Latin America is increasingly turning to China for an influx of capital.
China’s Premier Li Keqiang took a tour of South America and on a stop in Brazil announced billions of dollars in fresh investment. Most notably, China is injecting $7 billion into Brazil’s oil company Petrobras, which has suffered under the weight of a massive corruption scandal. China and Brazil have also agreed to setup a $50 billion fund that would invest in Brazil’s infrastructure.
Many of the economies in Latin America are largely driven by commodity exports, much of which is sent to China. That includes soy, beef, iron ore, copper, and other raw materials and agricultural goods.
Its lending serves a dual purpose. Not only does China gain access to the commodities it needs, but it is also building up a sphere of influence in the region. It has kept Venezuela afloat, although the Bolivarian Republic is in a state of economic crisis. It also provided much needed capital to Argentina, which has been severed from international financial markets and remains isolated due to a dispute with an American hedge fund. Related: Goldman Sachs Predicting $45 Oil By October
It also will provide Brazil with much needed capital as its economy stagnates and the financial toll to the corruption scandal within Petrobras mounts. President Dilma Rousseff is eagerly seeking to kick start the economy.
Moreover, the timing for China is opportune. With such a large degree of Latin American economies dependent on commodities – incidentally linked to Chinese economic growth – the global bust in commodity prices has led many Latin American assets to be undervalued. That presents a buying opportunity for China. China can scoop up tens of billions of dollars’ worth of assets on the cheap, in everything from banking, to infrastructure, electric power, oil, and rail.
The level of Chinese investment in Latin America offers a window into the way it is building up its presence in the region. China invested more than $22 billion in Latin America in 2014, more than the World Bank and the Inter-American Development Bank combined. Related: Oil Markets Indifferent To Latest ISIS Victory In Iraq
But to get all of those commodities across the Pacific Ocean, China is looking to build one enormous infrastructure project: a transcontinental railroad across Brazil, through the Amazon Rainforest to the Peruvian coast.
Aside from the price tag – upwards of $10 billion – the environmental toll alone is enough to raise skepticism. Slashing several thousand miles through the rainforest, as Brazil and Peru already struggle to reduce their rates of deforestation, would be an environmental nightmare. The destruction of the forest wouldn’t be limited to the tracks alone, but new development that would spring up around the rail line would make the damage done to the Amazon many times worse. The project could also impact more than 600 indigenous communities that are situated along the proposed route.
Those are good reasons to think the project may not come to fruition. But China is desperate for raw materials. The Twin Ocean Railroad, as it is known, could reduce the cost of shipping grain to China by $30 per ton. So it is pushing ahead with a feasibility study. Related: Oil Prices Will Fall: A Lesson In Gravity
China has also expressed interest in a large hydroelectric dam on the Tapajos River, a $5.9 billion project. Brazil is looking to build a long list of dams in the Amazon – by some counts, as many as 250 – in order to secure more base load electricitya more steady electricity supply. But they are often hugely controversial, as they destroy large swathes of forests and uproot indigenous communities.
There is yet one more megaproject crisscrossing Latin American jungles, backed by Chinese money. A destructive grand canal across Nicaragua – intended to rival the Panama Canal – has broken ground, but will not be the subject of the Premier’s trip this week.
After Brazil, Mr. Li’s itinerary will take him to Colombia, Peru, and Chile, three other major trading partners.
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As economic growth in Latin America slows, the region is looking to China for help.
By Nick Cunningham of Oilprice.com
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