The Article has been first published at The Manzella Report on 23rd May 2015 By Dr. R. Evan Ellis With recent visit b...
The Article has been first published at The Manzella Report on 23rd May 2015
By Dr. R. Evan Ellis
With recent visit by People’s Republic of China Primer Li Keqiang to Brazil, Colombia, Chile and Peru, some analysts have suggested that the PRC may be turning away from concentrating its engagement with Latin America and the Caribbean on the less market-friendly regimes of the Bolivarian Alliance. I beg to differ. Premier Li’s visit is nothing more and nothing less than the continuation, with ongoing adjustments, of China’s growing multidimensional engagement with the region.
It was symbolic that the Chinese government selected Premier Li to represent Beijing on the present trip. Within the Communist Party leadership, Primer Li is an economist who has been the steward of important parts of China’s adaptation to the global market system, including the Shanghai Special Economic Zone. It thus made sense for him to be China’s standard bearer to Colombia, Peru, and Chile, all members of the free-trade and market-oriented Pacific Alliance. It was also appropriate for him to visit Brazil, although President Xi just visited the country last July. For the PRC, size is important, and Brazil is by far the largest country in the region in geographic, economic, and military terms, as well as China’s largest trading partner south of the United States.
Premier Li’s trip also sends subtle messages about China’s differentiated rewards to those countries which collaborate and treat it well. Mexico, whose government twice stopped a China Railway-led consortium from winning a $3.4 billion infrastructure project, and which blocked the construction of the Dragon Mart complex and fined its developers, was the only Pacific Alliance member not included on the agenda.
The focus and chief beneficiary of Primer Li’s tour of the region appears to be Brazil. Chile, one of the Latin American countries most reluctant to bend its public procurement system to accommodate Chinese preferences, will announce much cooperation but few specific large-value projects. Colombia and Peru, whose governments took note when they were not included in President Xi’s two state visits to the region, will receive the kind of qualified affirmation of their importance that comes from a visit by the second-in-command.
Brazil: Profiting from a Friend in Need
As this article went to press, Primer Li had just completed the first leg of his Latin American tour, to Brazil. The attention given by the media to his activities in Brazil, including 35 agreements , suggests the importance of Brazil to China. Yet on closer inspection, the key deals signed bear the mark of a wealthy nation exploiting a once proud partner now in distress.
With Brazil’s state-owned petroleum company Petrobras in financial crisis, due to its role in an expanding bribery scandal, China Development Bank (CDB), China Export-Import Bank, and the Industrial and Commercial Bank of China (ICBC) are providing it $10 billion in credit — helping to advance the position of Chinese oil companies in the country, just as the $10 billion Chinese loan to Petrobras in 2009 helped create the conditions for subsequent moves into Brazil’s petroleum sector by Sinopec, Sinochem and CNOOC.
Another part of the $53 billion in agreements announced by the Brazilian government (only $27 billion according to Premier Li)actually constituted acceptance of a significant setback by Brazil’s flagship mining company, Companhia Vale Do Rio Doce (CVRD). CVRD has constructed an ambitious fleet of large ships to realize the value added of transporting its iron ore to the PRC and other global markets.
Initially blocked from access to Chinese ports , and with the collapse of global prices for its ore, CVRD has fallen on hard times, and during the Li visit, signed an agreement previously in the works to sell off four of those ships vessels to China Merchant Group, owner of shipping giant China Overseas Shipping Company (COSCO). Indeed, CVRD may eventually sell off its entire Valemax fleet for $2.1 billion, ceding the value added from transporting its ore, to China. Adding insult to injury, China Export Import Bank agreed to provide $2.4 billion in credit for said transport, in addition to a $4 billion loan from ICBC to help CVRD weather hard times. Each of these deals was part of the multi-billion dollar advance in Sino-Brazilian cooperation trumpeted by President Rousseff.
In another of the transactions, Premier Li and Brazil’s President Rousseff celebrated the launch of a project in which Chinese electricity giant State Grid will build a 2,082 km power line connecting the remote Belo Monte hydroelectric facility to the national power grid. Yet the entire project had, not long before, been paralyzed due to the Brazilian government’s objection to State Grid’s plan to bring 11,000 Chinese laborers into the country to do the work.
