Latin America: The Next Chapter in China’s Global Economic Strategy

• Harsh economic times are forcing China to change its investment tack in its pivotal markets, including in Latin America.
• China is investing in Latin America’s critical minerals, technology, renewable energy,  electric vehicles and high-end manufacturing sectors.
• China is likely to remain the global superpower in renewable energy for years, if not decades, to come.

For decades, China has been a key driver of global economic growth thanks to an economy that managed to maintain blistering growth for what seemed like forever. China’s economy ballooned from $1.2 trillion in 2000 to nearly $18 trillion in 2021, good for a nearly 10% annual clip ever since Beijing embarked on economic reforms in 1978. The country's gross domestic product (GDP) per capita, adjusted for inflation, rocketed from $293 in 1985 to more than $12,000 in 2021, one of the greatest economic transformations of modern times. But signs are now legion that China's economic nirvana has ended, with some analysts predicting that the Asian nation probably has another decade or so before it plunges into civil unrest and long-term economic decline.

The clearest sign of this decline is China's deflation problem. At a time when Americans are fretting about rising prices of goods and services, aka inflation, policymakers in Beijing are growing increasingly worried because prices are declining, aka deflation. China’s consumer price index declined for the final three months of 2023, marking the country’s longest deflationary streak since 2009. Deflation is a sign that China’s current economic model is broken and points to deeper malaise gripping the Chinese people.   

More worryingly, foreign investors are losing confidence in the Chinese dream. Last year, outflows of foreign direct investment in China exceeded inflows for the first time since 1998, with escalating tensions with the U.S. cited as a key reason why investments are fleeing from the beleaguered economy. Two-thirds of respondents to a survey taken last fall by the American Chamber of Commerce in the People's Republic of China cited rising bilateral tensions as a major business challenge. Last year, overseas companies invested 1.13 trillion yuan (S$209 billion) in China, good for an 8% Y/Y decline- the first decline since 2012. Unfortunately, the situation is not expected to improve any time soon.

“2024 will be worse. They would need to fully open many more sectors, eliminate forceful locations, and close down a few state agencies, but none of that is going to happen, so I think FDI will continue to fall,” Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, told the Business Times.

Harsh economic times are forcing China to change its investment track in its pivotal markets, including Latin America. Whereas the United States is Latin America's largest trading partner, China remains South America's top trading partner. As you might expect, China’s foreign direct investments have come under pressure, and Latin America is no exception. Over the years, China’s FDI in Latin America has been cut by more than half, from $14.2bn per year between 2010 and 2019 to $7.7bn from 2020 to 2021, and then to $6.4bn in 2022, the last year for which data is available.

But the massive decline does not tell the whole story. China has changed its investment strategy in the region from putting money into expensive infrastructure projects to strategic sectors such as critical minerals, technology, renewable energy, electric vehicles, and high-end manufacturing.

“Our data show a clear shift in Chinese FDI towards specific industries in Latin America and the Caribbean. Many of these new priority areas are described by China as ‘new infrastructure’, a term which encompasses industries — telecommunications, fintech and energy transition, for instance — which are . . . critical to China’s own economic growth strategy,” Margaret Myers, a co-author of the report by the Washington-based think-tank, has told the Financial Times.

Renewable Energy Superpower

China might not achieve its lofty ambition to surpass the United States as the world’s pre-eminent economic and military power any time soon, but is likely to remain the global superpower in renewable energy for years, if not decades, to come.

In its Renewables 2023 report, the International Energy Agency predicted that China will continue to cement its status as the colossus of renewable energy over the next five years by adding more capacity than the rest of the globe combined. The IEA says China will account for 56% of renewable energy capacity additions in the 2023-28 period. The world’s second-biggest economy is expected to grow its renewable capacity by 2,060 gigawatts (GW) in the forecast period, dwarfing the 1,574 GW capacity addition by the rest of the world. The IEA report highlights how Beijing is employing supportive policies to drive the massive expansion.

"China accounts for almost 90% of the global upward forecast revision, consisting mainly of solar photovoltaic (PV). In fact, its solar PV manufacturing capabilities have almost doubled since last year, creating a global supply glut. This has reduced local module prices by nearly 50% from January to December 2023, increasing the economic attractiveness of both utility-scale and distributed solar PV projects," the report said.

The IEA has pointed out that lower costs are making utility-scale solar cheaper in China than coal- and gas-fired generation.

By Alex Kimani for Oilprice.com

More Top Reads From Oilprice.com:

• Toyota Chairman Questions EV Market Future
• China's Economic Overhaul: A Blueprint for Renewable Dominance
• 9 Factors Driving Energy Markets in 2024