In Xi Jinping’s “Chinese Dream,” he hopes to achieve the goal of China becoming a “moderately well-off society,” where all citizens enjoy a quality standard living by 2020, and to modernize enough to become fully developed nation by 2049 (Kuhn, 2013). Therefore, China is seeking to reap the benefits of integrating itself into the international market economy. In January of 2018, President Xi Jinping formally invited the nations of Latin America to take part in China’s formidable Belt and Road Initiative, which can be seen as a catalyst for a shift in global power – away from an increasingly protectionist United States and toward an increasingly open China. Having expanded into Latin America in the previous decades, China’s surge in outbound foreign direct investment (OFDI) and trade there, especially in Brazil, is indicative of a broader attempt to globalize and establish economic diplomacy with other nations in order to succeed in its transition to a more advanced economy, and also increase its role as a world leader. Between 2003 and 2018, Chinese firms invested 54.1 billion USD in over 100 projects in Brazil alone (Chinese money, 2018). Brazil, receiving around half of Chinese investments in Latin America, has become increasingly relevant to China’s ambitions. Although 66% of Chinese investments go toward Asia, Latin America comes in second at 12% (Casanova, 2018). Brazil, Latin America’s biggest economy and currently the fifth most populous country in the world, provides China with a huge opportunity to tap into a new market, which China should pursue.
Brazil and China have shared an evolving economic relationship. Over the past few decades, the economies of Brazil and China have become increasingly intertwined, starting with high trade volumes in the early 2000s and shifting further to Chinese investment in a variety of sectors in Brazil’s economy throughout the past decade. Today, China is Brazil’s top trading partner, and, as of 2017, has exported $47.5 billion USD-worth of goods to China and imported $27.3 billion USD (“Brazil: Trade Statistics,” n.d.). Both countries can realize economic benefits from maintaining their cooperation, which appears destined to continue despite the fairly negative rhetoric toward China by Brazil’s president-elect Jair Bolsonaro.
The Evolution of China’s International Economy
Under China’s 1999 “Going Global” strategy, the Chinese government sought to increase the presence of Chinese companies abroad, and joined the World Trade Organization (WTO) in 2001. China aimed to gain access to better technology and management knowledge, secure enough natural resources to meet long-term domestic industrial needs, and obtain access to other industrialized markets. This all occurred in the face of tough domestic competitiveness, demonstrated by a fall in the rate of profit return for industrial firms (22% in 1986 to 5.2% in 2002). This caused an over-reliance on exports, and prompted Chinese businesses to look for opportunities abroad (Ding, Akoorie, & Pavlovich, 2009, p. 149).
Given that the early years of the “Going Global” strategy were in part characterized by attempts to acquire the necessary resources to support China’s export-oriented economy, efforts honed in on resource-rich regions (Djankov & Miner, 2016). Thus, the early 2000s marked a new phase in Chinese-Latin American relations from when diplomatic relations officially began in 1974. During the 2000s, bilateral trade between the countries of Latin America and China surged, along with a strengthening of political ties. Given the natural resources needed to support its rapid development and lack thereof, China continued to import mainly raw material commodities, particularly iron ore, copper, and soybeans, from Brazil, Chile, Argentina, and Peru throughout the decade. Leaders in Latin America saw an opportunity to expand economically through Chinese investment, with China providing new markets for its products, technology and capital. Additionally, the opportunity to become less economically dependent on the United States presented itself. Trade between Latin America and China grew to at a total of $12.6 billion in 2000, and climbed to $111.5 billion in 2008. The 2000s were considered South America’s “golden decade,” its commodity “super-cycle” accounting for around half of Latin America’s growth. China was a key enabler, driving up external demand and therefore commodity prices, and thus establishing itself as a presence in the region (Florido, 2009).
