China as a major economic power in Latin America and the Caribbean

The process of recovery of Latin America and the Caribbean from the Covid-19 pandemic is an opportunity to initiate a new stage in economic relations with China.

China as a major economic power in Latin America and the Caribbean
Progress of China as an economic power in Latin America and the Caribbean. Image by Julien Tromeur from Pixabay

China's advance as a world power is evident in Latin America and the Caribbean. In addition to trade links, the Asian economy is claiming greater presence as an investor and supplier of construction contracts. Last year, Chinese mergers and acquisitions decreased in Europe, North America and Asia-Pacific, but increased in Latin American economies, to the extent of representing a fifth of the foreign direct investment (FDI) that reached the region.

"The process of recovery of Latin America and the Caribbean from the Covid-19 pandemic is an opportunity to initiate a new stage in economic relations with China and to develop policies that ensure that investments from that country contribute to building productive capacities in recipient countries, to establish links with local suppliers, to generate employment and to promote sustainable development," states the Economic Commission for Latin America and the Caribbean (ECLAC).

In the midst of the dispute with the United States for leadership in the deployment of digital technologies, last year China was the largest investor in the world and the second largest recipient of FDI. In addition to generating 18 percent of the world's gross domestic product (GDP) and 22 percent of the world's manufacturing exports, the Asian economy went from representing 1.3 percent of outward FDI in 1990 to 31.8 percent in 2020.

In Latin America and the Caribbean, China's share of FDI -via mergers and acquisitions- rose from 1.7 percent of the total between 2005 and 2009 to 22.9 percent in 2020. While its investment announcements in the same comparison periods went from 3.5 to 4.7 percent, respectively, according to ECLAC.

The organization explains that since 2010 the presence of Chinese companies in the region has increased, both through mergers and acquisitions and the development of new projects, construction contracts and concessions. However, "the change that has occurred in these 10 years in the pattern of Chinese investments in Latin America and the Caribbean does not coincide with the process of technological sophistication of the country and the evolution of its companies in the world".

Until 2010, FDI in Latin America from China -including Hong Kong- did not exceed US$400 million per year; since then it has exceeded US$1 billion per year. In total, between 2005 and 2020, Chinese companies completed 150 mergers and acquisitions in the region, for a total of 83 billion dollars; and announced 652 investment projects for an estimated total amount of 75 billion dollars.

ECLAC details that the first phase of Chinese investments in the region, which began in 2000, was mainly in hydrocarbons, metal mining, agriculture and fishing. Starting in 2010, a gradual process of diversification began, and Chinese companies began to invest in electricity, construction of transportation infrastructure (ports) and, to a lesser extent, in manufacturing, the financial sector and information and communications technologies.

China is currently seeking to invest in technology through the Digital Silk Road project, with projects in fiber optic cables and telecommunications networks, e-commerce and mobile payment systems, projects related to the space industry, data centers, research and smart cities. However, its mergers and acquisitions in the technology sectors in Latin America and the Caribbean are very scarce.

Apart from FDI, another important aspect of the internationalization of Chinese companies is construction contracts and loans to sovereigns. Between 2005 and 2020 in Latin America and the Caribbean, 99 loans were registered for a total amount of US$137 billion. According to ECLAC, 93 percent of these resources were concentrated in four countries: Venezuela, Brazil, Ecuador and Argentina.

"The process of China's conversion into a world power has some characteristics that differentiate it from that of other leading countries. Among these characteristics are the strong presence of state-owned enterprises and the support that the government provides to the internationalization of companies through tax benefits and public financing, especially through the China Development Bank and the Export-Import Bank," explains the agency in the document Foreign Direct Investment in Latin America and the Caribbean 2021.

It details that in 1980, China had 88 percent of its population living in extreme poverty, an indicator unmatched by any other world power. The progress in this condition is due to "a profound transformation of the productive structure and the closing of the technological gap, processes that have been promoted by successive government plans".

For example, as part of a five-year plan that seeks to deepen the domestic market and technological development, it is intended that spending on research and development (R&D) will increase at a rate of 7 percent annually between 2021 and 2025; in 2018 it reached 465.2 billion dollars. More is also invested in expanding the higher education system; in 2016, China awarded 1.7 million university degrees in science and engineering compared to 800 thousand in the United States.

Under this scenario "in Latin American and Caribbean countries it is crucial to move towards a greater understanding of the role, vision and strategy of that country in order to adopt a position that allows them to establish a mutually beneficial relationship", ECLAC recommends.