 'the world's most violent city'
Glencore: Profiteering from hunger and chaos
Brazil's 'lessons' for Arab rebels
Nicaragua's Ortega: Socialism to opportunism?
Governments in the region have discarded that advice in recent years, looking instead to a mixed economy, in which the state is actively involved in setting monetary policy and managing natural resources. Brazil's government-backed oil giant Petrobras is the clearest example of South America's new form of hybrid capitalism.
Critics charge that the IMF offered one set of prescriptions for developing countries: cut social spending, lower inflation at the cost of job creation and raise interest rates. During crisis at home, the fund's US backers did the opposite, relying on government stimulus programmes and low interest rates to boost growth.
"Unlike the Americans, the Chinese do not have all sorts of draconian policy conditions on their finance," Gallagher said. Other experts have echoed this sentiment - China is more concerned with getting the goods, rather than changing the structure of economies with which it trades.
After defaulting on its massive debt in 2002, following street protests and a bitter economic crisis, Argentina settled its debts with the IMF in 2006 and has ignored its advice ever since.
Back in Buenos Aires' Chinatown, a young Cantonese waitress carried trays of fresh orange juice and sparkling water, chatting in imperfect Spanish to eager Portenos (residents of Buenos Aires) who sit outside in the summer air. While it does not glisten, Chinatown is increasingly becoming fashionable, with young Argentines. Some local libraries even offer free Mandarin language classes, financed with Chinese money, as part of the country's quiet "soft power" in the region.
In recent weeks, Chinese officials have expressed concerns about an economic slow-down, linked to the crisis in European export markets. That could spell trouble for growth in South America.
"Seventy-two per cent of Argentina's soy goes to China," Gallagher said. "If China's demand slows by a few percentage points, you could have an unwinding." He worries commodity exporters have put "too many eggs in the China basket".
Even so, the restaurants in Buenos Aires' Chinatown and beyond are filled with well-dressed people chowing down on BBQed meat, noodles and warm bread. The economy has been strong, despite inflation.
China's growth has played an important role in reducing poverty across Latin America, which has fallen to its lowest level in 20 years, according to the UN figures released in December.
While Brazilian manufacturers worry about dependency and increased competition, the country's economy has, according to Cardoso, seen an "increase in productivity, an increase in real wages, and a decrease in inequality".
"People are feeling better off," she said. At least part of this feeling can be linked to China and the commodities boom.
Follow Chris Arsenault on Twitter: @AJEchris
Source: Al Jazeera
http://www.aljazeera.com/indepth/features/2011/12/20111212162113350425.html
China is buying commodities and fuelling economic growth, but some worry the communist giant is creating dependency.
Chris Arsenault Last Modified: 21 Dec 2011 18:41
China has more than $75bn in financial investments across South America [Chris Arsenault/Al Jazeera]
The small restaurants and shops selling plastic sandals, tacky umbrellas, kitchen wares and paper lanterns in Buenos Aires' Chinatown do not give the impression of impending economic dominance.
Away from this small urban area, however, China has been not-so-quietly buying up agricultural products, companies and minerals around South America.
Some analysts consider this aggressive drive for resources as a new form of imperialism, in which a big power wrangles raw materials from weaker states. Others believe China's push gives South Americans an alternative to the US, which critics say has attempted to control Latin economies through debt and support for dictators. Regardless of how it is seen, China's economic footprint in the region is growing dramatically.
"Across Latin America we are seeing that China is having an increasing importance in trade and investment," Ricardo Delgado, director of Analytica Consulting in Buenos Aires, told Al Jazeera.
"Brazil and Argentina produce and export many raw materials: soy, sugar, meat and corn… China is a very important driver of demand for these commodities."
Since 2005, China's development bank and other institutions have spent an estimated $75bn on financial investments in South America, said Boston University professor Kevin Gallagher. This is, he points out, "more [investment] than the World Bank, US Export Bank and the Inter-American Development Bank combined".