Spurred by a bilateral trade volume of 6.3 billion USD in 2003 as a result of this commodity super-cycle, relations between China and Brazil became increasingly relevant. From Brazil, China imported mostly primary commodities, like soy and iron ore. Apart from various labor-intensive manufactured products, labor-intensive high technology made up the highest share of Brazilian imports from China at 25 percent in 1996 and then surged to 41.4 percent in 2009 reflecting China’s attempts to export higher up the value chain (Jenkins, 2012). In May of 2004, the Brazil-China High-Level Commission for Coordination and Cooperation (COSBAN) was created to cement relations and establish economic diplomacy. In November of that same year, President Hu Jintao visited Brazil, at that time under President Luiz Inácio Lula da Silva, and Chinese Minister of Commerce Bo Xilai and the Brazilian Foreign Minister Celso Amorim signed a “Memorandum of Understanding on Cooperation in Trade and Investment Cooperation.” In this memorandum, Brazil officially recognized China’s market economy status within the WTO (Ministry of Foreign Affairs, 2004).
Trade remains high between the two countries today, with China a ready market and continuing to buy Brazilian soy and other food crops to feed its population of 1.4 billion. Brazil’s exports to China went from comprising 2 percent of its total in 2000 to 26 percent in the first quarter of 2018. Brazil, operating at a trade surplus for the past few decades, and reaching 20 billion USD in 2017, can in part attribute this surplus to its trade with China (“Chinese money,” 2018). Eighty-six percent of Brazil’s exports consist of raw materials, and in light of the trade war between the US and China, Brazil has become increasingly relevant as an exporter of soy. Soy is of great importance to China, which buys 60% of soy traded worldwide. As its population moves toward a more varied and “Western” diet, more and more soy is being used to make animal feed and vegetable oil. The US has been China’s biggest supplier of soybeans, but in July of 2018, China imposed a 25% import tariff on US soybeans in retaliation to President Donald Trump’s trade policies. Given this tariff, China’s soybean imports are likely to see their biggest fall in 12 years in the next quarter. Thus, for food security, China is looking more and more to Brazil, which is becoming increasingly competitive with the United States. Over the last eight years, Chinese demand for Brazil’s soybeans increased more than three-fold. As of 2017, Brazil accounted for 53% of China’s soybean imports, a percentage that will likely increase in the years to come (“Why China,” 2018).
The Emergence of Chinese OFDI in Brazil
Chinese investment in Brazil began to surge dramatically in 2010, which marked a shift in the economic relations of the two countries, taking on new dimensions alongside commodity trade. A total of $67.5 billion USD in investments was announced between the years 2010 and 2015. China’s state-owned enterprises accounted for 93% of the capital invested in Brazil, underscoring an expectation on the part of the Chinese government itself to conduct investment activities in the country in the long run. China’s “Going Out” policy would increase the presence of Chinese companies worldwide (Chinese investments, 2017).
At first, Chinese investment activity pertained mainly to the natural resources sector, in order to bolster Brazilian exports. In 2010, China’s state-owned oil and gas company Sinopec purchased 40% of the Brazilian operations of the Spanish company Repsol, one of many purchases of companies operating in natural resources. The years 2011 to 2013, however, saw gradual diversification of China’s investment in Brazil. Given favorable economic conditions, strong Brazilian growth in GDP and an expanding domestic consumer market, China looked to enter Brazil’s large consumer market and industrial area by selling machinery, automobiles, equipment, and electronic devices. The year 2012 saw an uptick in greenfield investments by Chinese companies from eight to twelve total, along with only four M&A deals and two joint ventures. Of note was the arrival of the Chinese car manufacturer, Chery, the machine and equipment builder, Sany, and Huawei and Lenovo’s expansion in the electronics and communications sectors. Starting in 2013, Chinese banks began to establish themselves in Brazil and take shares of Brazilian or international banks already in operation within Brazil. For example, the Industrial and Commercial Bank of China (ICBC) arrived in Brazil with an initial investment of $100 million USD, hoping to support the gradual internationalization of the Yuan with promoting investment and bilateral trade (Chinese investments, 2017).
