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Julie J Chung, the principal deputy secretary at the Bureau of Western Hemisphere Affairs, has warned the Trinidad and Tobago Government and private sector companies to stay alert to the dangers of China's debt diplomacy, which will result in disrespect for transparency and even national sovereignty. (Graphic: Chris Lewinson)

Chinese FDI a major recovery boost for LAC

Julie J Chung, the principal deputy secretary at the Bureau of Western Hemisphere Affairs, has warned the Trinidad and Tobago Government and private sector companies to stay alert to the dangers of China's debt diplomacy, which will result in disrespect for transparency and even national sovereignty. (Graphic: Chris Lewinson)

Latin America and the Caribbean’s (LAC) recovery process from the novel coronavirus pandemic is an opportunity to embark on a new stage in economic relations with China to develop policies to promote sustainable developments within the region.

In a world still in crisis on account of the pandemic, China has continued to make progress towards consolidating its position as a global economic power, which has influenced the growth in Chinese investment in the LAC region.

In its annual study, Foreign Direct Investment in Latin America and the Caribbean 2021, the Economic Commission for Latin America and the Caribbean (ECLAC) indicated that a more dynamic relationship between the two could result in building productive capacities in receiving countries.

Alicia Bárcena, ECLAC Executive Secretary, during the presentation of the report on Foreign Direct Investment in Latin America and the Caribbean 2020. (Photo: ECLAC)

The study noted that Chinese companies have used different types of investments depending on the destination region and sector, such as Greenfield investments, and the Belt and Road Initiative. The Belt and Road Initiative seeks to connect Asia with Africa and Europe via land and maritime networks, with the aim of improving regional integration, increasing trade, and stimulating economic growth.

Greenfield Investment is a type of foreign direct investment (FDI) in which a parent company creates a subsidiary in a different country, building its operations from the ground up. In addition, mergers and acquisitions have ensured the supply of natural resources and have secured access to cutting-edge technologies in core economies.

Arrangement of various world currencies including Chinese Yuan, Japanese Yen, US Dollar, Euro, British Pound, Swiss Franc and pictured in Warsaw, January 26, 2011. (Photo: Reuters/Kacper Pempel)

According to the study, the LAC region, between 2005 and 2020, accounted for 8.9 per cent of the total amount of mergers and acquisitions by companies from China and Hong Kong, and 8.1 per cent of the amount of project announcements. While the share of Chinese companies in the region’s total mergers and acquisitions rose from 1.7 per cent between 2005 and 2009 to 16.3 per cent between 2015 and 2019.

Nevertheless, the change that has taken place in the pattern of Chinese investments in the LAC region over the past 10 years does not coincide with the country’s process of technological sophistication or the evolution of its companies in the world, as these investments remain concentrated in a small number of activities, mainly mining, energy, and transport infrastructure.

The first phase of Chinese investment in the region, from 2000 until early 2010, was characterised by investments in hydrocarbons, metal mining, agriculture, and fisheries, the study indicated.

However, in the second phase, from 2010 onward, a gradual process of diversification began, with Chinese companies embarking on investments in electricity, the construction of transport infrastructure (mainly ports) and, to a lesser extent, manufacturing, the financial sector, and information and communications technologies.

Consequently, the study advised that with regard to relations between China and the LAC region, there is a need to promote greater regional cooperation to give the countries of the region more leeway in defining their investment and trade policies.

Infrastructure projects under different forms of contracts have particularly been used in the framework of the Belt and Road Initiative, and they represent a growing form of participation by Chinese companies and technologies in the region, amounting to roughly US$77 billion between 2005 and 2019.

China has also provided the region’s governments with financing to carry out these projects, and between 2005 and 2020, the LAC region registered some 99 loans in the amount of US$137 billion.