Even the $10 billion, 5,300 kilometer “twin oceans” rail project, a centerpiece of Premier Li’s tour, may be less of a victory than a concession to China by a politically and economically exhausted Brazilian government, with its economy expected to contract 1.2% this year, and with demands for the impeachment of President Rousseff over the Petrobras scandal.
Technically, China and Brazil only agreed to conduct a “feasibility study” for the railroad, and has not committed to contract Chinese companies to do the work — an important distinction given numerous infrastructure projects in which the Chinese companies which have done initial studies have failed to win the much larger construction contract that followed. Examples include Rositas hydroelectric facility in Bolivia, as well as work on the Magdalena river in Colombia, where the Brazilian firm Odebrecht was awarded the contract, rather than Hydrochina, which had produced the masterplan for the development of the river.
In addition, the prospect of Brazil borrowing $10 billion from the PRC to build the 2,000 km portion of the rail project traversing its territory, indicates the dire fiscal condition in which the country currently finds itself, in contrast to the days in which Brazil’s own development bank BNDES would fund such major projects, reserving the work for Brazilian companies and laborers.
Nor is it clear whether the “twin oceans” rail project, which may eventually be worth $30 billion or more, will further the development of Brazil, or will instead, accelerate its “re-primarization.”(1) While infrastructure improvements are, in themselves, a contributor to a country’s growth, the proposed railroad link, advertised to reduce Brazil to China shipping costs by $30 per ton, will facilitate expanded Brazilian exports of soy and iron to the PRC (even as prices for those commodities decline), while also making Brazil more accessible for Chinese high value added products and facilitating the integration of Chinese components into Brazilian goods in manufacturing centers such as Manaus. In the process, the railroad will strengthen Brazil’s economic and financial dependence on the PRC, and if such commodity exports also drive up the value of the country’s currency (the “dutch disease” effect), it may make Brazil less competitive as an exporter of manufactures, vice a source of low value added commodities to feed the Chinese industrial machine.
One of the most positive stories from Premier Li’s visit to Brazil was the announcement of a $1.1 billion sale of 22 Embraer ERJ-190 aircraft to China’s Tianjin airlines. When Embraer established a agreement with the Aviation Industrial Corporation of China (AVIC) in 2003 for the co-production of its mid-sized ERJ-145 aircraft, an ongoing point of contention was whether it would be allowed to sell its larger ERJ-190s into the Chinese market, or whether its Chinese partner would use the partnership to absorb the technology and develop a new aircraft which, with the government’s help, it, rather than Embraer would sell to the Chinese market.Colombia: Hopes for Peace and the Resurrection of a Free Trade Accord
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| CCTV/CNTV Screen Grab |
As Premier Li left Brazil for Colombia, he released a (Spanish-language) letter to the Colombian people, printed in the nation’s major newspapers. His eloquent invocation of the “magical realism” of Colombia’s most famous author, Gabriel GarcÃa Márquez was ironically appropriate; the Chinese investment and win-win relationships that Li describes seems to correspond more to an imaginary Chinese “Macondo,”(2) than to the reality of Sino-Colombia cooperation occurring today.
The paucity of agreements for concrete projects announced during Premier Li’s stop in Colombia contrasts to the initiatives showcased during his time in Brazil. Nonetheless, the visit affirms PRC interest in working with Colombia, and lays the groundwork for future advances.
The principal news item from Premier Li’s stop in Colombia was arguably resurrection by the two nations of the China-Colombia Free Trade Agreement. Such an accord was previously called for by Colombia’s President Manuel Santos, and his Chinese counterpart, during President Santos’ May 2012 visit to the PRC. Indeed, the assignment of experienced Chinese Ambassador Wang Xiaoyuan to Colombia, after having overseen the negotiation of a China-Costa Rica free trade agreement as PRC Ambassador to Costa Rica, was seen by many in Colombia as an indication of China’s interest in achieving a similar agreement with Colombia.
After having been declared dead and being entombed away from the public discourse for three years, the China-Colombia free trade agreement was resurrected this week, first in the interview given by Ambassador Wang, then in Premier Li’s published message to the Colombian people, and finally, in the meeting between Premier Li and President Santos.