China’s Investment Profile in Brazil
A significant turning point occurred between 2014 and 2015, when the sheer volume of Chinese investment in Brazil skyrocketed and expanded into new sectors. This can be viewed in the context of the Belt and Road Initiative, officially promoted by Xi Jingping in the fall of 2013. BRI, so broad in scope that it is including the Arctic region, constitutes a massive undertaking and denotes a shift in China’s “Going Global” strategy that some consider a “second opening up.” Xi Jinping is aiming to promote domestic economic growth and establish economic diplomacy, partnering with others countries in various construction projects focusing on infrastructure, especially for transportation, and energy; China is looking to build railways, power grids, gas and oil pipelines, and maritime ports. As of today, $900 billion USD worth of projects are underway or in the works, according to Fitch. Even though China’s state-owned enterprises have dominated investment in Brazil, an increasing amount of private investment has taken place in the manufacturing and services sectors, reflecting China’s push toward liberalization and a move toward more labor-intensive, value-adding sectors (Chinese investments, 2017). In January of 2018, Didi Chuxing, China’s ride-sharing giant and possibly the most highly valued startup in the world, recently acquired Brazil’s 99 for one billion USD (Hawkins, 2018).
Throughout the year 2015, Chinese companies had been making acquisitions abroad like never before, and according to the Rhodium Group, exceeded a level of $60 billion USD in acquisitions worldwide. Prominent examples outside of Brazil include the purchase of Dutch grains trader, Nidera, by China’s National Cereals, Oils and Foodstuffs Corporation (COFCO). China’s National Chemical Corporation (ChemChina) also acquired Milan-based Pirelli, the world’s fifth largest tire manufacturer. Naturally, Brazil experienced China’s growing prominence as well. From 2014 to 2016, China’s entry mode into the country saw twenty-three M&A deals while only sixteen greenfield investments (Chinese investments, 2017).
Additionally, the agribusiness sector experienced an uptick in Chinese investments, again mostly through Chinese acquisitions of trading companies. COFCO’s acquisitions of Nidera and Noble Group allowed them to penetrate Brazilian agricultural production, in these cases grain and sugar. In 2016, Shanghai Pengxin Group’s Hunan Dakang Pasture Farming business invested around $200 million USD to acquire a 57% share of the Brazilian grain processor and trading company, Fiagril (Chinese investments, 2017).
In 2014, Chinese companies began to invest a significant sum in the production and transmission of electricity, and took on a number of other infrastructure projects. Given Brazil’s need for more infrastructure and China’s experience in the implementation of infrastructure projects, China emerged as an important player, heavily investing in this sector. Brazil’s infrastructure industry, once prosperous, had seen a significant decline in recent years, and creating an opportunity for Chinese companies to step in. The Brazilian industry was rocked in March of 2014 by a corruption scandal of massive proportions dubbed “Lava Jato,” or “Car Wash,” in which a great number of construction projects, most significantly the Belo Monte dam, were undermined by poor planning, corruption, and criticism over their environmental and social effects. (As of today, investigations into Lava Jato continue). BNDES (Banco Nacional de Desenvolvimento Economico e Social), also having been involved in Lava Jato, has poured money into Brazil’s four mega-construction companies (OAS, Andrade Gutierrez, Camargo Correa, and Odebrecht), which have been tainted by corruption, having engaged in inflating contracts, bribery, kickbacks, and rigged bids (Branford, 2016). Rampant corruption coupled with Brazil’s 2015-2016 economic crisis provided an opportunity for China to emerge.
Brazil’s exports are inevitably tied to its infrastructure sector, its ability to transport materials across the country to its ports. Brazil’s weak infrastructure thus hurts its ability to compete in exports. Brazilian soy producers have to contend with transport costs nearly 30% higher than those of the United States. This difference can be accounted for by the fact that over 60% of Brazil’s soybeans are transported over a taxing 1,300-mile route from the soy-producing state of Mato Grosso mainly by trucks to reach ports. By contrast, the US and Argentina rely more on rail and ship. In light of today’s trade war, China has a vested interest in Brazil’s infrastructure, given that better infrastructure would make overland transport more efficient and cheaper, and ultimately bring down the total cost of soybeans (“Why China,” 2018).
