China’s Brazilian shopping spree
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RIO DE JANEIRO, Brazil — They’ve snapped up iron mines in the south, bought into oil fields off the coast, and they may be trolling for 850,000 acres of farmland, too.
While Chinese investors spent the last decade buying up natural resources across Africa, this year they’ve begun an unprecedented shopping spree in Brazil. In less than 12 months, Chinese investment has jumped by orders of magnitude — from a registered $82 million in 2009 to more than $25 billion in planned projects reported so far this year.
“It’s the first year where big, big investments — tens of billions of dollars — have been announced,” said Kevin Tang, a director at the Brazil-China Chamber of Commerce and Industry. “This decade will be one where we see an investment boom between China and Brazil.”
Chinese companies have announced more than $25 billion in Brazilian investment deals to date in 2010, according to a tally of deals tracked by the government and reported in the press. Billions more are reportedly in negotiations.
Experts say China’s interest in resource-rich Brazil could be a boon, but only if the government ensures the bulk of the money goes toward Brazilian industrial production rather than raw materials. Others call China’s move a wake-up call to the United States and other developed nations. In the global race for natural resources like oil, analysts say, finding renewable sources of energy is the only way to win in the long run.
“China’s needs for resources, especially energy, are going to grow exponentially in the decades ahead. And the fact is the world doesn’t have all that much more to give,” said Michael Klare, a professor of peace and world security studies at Hampshire College in Massachusetts and author of the book “Rising Powers, Shrinking Planet.”
“There will be greater competition for what remains of the world’s resources.” Klare said. “And this will lead inevitably to friction until and unless we in the West, and China and India move very rapidly to more energy-efficient, more resource-efficient modes of living. And there’s a lot of talk about that but not a lot of real progress.”
Instability, corruption and oppression in many of the world’s biggest oil-producing nations are oft-cited reasons for America’s need to find renewable energy sources. But China’s seemingly insatiable appetite for resources should be another motivation, said Charles Wolf, senior economic adviser at the non-profit think tank The RAND Corporation. Wolf says the search for alternatives is well underway.
“We should be moving and we are,” he said. In that sense, China’s ever-growing demand for natural resources “may be a problem, it may be an opportunity.”
Many Brazilian analysts agree. This year’s investment surge is just the latest demonstration of the increasingly close relationship between Brazil and China, which surpassed the United States last year to become Brazil’s biggest trading partner.
“The expansion of trade and of investment is very beneficial for the country, with one qualification,” said Sergio Amaral, chairman of the China-Brazil Business Council. “Sometimes you don’t know whether the investments are looking for Brazil as a market or whether they correspond to strategic purposes of the Chinese government.”
Amaral, a former minister of development, industry and foreign trade, notes that even private Chinese companies have very close ties to the Chinese government, and some of the investments here have been undertaken by state-owned Chinese companies.
“The economic exchanges between the two countries are increasing fast,” Amaral said. “Sometimes I have the impression that the Brazilian government is not as well prepared as it will need to be to cope with the new situation — a new nature and a new magnitude of investments.”
He says the government needs to ensure the various agencies in charge confirm the Chinese are investing on the merits, and not for strategic purposes like fixing prices of raw materials.
The government also must try to channel the Chinese cash into sectors that will help the Brazilian economy grow, he said. Selling manufactured goods tends to provide more jobs and economic growth for the country making those products. They make up about 90 percent of what Brazil imports from China, while Brazil chiefly sends back raw materials like iron ore, oil and soy.
Chinese manufacturers are hard to compete with because they operate with advantages — low-interest loans, low taxes, new infrastructure, a devalued currency — which simply don’t exist in Brazil. Brazil’s roads are crumbling, its interest rates soaring and its real ranks among the most overvalued currencies in the world. And so it’s little surprise Chinese imports often out-compete locally manufactured goods.
It’s a dynamic repeated across Latin America, but “in the case of Brazil it’s even worse,” said economist Alexandre Barbosa, a professor at the University of Sao Paulo.
“Brazil is the country that has the most developed industry on the continent,” Barbosa said. “So China is displacing some of our exports in other countries of the region.”
This is bad for some manufacturers, and could be bad for the country as a whole if the manufacturing industry starts to shrink. Barbosa says Brazil can protect itself by directing investment to the right places, particularly high-technology industries.
“The Chinese are sitting on a tremendous amount of foreign reserves,” he said. “So why don’t they use their banks to establish a semi-conductor company here in Brazil. We don’t produce semiconductors here, so that would be amazing.”
But making this happen will require an aggressive effort by the Brazilian government to negotiate favorable trade and investment.
Brazil’s foreign trade secretary at the Ministry of Development, Industry and Foreign Trade, Welber Barral, said efforts to do so are underway.
“We have an investment policy that is very focused on bringing innovation and adding value to the Brazilian companies,” Barral said.
He cited the highest profile example — a multi-billion-dollar steel mill under construction in the state of Rio de Janeiro — along with other, smaller investments. The Chinese company H-Buster announced this year a $225 million expansion in Brazilian factories to make LCD screens. At least two companies are spending tens of millions to increase production of motorcycles, Barral said, and others are building auto factories.
Nevertheless, most of China’s biggest Brazil deals announced this year have been for commodities — the $1.2 billion purchase of an iron mine in the state of Minas Gerais; $7.1 billion to buy the Brazilian oil operations of the Spanish company Repsol, another $3.1 million for shares in an offshore oil field owned by the Norwegian company Statoil.
The most contentious investments appear to be in farmland. Several reports in the press regarding Chinese plans to buy hundreds of thousands of acres of farmland have sparked worries that China’s investment amounts to a land grab.
The newspaper O Estado de Sao Paulo ran an editorial in August that raised the specter of neocolonialism. It said that foreign investment is generally welcome, “but ‘business’ takes on another meaning when investments are subject to the strategic rationale of a foreign power.”
And the government seems to have responded. Secretary Barral pointed to a recent reinterpretation of Brazilian law, declaring that government approval will be required for large purchases of land by foreigners.
The Chinese government has shown a willingness to try other options. This month the governor of Goias announced a deal for up to $7.5 billion in Chinese investment for agriculture in the state of Goias. Early reports indicated the money will be used to turn 6 million acres of pasture into soy farms, and everything they produce will go directly to China.
When the deal was announced, the Goias secretary of planning and development, Oton Nascimento Junior, made a point of saying that China won’t own the land. The money will instead go to local producers to build roads, buy equipment, improve the soil and finance production.
“There is nothing here involving land purchases,” the secretary emphasized. “This is purely a partnership.”