Chinese private investment, often coming from large state-supported firms that set-up operations in the region or buy local companies, has been about $60bn, Gallagher said.
In the past five years, Bilateral trade between China and South America jumped more than 160 per cent, rising from $68bn in 2006 to $178bn in 2010. In Peru, Chinese mining giant Chinalco spent $3bn buying "copper mountain" - an entire rock formation containing two billion tonnes of the precious metal. The firm expects a 2,000 per cent profit on its investment.
The Chinese state lent Petrobras, Brazil's national oil company, $10bn in 2009. And a plan from China's Beidahuang food company to lease more than 300,000 hectares of land to grow genetically modified soya, corn and other crops in Argentina's Patagonia region has locals furious about potential environmental damage.
Food and fuel
As director of Mercampo, an agricultural consulting firm based in Rosario, Argentina, Gabriel Perez has seen the increase first hand. More trade delegations are coming from China, and tycoons from the world's second largest economy are eager to invest in agriculture and commodities.
"China has the strategic vision to ensure food security and energy in their country [as they worry] that long-term problems will be the supply of raw materials," Perez told Al Jazeera. "This is undoubtedly the primary reason for China's investments in South America."
Foreign firms eye Argentina's land
Chinese firms often buy local assets or lock-in long term supply agreements, sometimes making deals in Chinese currency, rather than the US dollar which typically underpins international trade.
China's expanding relationship with South America has global repercussions far from Argentinian soy farms or Brazilian beaches. Unlike most Americans, regular working-class Chinese people save money. Instead, China maintains a large surplus in its foreign trade.
These factors allowed the Chinese government to amass more than $3tn worth of foreign exchange reserves by the end of March 2011, according to China's national statistics bureau.
Most of that money, nearly $2tn, has been invested in US treasury bonds. For years, they provided a low-risk, low- reward, but stable place to put surplus capital. Now China has a conundrum: The US is living beyond its means and has, according to Standard and Poor's, lost its AAA credit rating.
Yet, if China starts selling its US bond holdings, the debt will lose value. China, the largest holder of the debt, will be shooting itself in the foot. The country, therefore, is trying to quietly move its reserves into assets in emerging economies such as those in South America.
South America became the "primary focus" of Chinese non-bond investments in 2009, according to the Heritage Foundation, a conservative US think-tank that has tracked the communist giant's overseas purchases.
China is now Brazil's largest trading partner. Beijing owns $18.3bn worth of assets in South America's largest country, according to the Heritage Foundation.
"The most important contribution of China’s growth has been trade," Eliana Cardoso, a World Bank economist and former MIT economics professor based in Sao Paulo, told Al Jazeera. "It has contributed to the increase of commodity prices."
Debt and dependency
Throughout South America's history, economists and politicians have worried about dependency created by countries exporting raw materials and then depending on industrialised nations for high-end manufactured goods and technology.
"An economy organised around the export of resources often dampens economic diversification and the development of value-added industries, so there is a way in which China could be as much of a problem as the US," said Greg Grandin, professor of history at New York University and author of Empire's Workshop: Latin America, the United States and the rise the new imperialism.
China has, however, given Latin American countries a "more diversified set of options to negotiate prices and interest rates" than what the US would offer, Grandin told Al Jazeera.
Raul Prebish, an Argentinian economist and former director of the UN’s Economic Commission for Latin America (ECLAC), argued that nations on the "periphery" of world trade were doomed to be primary commodity exporters unless they developed by building a domestic manufacturing base and closing trade links.
"Unlike the Americans, the Chinese do not have all sorts of draconian policy conditions on their finance "
- Kevin Gallagher, Boston University
"In Brazil, China is an important competitor in low labour cost industries. Chinese prices are low and problems of dumping and subsidised exports are common," Delgado said. "Our industries are not prepared very well for this competition." China is frequently accused of keeping its currency artificially low to boost exports.
Brazil's real and other South American currencies have risen drastically due to the commodities boom in recent years. Brazil’s former finance minister went so far as to warn of a "currency war" as countries around the world tried to lower their currencies to boost exports.