China’s expansion into Brazil’s infrastructure sector is further evidenced by the acquisition of Brazilian company, Concremat, in 2016 by China Communications Construction Company’s (CCCC). The CCCC also bought 51% of a new port project in São Luís, Maranhão, to build with WPR, a subsidiary of Brazilian WTorre group, at an estimated cost of 545 million USD with the projected time to completion of three years. The Industrial & Commercial Bank of China Ltd is set to finance the project with a $520 million USD investment. In 2017, 70% of grain exports coming from Mato Grasso went through southern ports. The port in São Luís, being in the northern part of Brazil’s coastline, would greatly assist in reducing transportation costs, given that the route to China would be shorter (“China communications,” 2017).
Another prominent example of China’s influence is the Twin Ocean Railroad project, a huge project designed to cut transportation costs for Brazilian exports to China by building railroads from Brazil’s Atlantic Coast, through Bolivia, to Peru’s Pacific coast. This would allow exporters to bypass the Panama Canal and use the 3,000-kilometer route from coast to coast instead, as the travel time for exports going from Peru’s coast to China is significantly shorter than going from Brazil’s to China. President Xi Jinping and Premier Li Keqiang, in their trips to Brazil in 2014 and 2015, pronounced their support for the project, and Xi signed a bilateral agreement to invest in Brazil’s railroads. A tenuous projection by IIRSA has the project at completion by 2024. As China’s Belt and Road Initiative harkened to the glory days of the Silk Road, this Central Bi-Oceanic Railway has been likened to the Inca’s Qhapaq ñan, a 15th century 30,000-kilometer network of roads used for trade, defense, and communication (“Update: Twin,” 2016).
The activities of the State Grid and the China Three Gorges Corporation (CTG) are also exemplary of China’s shift to investment in Brazil’s electric energy sector and M&A activity, and underscores the sheer scale of new projects and investments in Brazil. State Grid and CTG are considered the leading companies in Brazil’s electric energy development. China’s state-owned Three Gorges Corporation (CTG) is the world’s largest producer of hydroelectric power, having constructed the largest plant in the world – the Three Gorges dam in China. It entered Brazil in 2013, and, after a series of acquisitions, became a major player in the sector. In 2015 alone, CTG reached a total generating capacity of 6 GW by acquiring power generating firm Triunfo for $490 USD, Jupiá and Ilha Solteira for $3.7 billion USD. In 2016, CTG put in $1.2 billion USD to buy Duke Energy and thus increased its capacity of electrical production to 8.2 GW (Peters, Armony, & Cui, 2018).
State Grid operates a significant portion of China’s electric transmission, and is today the second largest company in the world by revenue and one of the world’s largest infrastructure companies, employing over 900,000 people around the world. In Brazil, State Grid currently has 13 transmission lines spanning 7,600 km, and is in the process of building 9,800 km more. State Grid came to Brazil in 2010, acquiring multiple transmission energy companies from Spain’s ACS and Plena Transmissora, and in 2016, acquired a 54.64% equity stake in CPFL Energia, the largest integrated private company in the energy sector. Thus, State Grid significantly expanded its reach over the transmission and distribution sectors of Brazil and became the largest electricity distributor in the country (Peters, Armony, & Cui, 2018).
Previously in 2014, State Grid formed the Belo Monte Transmissão de Energia (BMTE) consortium, with 51% control (Two minority partners were under Brazil’s Electrobras, one of Latin America’s largest power utility companies, with Electronorte taking 24.5% and Furnas at 24.4% ownership.) In February of that year, the consortium won a bid to implement transmission lines. Given Belo Monte’s potential to be the third largest dam in the world, the construction of power transmission lines was essential to connecting and therefore providing electricity to Brazil’s broader consumer market. Construction of the 2,100-kilometer transmission line began in April of 2016, starting near the Belo Monte dam on the Xingu River in the province of Pará and stretching all the way to the Southeast of Brazil near Sao Paolo. An estimated 8,000 direct and indirect workers were employed for this project. Construction costs were estimated at $1.6 billion USD, most going toward 25,000 km of cable and 64,000 tons of steel. In June of 2015, State Grid’s consortium won a second bid for a second transmission line extending 2,550 km from Xingu River to Rio de Janeiro, with an estimated investment of $2.2 billion USD. As of 2018, construction on this line has yet to begin (Peters, Armony, & Cui, 2018).
