Butting in or Rounding Out? China’s Role in Latin America’s Investment Diversification

Economically, the asymmetry between China and Latin America has led to discourses that underline the prevalence of China’s interests over those of Latin American countries, given China’s position as the more powerful player. Politically, greater attention has been placed on how China could be using its economic leverage to advance political and ideological gains. But less has been said about where China is positioned as it enters Latin America’s investment landscape and the conditions under which countries in the region have been responding to China’s advances.

In a new working paper, Global China Initiative Predoctoral Fellow (2020) Victoria Chonn Ching examines the impact of Chinese investments on Latin America’s investment diversification, which is mainly divided into two categories: geographical and sectoral. As a region that has sought its reintegration to international markets since the 1990s, Latin American countries continue to seek the expansion of their economic and finance partners and networks. China has become an active and fast-growing partner; however, the size of its economy, the pace of its growth and the dominance of state-owned companies in sizable investment projects have underlined the possibility of unfair competition by Chinese firms and even the potential relinquishing of national resources. Two questions frame Chonn Ching’s exploration: (1) Are China’s investments “butting in” Latin America’s investment landscape, that is, are Chinese firms pushing out other investing countries? (2) Or are they “rounding out,” in that they are mainly driven by the host country’s demands and interests, potentially filling a void left by other partners?

Main findings:

• While its growth has been fast in terms of mergers and acquisitions, China does not appear to be an immediate threat to traditional investors in the region. Instead, China is buying as top traditional partners in the region are also selling.
• Similar to trade exchanges, China’s interactions in Latin America have been centered on a group of countries and depending on the domestic investment policies of these countries, China’s impact may be more acute in some cases than in others.
  • In Brazil, China’s investments have varied from transactions in the automotive sector to software and IT services, as well as in the more predominant extractive and energy sectors, showing gradual diversification within one country.
  • Yet, project delays and postponement in Peru, for example, due to weak due diligence or ineffective compliance of local environmental standards also indicate how some Chinese investments may still need improvements.
• Data from the Red ALC-China indicates that from 2000 to 2017, Chinese foreign direct investment contributed to 15 percent of the estimated 2 million net jobs China created in Latin America, a socio-economic trend that has been less analyzed, which suggests Chinese firms can contribute to the region’s employment market.

Thus far, China appears to be an additional source of capital and resources for Latin America, but Chonn Ching says further examination is needed, particularly in countries with weaker investment policies and more lax environmental and labor standards. China may be contributing to the completion of key projects, but one question is whether the benefits and advantages supersede the costs in the long term.