China is unstoppable – at least in the realms of foreign investment and international development finance. Within less than a year, Beijing-led initiatives pledged to mobilize $519 billion to enhance South-South cooperation and finance trade, infrastructure, and industrial projects overseas. High-profile ventures such as the New Silk Road and BRICS-sponsored projects are likely to benefit the most from this movement. And while figures like these should be taken cautiously, this trend has clearly settled. Long-term financing for international projects is increasingly coming from the East. Newly founded development finance institutions, sponsored by the Chinese, are expected to deploy between $207 billion and $353 billion in Asia, Africa, Latin America, Eastern Europe, and the Middle East within a seven-year period.
Yet, while such disbursements will fall short of the overall gap of $10 trillion to finance infrastructural endeavors in emerging markets, they will likely outpace the $215 billion of total loans expected to be deployed in infrastructure by traditional multilateral institutions such as the World Bank, the Inter-American Development Bank, and the Asian Development Bank during the same period.
Moreover, this “big push” will probably foster the reshaping of global trade and the reinventing of South-South business. Emerging market multinationals are going to face strong incentives to undertake joint ventures, engage in mergers and acquisitions, and establish strategic alliances with their Chinese peers.
The recent visit of the Chinese Premier Li Keqiang to Brazil, Peru, Chile, and Colombia is part of this wider trend. Indeed, China has promised to mobilize $85 billion to fund infrastructure and industrial projects within Latin America in the coming years, including the Plan of Cooperation between China and the Latin American and Caribbean Countries and infrastructure projects in Brazil.
While Chinese involvement in infrastructure and industry in Latin America is no big news, at least three features shed new light on the topic. First, Chinese undertakings in Latin America now have a broader geopolitical focus: balancing the U.S. strategy to pivot towards Asia and support the Trans-Pacific Partnership (TPP). Second, China’s “new normal” and existing problems with Beijing’s financial diplomacy urge changes in the country’s “Go Global” policy. The traditional “Angolan mode” – financial cooperation packages concentrated in a few countries and modeled merely as bilateral resources for infrastructure deals – should be balanced by more sophisticated projects undertaken in a broader base of countries. As it stands, overseas assets of Chinese policy banks are too exposed to riskier clients highly affected by the commodity market. A sustainable long-term strategy demands shared risks and diversified portfolios. Thus, future financial cooperation is expected to involve multi-layered arrangements, including newly founded multilateral development finance institutions, regional initiatives, and traditional Chinese players such as policy banks, commercial banks, and contractors. China has been trying to push this new approach to Latin America since the realization of a forum with the Community of Latin America and Caribbean States (CELAC) in July of 2014.
Finally, Brazil’s “perfect storm” of economic crisis and political scandal is creating unprecedented opportunities for further expansion of Chinese interests in the seventh largest economy, albeit one of the most closed economies, in the world. Brazilian officials had often been cautious about Chinese investment in strategic sectors such as infrastructure and energy. However, distrust in international capital markets and fiscal consolidation are increasing the competitiveness of Chinese business partnerships in Brazil. On April 1, 2015, when debt markets were still waiting for the audited financial statements of crisis-torn Petrobras, the China Development Bank (CDB) provided a $3.5 billion credit line to the state-controlled company. Last week, during Keqiang’s visit to Brazil, Petrobras contracted another $3.5 billion credit line with the CDB and China’s Export-Import Bank. Should Brazil’s National Petroleum Agency (ANP) organize licensing rounds in 2015 and 2016, Chinese national oil companies will likely benefit from the allocation of concessions and production sharing contracts, increasing their stake in both the pre-salt and post-salt oil.
Similarly, Chinese contractors are expected to participate in the concession tenders organized by the Brazilian government in 2015 and 2016. In this case, the Chinese leverage is the fragile position of some big Brazilian contractors involved in Petrobras’s corruption scandal and the slower pace of the new disbursements from the Brazilian National Development Bank (BNDES). In this economic climate, China is more than willing to wage its checkbook diplomacy. Indeed, Dilma Rousseff and Li Keqiang announced that Caixa Economica Federal and the Industrial and Commercial Bank of China are cooperating to create and manage a $20 billion fund to finance infrastructure in Brazil. Similarly, Brazil’s Ministry of Planning, Budget, and Management and China’s National Development and Reform Commission are discussing the creation of another $20 billion fund to finance investment and cooperation in production capacity. These are major undertakings that might consolidate the position of Chinese companies within the construction and capital goods sectors in Brazil.
In sum, closer relations with Brazil may help China boost its interests in South America. In this sense, the Trilateral Brazil-Peru-China Transcontinental Railroad, a project aiming to link the Brazilian Atlantic to the Peruvian Pacific, is a good example of how Chinese interests may converge with Brazilian initiatives. In fact, Chinese money and Brazilian regional expertise and institutional knowledge may prove a perfect combination to re-shape South America’s infrastructure. One should not be surprised if many such partnerships form in the months and years to come.