China-Brazil Economic Diplomacy
The governments of China and Brazil are clearly engaged in building economic relations between the two countries, and, in the years 2014 and 2015, have signed a series of agreements promoting both trade and investment. In July, 2014, the first “China-Latin America and the Caribbean Summit” was held in Brasilia, chaired by Brazil’s president Dilma Rousseff, and attended by President Xi Jinping. Striving for “equality, mutual benefit, win-win cooperation and common development,” China proposed the “1+3+6” cooperation framework for economic cooperation. “One” represented a plan of cooperation between China and CELAC aiming for inclusive growth and sustainable development, “three engines” denoted mutually beneficial trade, investment, and finance, and the “6” alluded to the fields of focus, including infrastructure construction, manufacturing, energy and resources, information technology, agriculture, and science and technological innovation. China pledged to implement 10 billion USD in special loans for Chinese-Latin American infrastructure and commit 5 billion USD to start the China-Latin America Cooperation Fund to finance projects across all sectors in the region (“Xi Jinping attends,” 2014).
As a result of the summit, Xi Jinping set the goal of increasing trade with Latin America to 500 million USD, and to invest at least 250 billion USD in the region by 2025. According to Jose Graca Lima, the head of Asian affairs in the Brazilian foreign ministry, a “second generation” of Chinese investment was taking place, one which was shifting focus from trade in raw materials to the promotion of heavy industry and infrastructure. The Brazil-China Cooperation Fund for the Expansion of Production Capacity, worth $20 billion, was established to encourage such investments. In May of 2015, China’s premier Li Keqiang visited Brazil and signed a series of trade and investment deals, 56 in all and mainly in infrastructure, aiming to invest a total of 50 billion USD in the country. Brazil, having experienced slow growth for the past five years after the commodities super cycle, was receptive. Rousseff was especially keen to improve the country’s rudimentary infrastructure as it prepared to host the 2016 Olympics. (In fact, China had been supplying new metro trains for the event). Finally, in January of 2018, President Xi Jinping formally invited Latin America to partake in China’s Belt and Road Initiative, a further indication of strong Chinese interest in cooperating with Brazil, and was widely well received by Michael Temer’s pro-China government (“China and,” 2015).
Brazil’s new president-elect, Jair Bolsonaro, appears to pose a threat to this relationship of cooperation. Nicknamed the “Brazilian Trump,” Bolsonaro has issued a series of statements on the campaign trail bashing China, advocating for greater protectionism and voicing support for President Trump himself. During the campaign, he played on fears of Chinese involvement in the Brazilian economy, stating, “China isn’t buying in Brazil. China is buying Brazil. This is a big problem that we should be worried about… Are you willing to leave Brazil in the hands of the Chinese?” Bolsonaro went as far as to visit Taiwan in April, eliciting a letter of protest from the Chinese embassy to the head of his campaign. However, after his victory, Bolsonaro changed his tune. He met with China’s ambassador to Brazil, Li Jinzhang on November 5, and said that Brazil looks to China as a “great cooperation partner” and will put forth an effort to expand ties and cooperation with China (Jeong-ho, 2018). “Brazil is trying to come out of an enormous fiscal crisis and our capacity to invest is very compromised,” said Luiz Augusto de Castro Neves, president of the Brazil-China Business Council, a non-profit organization based in Rio de Janeiro with nearly 80 Brazilian and Chinese affiliated companies. “If it were just up to us, we wouldn’t recover so soon. In that sense, Chinese investment can be fundamental to accelerate Brazil’s economic recovery (Biller, 2018).” It is hoped that Bolsonaro has realized the potentially damaging effects on Brazil’s economy were China to cease economic activity, and is now willing to promote the relationship between the two countries.
