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China’s Latin American investments downshift to smaller, more strategic projects

In World
February 22, 2024

Margaret Myers, one of the study’s main researchers and director of its Asia and Latin America programme, said that the years of large, high-risk projects have led to a reorganisation of priorities in Beijing. She believes that the Chinese economic slowdown has led several companies, whether state-owned or private, to favour smaller investments, with faster returns and requiring fewer operating costs, such as building roads, bridges, railways, or airports.

The intake dam of the Coca Codo Sinclair hydroelectric project built in Ecuador. Photo: Sinohydro via Xinhua

Myers cited the Coca Codo Sinclair dam, a project in Ecuador financed and built with Chinese money. The dam, announced in 2010 as a flagship belt and road infrastructure project in Latin America, cost US$2 billion, of which US$1.7 billion was financed by a loan from the Export Import Bank of China.

The project was touted by Rafael Correa, then the Ecuadorian president, as the most ambitious and comprehensive infrastructure project in the history of his country’s energy industry. Opened in 2016, the dam was also seen as a key part of a green energy transition plan, as it would significantly reduce Ecuador’s dependence on thermoelectric energy generated by fossil fuels.

Chinese President Xi Jinping attended the inauguration ceremony of the project and proudly referred to it as an example of a China willing to cooperate “in light of the principles of cooperation such as equality, mutual benefit, win-win, flexibility, pragmatism, openness, and inclusiveness”.

The problems that the project brought in the following years not only challenged this view, but also caused mistrust towards belt and road projects across the region.

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Local media discovered that the contract signed with the Chinese prohibited Ecuador from choosing the company building the dam. The loan was granted on the condition that Sinohydro, a state-owned engineering company based in Beijing, would commission the construction.

Shortly after the inauguration, though, several structural flaws were discovered and local engineers responsible for operating the structure began to find cracks – first dozens, then thousands.

By 2022, almost 18,000 had been identified, making it virtually impossible to use the dam as planned. The problems were so extensive that when it was fully activated, the dam caused a short circuit in the country’s power grid, leaving entire towns without electricity for days.

Moreover, the dam cost Ecuador dearly. The country is still paying for the loan by exporting oil to China at discounts of up to 80 per cent. Faced with such failure, several Latin American governments have been reluctant to cooperate with Beijing on other mega-projects, forcing China to adapt.

06:27

Should Chinese nationals be concerned about Ecuador’s security crisis?

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“Some of the projects that China financed in the region have been viewed positively, but others, like this one in Ecuador, have also generated extensive controversy,” Myers said.

“So China has decided to prioritise projects in the so-called new infrastructure sectors, very much intended to try not to generate the same level of controversy as some of these larger-scale projects, where there is a lot of room for very impactful error.”

The term “new infrastructure” is not new, she noted. It emerged in 2018, was included in China’s 14th Five-Year Plan, and covers sectors such as information technology, fintech, electric car manufacturing and other sectors that rely heavily on innovation and technology.

Myers said that Beijing has reaffirmed its belief that high-value-added sectors are more beneficial to the modernisation of the Chinese economy and more sustainable in the long term.

Once investments are announced, they bring further benefits. Because it’s not enough to just build a new factory

Tulio Cariello, China-Brazil Business Council

By exporting tech to developing countries, Beijing can also gain important market share by offering projects at competitive prices and with significant benefits, even if China’s presence in these sectors raises eyebrows from Western partners, who often mention the potential national security risks involved.

“In Latin America, there is a lot of resistance to the introduction of technologies that in some cases are significantly more expensive,” Myers noted.

“When Latin American countries do a cost-benefit analysis, they generally conclude that they would like to pursue opportunities with Chinese providers of wide-ranging technologies,” she said.

One vivid example of this shift is the significant increase in Chinese investment in the electric vehicle industry in the region, which reached US$2.2 billion in 2022, representing about 35 per cent of the total value of Chinese foreign direct investment that year.

It has become increasingly common to see cars from Chinese EV brands such as BYD and Great Wall Motor (GWM) on the streets, thanks to billion-dollar investments by these companies, often accompanied by involvement in related sectors like battery manufacturing and the mining of lithium and rare earths.