It was also significant that China and Colombia committed, during Premier Li’s visit, to a development plan for Colombia’s troubled Pacific Coast port of Buenaventura. The port is Colombia’s principal commercial access point to the Pacific Ocean, yet is so hampered by criminal violence, poor infrastructure, corruption and inefficiency, that many logistics companies prefer to use the much longer route through the Panama Canal to the Atlantic Coast ports of Cartagena, Santa Marta, and Barranquilla to serve the nation’s principal inland cities.
While the details of the plan for Buenaventura were not clear, it likely involves taking forward one of two initiatives already in the works. One is the construction of an ambitious 200 km free trade zone complex north of the city. The other is a previously blocked attempt by a Chinese consortium to re-zone the entire area surrounding Buenaventura into a port concession which it would presumably then be given to manage, effectively doing an end run around the Colombian, Philippine and Hong Kong based businessmen currently working on individual port infrastructure projects in the area: the Buenaventura public terminal, TCBuen, and Aguadulce.
Also unclear is whether the initiative to reclaim Buenaventura from the terrorist groups and criminal bands (BACRIM) which currently dominate the area will involve an expansion of Sino-Colombian security cooperation. Chinese owned companies such as Huawei and Emerald Energy have had difficulties with criminal violence against their operations in the country in recent years. Officers from the People’s Liberation Army already attend training courses at the Colombian military base at Tolemaida. Also welcome news during Premier Li’s visit to Colombia was China’s pledge to assist the country with the transition from conflict to peace, although the $8 million in aid offered by Premier Li is probably less than what the Colombian government spent to host the Premier and his delegation during the current visit.
Moreover, if the Chinese government is serious about supporting Colombia’s struggle to reclaim the country from insurgents and criminal bands, one place to start is arguably imposing greater control over PRC-based companies operating in Colombia. In recent years, the Chinese NORINCO group reportedly shipped thousands of small arms to the FARC based on falsified documents in the name of Colombian armed forces head, General Freddy Padilla. Similarly, former Colombian Congressman Óscar Tulio Lizcano claims to have personally observed helicopters from the China National Petroleum Corporation flying medical personnel and supplies into FARC camps while he was a captive of the FARC in such camps.
While Premier Li’s promises of Chinese invest in a post-conflict Colombia were welcome, the timing of such expressions was also auspicious; during the visit, the Colombian military launched a major bombing raid against a FARC encampment, and in retaliation, the FARC declared an end to their previous announced unilateral cease-fire.
Yet another agreement signed during Premier Li’s stop in Colombia was a commitment to set up facilities in Colombia to produce “iron and steel, construction materials and engineering equipment.” The move is likely an effort by Chinese companies to expand their participation in Colombia’s mining sector, from which it already purchases coal and nickel, but in which it has been unable to establish a significant presence on the ground, with established mining firms already operating there.
Such cooperation in establishing a local presence in iron and steel, construction materials and engineering equipment also may reflect PRC hopes to win work on infrastructure projects in the country, overcoming its dismal track record in the sector to date. Chinese companies have been notably absent from participation in Colombia’s “Highways of Prosperity,” while a Chinese offer to build the Bogota metro when the previous contract collapsed amidst a corruption scandal, was a non-starter. Efforts by Chinese companies to win work on the Hydroituango hydroelectric facility in Antioquia, and projects on the Magdalena River have produced similarly poor results. Work by China United Engineering Corporation (China CUC) on the GECELCA III coal-fired power plant in Córdoba has reportedly been mired in production delays and associated contractual disputes.
One source of Chinese difficulties with respect to such infrastructure projects has been responding in a complete and agile fashion to the demands of participating in Colombia’s competitive public procurement system, including the requirements of Colombia’s Public Law 1508 for Private-Public partnerships. Yet Colombian legal experts suggest that there are avenues for the country to circumvent the established system and negotiate state-to-state deals with the PRC. To this end, it was auspicious that Chinese Ambassador Wang, in his interview with the Colombian press reminded his audience of the availability of the $35 billion infrastructure fund for the region that President Xi announced during his visit to South America in 2014.