"You hear lots of complaints from the industrial sector that competition has become very hard, because the exchange rate is misplaced," Cardoso said, adding that she thinks such concerns are minor compared to the country's growth.
Plenty of economists who do not have strong positions in debates about dependency think it's wrong to worry about Chinese investment because the terms of trade are squarely in South America's favour, as countries maintain large trade surpluses with China.
The values of basic products have changed dramatically since the 1960s when "dependency" became a fashionable topic of discussion.
High prices
"In the last decade, the price of commodities that Latin America exports have doubled and tripled, while the industrial goods it imports from China have become cheaper," Aldo Pignanelli, Argentina’s former Central Bank president, told Al Jazeera's Lucia Newman. "This has allowed Latin America to have a positive trade balance, a strong accumulation of reserves in its central banks and a growth rate that will surpass six per cent this year."
More importantly, Chinese loans, representing the bulk of investment, do not come with the same strings as aid from the International Monetary Fund (IMF) or Inter- American development Bank, which are seen as Washington's fiscal agents.
Through the IMF and World Bank, US policy makers demanded privitisation and low inflation rates, often at the expense of growth, on Latin America through the 1970s and 80s.
IN depth
More from Chris Arsenault:
China buys gold, challenges US dollar
Fighting Brazil's 'currency war'
Invest in 'the world's most violent city'
Glencore: Profiteering from hunger and chaos
Brazil's 'lessons' for Arab rebels
Nicaragua's Ortega: Socialism to opportunism?
Governments in the region have discarded that advice in recent years, looking instead to a mixed economy, in which the state is actively involved in setting monetary policy and managing natural resources. Brazil's government-backed oil giant Petrobras is the clearest example of South America's new form of hybrid capitalism.
Critics charge that the IMF offered one set of prescriptions for developing countries: cut social spending, lower inflation at the cost of job creation and raise interest rates. During crisis at home, the fund's US backers did the opposite, relying on government stimulus programmes and low interest rates to boost growth.
"Unlike the Americans, the Chinese do not have all sorts of draconian policy conditions on their finance," Gallagher said. Other experts have echoed this sentiment - China is more concerned with getting the goods, rather than changing the structure of economies with which it trades.
After defaulting on its massive debt in 2002, following street protests and a bitter economic crisis, Argentina settled its debts with the IMF in 2006 and has ignored its advice ever since.
Back in Buenos Aires' Chinatown, a young Cantonese waitress carried trays of fresh orange juice and sparkling water, chatting in imperfect Spanish to eager Portenos (residents of Buenos Aires) who sit outside in the summer air. While it does not glisten, Chinatown is increasingly becoming fashionable, with young Argentines. Some local libraries even offer free Mandarin language classes, financed with Chinese money, as part of the country's quiet "soft power" in the region.
In recent weeks, Chinese officials have expressed concerns about an economic slow-down, linked to the crisis in European export markets. That could spell trouble for growth in South America.
"Seventy-two per cent of Argentina's soy goes to China," Gallagher said. "If China's demand slows by a few percentage points, you could have an unwinding." He worries commodity exporters have put "too many eggs in the China basket".
Even so, the restaurants in Buenos Aires' Chinatown and beyond are filled with well-dressed people chowing down on BBQed meat, noodles and warm bread. The economy has been strong, despite inflation.
China's growth has played an important role in reducing poverty across Latin America, which has fallen to its lowest level in 20 years, according to the UN figures released in December.
While Brazilian manufacturers worry about dependency and increased competition, the country's economy has, according to Cardoso, seen an "increase in productivity, an increase in real wages, and a decrease in inequality".
"People are feeling better off," she said. At least part of this feeling can be linked to China and the commodities boom.
Follow Chris Arsenault on Twitter: @AJEchris
Source: Al Jazeera
http://www.aljazeera.com/indepth/features/2011/12/20111212162113350425.html
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