Chinese carmaker BYD launches virtual showrooms in Latin America push

The China-Brazil Business Council (CBBC) also noted the trend: a September report pointed out that the volume of Chinese investment in Brazil – traditionally one of the largest recipients of state and private funds from China not only in Latin America but worldwide – fell by 78 per cent between 2022 and 2023. However, the largest announced projects were related to the EV industry.

Last year, BYD and GWM bought manufacturing parks in Brazil that had been abandoned by Western brands such as Ford and Volvo. Since then, according to Tulio Cariello, research director at CBBC, the sector has gained momentum and is starting to attract more Chinese players.

He said that an emerging industry in Brazil was eager to electrify various sectors of the economy, from public transport to construction machinery. The demand has attracted companies such as Higer Bus, a Chinese maker of electric buses based in Suzhou.

Higer Bus is present in several Latin American countries such as Costa Rica, Paraguay, Colombia, and Venezuela. A factory will soon be fully operational in Brazil and the company is already planning to build a second one this year.

“The most important thing in this industry is that once investments are announced, they bring further benefits. Because it’s not enough to just build a new factory, you also need to bring various advanced machines and train staff for the operational phase,” Cariello said.

“It’s an investment that prioritises profitability and viability.”

Margaret Myers, director of the Inter-American Dialogue’s Asia and Latin America programme, said that years of large, high-risk projects have led to a reorganisation of priorities in Beijing. Photo: Wilson Centre

Given the growing need for technologies that are free of American patents, for example, Chinese companies have increasingly invested in research and development.

For example, Cariello said, since 2022 Volvo – originally a Swedish car manufacturer whose main shareholder now is the Chinese group Geely – has steered most of its investments in Brazil into research.

“In general, this new era of investments shows a predominance of private companies, many of them producing goods with very high added value and technology,” he said, adding that the new priorities challenge the stereotype of Chinese products in Latin America, which are still considered inferior and of low quality.

William Tang, operations manager at the logistics company Cai Niao in Brazil, said that Beijing has a clear interest in encouraging expansion of technology companies abroad. Cai Niao is part of the Alibaba Group, which also owns the South China Morning Post.

“If growth opportunities within China are limited, the goal will be to be a leader abroad,” he said.

Tang added that he helped develop a logistics company, sales platform, new warehouses and technologies, including beepers, to track and confirm deliveries of Brazilian imports from China.

The success has spurred Cai Niao to introduce more innovations from China, including smart lockers, parcel-sorting robots and automated distribution centres, which it has subsequently licensed to local businesses, including a leading cleaning products company and a major manufacturer of household appliances.

China resets relations with belt and road partners through green investment push

To some, though, the new investment trend is also cause for concern. Francisco Urdinez, a China scholar at the Pontifical Catholic University of Chile, said that Beijing, faced with the need to revive economic growth at home, is tending to reduce loans through its development banks and focus on commercial loans, which usually come with higher interest rates.

There is therefore less room for loans that are primarily motivated by diplomatic objectives or political alliances. This could put Latin America in a tricky position, Urdinez said, since many countries rely on Chinese money to drive their infrastructure agenda.

“For a long time, Chinese credit was a concrete alternative to the lack of Western investment and a way for governments in the region to create job opportunities and economic growth for many regions,” he said.

“The absence of this is a problem because the West has no interest in filling this gap. It seems that we are moving towards a ‘new normal’, which is the worst-case scenario for the region: less Chinese investment while Western investment remains low.”

Urdinez also feared that the entry of Chinese players into strategic technology sectors like data processing and 5G would make Latin American countries increasingly exposed to external pressure, particularly from the US, which has urged its allies to reduce reliance on Chinese networks that might be security risks.

He contended that the world is moving towards a new model of “capitalism with flags” – where investments are associated with countries with opposing interests and smaller nations are forced to take sides.

The outlook could create an opportunity for Western partners to reestablish a presence in the region, particularly the United States.

“But this hinges on loan availability, including whether the World Bank collaborates on projects jointly funded by the Development Bank of Latin America or the Inter-American Development Bank,” Urdinez said.

“And if that scenario doesn’t materialise, a void would remain. Neither China nor the US would be able to enhance their positions in the region. Consequently, we would then find ourselves isolated.”

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