Peru: Mining, Trains and Asparagus
While Premier Li had not yet departed Colombia for Peru as this article went to press, an important topic of conversation when Premier Li arrives there, as during his stop in Brazil, will likely be the “twin oceans railroad.” Reportedly, projects associated with the railroad for the development of Bayóvar, which will be the Pacific Coast anchor point of the railroad, will be announced during the Peru leg of his tour.
Although the geographic trajectory for the railroad has not been finalized, the rumoured route would enter Peru from Cruzeiro do Sul in Brazil, to Pucallpa, Peru, and from there, to Tingo MarÃa, then traverse the mountains before crossing the Sechura desert to end in the port of Bayóvar.
Beyond announcing projects associated with the Peruvian portion of the “twin oceans” railroad, Premier Li’s stop in Peru will almost certainly involve references to cooperation in the mining sector. Yet the key to Chinese mining investment in Peru is not new deals, but the successful development of existing commitments, given social protests that have impacted both Chinese and non-Chinese mining investments in the country in recent years.
One third of all mining projects in Peru are already controlled by Chinese companies, with associated future investment commitments of $19 billion. Key projects include the enormous Las Bambas mining project, recently acquired by China Minmetals for $6 billion, but whose development has been slowed by protests both before and after the acquisition, the currently suspended Rio Blanco mine near Piura, the Shougang mine in Marcona (subject to annual labor unrest), and two relative Chinese success stories.
The first is the Toromocho mine, which is going forward following the successful relocation of the 5,000 person town of Morococha, and following recovery from the suspension of operations in March 2014 due to contaminated groundwater. The second is Pampa de Pongo, in which the Chinese concession holder, Zhinzhao, has been relatively successful in addressing the sensibilities of the local communities over issues such as the impact of the minerals port associated with the mine, on local fishing.
Chile: Good Business without Chinese Megaprojects
In Chile, Premier Li’s visit is likely to feature references to energy and agricultural cooperation. Indeed, Chilean exports to China presents powerful lessons for the region, both positive and negative.
On one hand, the relative success of Chilean agricultural products such as wine in the Chinese market shows what is possible with intelligent corporate activity backed by government support and effective promotion of the national brand. On the other hand, the vast majority of Chile’s exports to the PRC continue to be copper and potassium nitrate. Yet Chinese investment in Chile’s mining sector has been almost absent, due to Chilean regulations limiting foreign ownership of developed mines, as well as the government’s refusal to sell China Minmetals a 49% interest in the Gabriel Mistral mine in 2008.
Although Premier Li’s stop in Chile may mention cooperation on infrastructure construction, specific projects are unlikely to be on the agenda. Indeed, the only serious public effort to interest the Chinese in such projects to date, then president Sebastian Pinera’s 2012 effort to interest the Chinese in building a 3 km long suspension bridge linking the island of Chiloe to the mainland, apparently failed to entice Chinese investors beyond preliminary talks without Chilean willingness to bend its procurement system to Chinese preferences.
Yet as Chilean President Michelle Bachelet prepares to receive her Chinese suitor, she is facing an economy slowed by falling copper prices and a corruption scandal involving her own son. With a governing coalition that is significantly further to the left than that supporting her first Presidency, she is arguably highly motivated to generate significant, positive news through her interactions with Premier Li.
The Long-Term Impact of the Li Visit
As with other high-level Chinese diplomatic trips to Latin America and the Caribbean in recent years, the most enduring effect of Premier Li’s visit to Brazil, Colombia, Peru and Chile is the incremental strengthening of the web of commitments, infrastructure, and personal connections through which the PRC is advancing its commercial activities in, and political influence with, the region.
Premier Li’s visit does not indicate a particularly significant change in the focus or style of China’s engagement with Latin America and the Caribbean, yet is part of a sustained, ever-evolving process through which that engagement is transforming the region in political, as well as economic terms, and by association, is transforming the position of the United States in the region as well.
Premier Li’s visit may ultimately be relegated to the footnotes of history, yet the collective content of such footnotes are what transformations are made of.
Footnotes
1. A term referring to the reversion of a country’s economy from manufacturing, to a concentrated on lower value added activities associated with the extraction and export of commodities.
2. The fictional village which is the setting of GarcÃa Márquez’s most famous work, One Hundred Years of Solitude.
