Despite turmoil, China is going long on Brazil: FT

If Brazil’s political and economic volcano threatens to dump an ashmound on the case for investing across Latin America, nobody told the Chinese about it.

In fact, even as drumbeats for the suspension and impeachment of president Dilma Rousseff rose to a crescendo last month, expectations held that China would plough record amounts into building hydrodams, power lines, toll roads and transit systems across Latin America — with Brazil emerging as the Asian investors’ top pick.

That is the conclusion from a survey of 20 infrastructure executives and specialists conducted by FT Confidential Research, a unit of the Financial Times.

The poll of their investment expectations found that appetite among big Chinese players remains undimmed, despite a rocky economic and political period for Brazil and other countries in the region, because they are thinking of longer-term strategic goals. Indeed, Brazil is expected to receive the greatest level of Chinese investment in Latin America in 2016.

Notably, the operator of the largest dam in the world, China Three Gorges, is making big bets on the region’s hydropower infrastructure. Li Yinsheng, the chief executive of CTG’s Brazilian arm, told FTCR that even after winning auctions as the sole bidder for two hydroelectric plants in November 2015 — costing R$13.8bn ($3.9bn), and bringing its total investment in Brazil to R$17bn — the company still plans to acquire sizeable greenfield assets.

CTG is not alone. China’s State Grid is developing two transmission lines delivering power from the recently inaugurated Belo Monte dam in the middle of the Amazon to south-east Brazil at a cost of R$12bn.

A majority of respondents to the FTCR survey — 13 out of 20 — expected Chinese investment in Latin America to increase in 2016, while only one believed it would shrink, as the first chart shows.

Despite the tumbling prices of oil and gas and mineral resources, 50 per cent of respondents said the energy and mining sectors would still receive significant Chinese investment in 2016, though the energy sector (including hydroelectric dams and power transmission) was expected to be the top area of investment. But there was evidence of expectations of greater diversity into areas such as transport and other sectors such as housing, as the second chart shows.

Chinese companies have already established themselves in Latin America, investing a total of $41.8bn in infrastructure from 2013 to 2015, particularly in the extractive industries, as the third chart shows. While this investment total might be dwarfed by the scale of Chinese investments in Asia, our study suggests a hunger for new Latin American projects despite regional volatility and China’s own economic slowdown.

Yet even though funding — often state-encouraged — is plentiful, China is becoming more selective with its investments. Time was, China was happy to take on projects in markets shunned by western investors, notably the so-called Alba countries, which include Venezuela, Bolivia, and Ecuador. Now, respondents said they expected this year’s Chinese investment to shift rapidly away from Venezuela, with Brazil and Argentina predicted to be the two greatest recipients, as the final chart shows.

Countries such as Venezuela never demanded a high level of transparency and provided an entry point to the continent in a way that less liable to generate confrontation with the US. During this period, Chinese investment was largely absent from the more transparent, free-market economies of Latin America, such as Colombia, Chile and Mexico.

But the flaws in this approach became obvious by 2013, as the security and political situation deteriorated in Venezuela and allegations of corruption emerged. China is now diversifying away from the seething cauldron of risk that Caracas has become.

“China is understanding that it did a poor job of assessing risk,” says Dr Evan Ellis of the US Army War College Strategic Studies Institute. “As the [Nicolás] Maduro administration has fallen apart, China has only given the appearance of supplying loans, without actually providing new money. This is money to cover work done by Chinese companies and allows the country to maintain face while consolidating its position. China is playing a much tougher game with Venezuela.”

As for Argentina, it should be noted that its renewed favour among international investors means China will now face stiffer competition from western nations than it did during the previous period of Peronist political management.

Survey respondents also told FTCR they expect Mexico and Colombia to benefit from China’s waning interest in Venezuela. Both are considered relatively low risk, with good-sized domestic markets. Risk should fall further this year in Colombia following the imminent signing of a peace accord with the militant Farc group.

Chinese investment in Colombia has already picked up. Together with local partners, China Harbour Engineering recently won the contract for Autopista Mar 2, a 245km motorway in north-west Colombia that is part of the so-called fourth generation of road concessions.

This is a prime example of the sort of project sought by China, involving both construction and operation. The FTCR survey suggests it is likely to be just one of the first of many in Latin America in the coming years.