The expansiveness of Belt and Road Initiative has also raised concerns among various environmental groups. Environmental concerns are not new to China, given its problem with urban pollution and its high levels of carbon dioxide emissions. According to the multi-university Working Group on Development, Chinese trade and investments have been major drivers of environmental degradation in Latin America since the 2000s. Given China’s significant investment in extractive primary commodities, such as oil and gas, China has negatively impacted the region’s biodiversity. Latin America’s exports to China use around two times as much water and give off over 12% more net greenhouse gas emissions per dollar compared to its other exports (Ray, Gallagher, Lopez, & Sanborn, 2015). While the blame cannot be placed solely on China – it is also up to the Brazilian government to employ effective environmental regulations – the negative externalities of Chinese projects in Latin America could tarnish its international image, even as it attempts to become a world leader in renewable energy. President Xi Jinping, during the Belt and Road Forum of May 2017, affirmed China’s commitment to sustainable development. Xi stated that China “should pursue the new vision of green development and a way of life and work that is green, low-carbon, circular and sustainable… Efforts should be made to strengthen cooperation in ecological and environmental protection and build a sound ecosystem so as to realize the goals set by the [United Nation’s] 2030 Agenda for Sustainable Development.” Xi also promised to set up a “big data service platform on ecological and environmental protection” and to “provide support to related countries in adapting to climate change (Ortolani, 2018).” Latin America’s governments have set environmental and social standards and sought to enforce these for Chinese firms exporting to China, but face pressure to deregulate as mining and hydrocarbon-emitting companies increase their influence. China has in place guidelines for outbound investors that address environmental and social concerns, but they are weak in comparison to their counterparts in the world economy, particularly in terms of transparency and means of enforcement (Ray, Gallagher, Lopez, & Sanborn, 2015). Additionally, different Chinese firms will see different results in adhering to these guidelines. However, Courtney Weatherby, a research analyst at the Stimson Center, cautions that given the immense scope of China’s infrastructure projects and the resources it involves, the environment will definitively be impacted. The development of new transportation infrastructure will inevitably result in the destruction of forests, cause habitat fragmentation, and open protected areas to illegal loggers and even encourage drug trafficking. The Twin Ocean Road project threatens to exacerbate these problems in the Amazon. Additionally, Brazil’s agribusiness voting bloc, representing large landholders in Congress and called the “ruralistas,” is looking to do away with many environmental regulations already in place (Ray, Gallagher, Lopez, & Sanborn, 2015). The uptick in China’s demand for Brazil’s soybeans, spurring greater production to satisfy demand, has led Brazilian soybean producers to look for more land for cultivation. While economically positive, the acquisition of land poses a threat to the ecosystems of soy-producing regions given the deforestation that is required, particularly in the richly biodiverse, soy-producing Cerrado region (Andreoni, 2018). The Amazonian hydropower projects, such as Brazil’s Belo Monte Dam in which Chinese companies have been heavily involved, have also been a source of contention. The first transmission line would cause the loss of 1,725 hectares of native vegetation, but still got approval from the Brazilian Institute of Environment and Renewable Natural Resources lands (Peters, Armony, & Cui, 2018). According to Philip Fearnside of the National Institute for Research in Amazonia (INPA), “tropical dams are often falsely portrayed as ‘clean’ [carbon] emissions-free energy sources. Calculations… show that emissions from storage hydroelectric dams would exceed those from electricity generation based on fossil fuels.” Importantly, these projects also threaten and have threatened indigenous populations living in the Amazon (Hance, 2012). The Belo Monte project had elicited protest from the indigenous communities along the Xingu River, since it posed a threat to their local fishing activities and encroached upon their lands (Peters, Armony, & Cui, 2018). While potentially incurring hefty environmental costs, China’s international reputation could be tarnished if the appropriate environmental standards are not adhered to.
China has a clear and vested interest in pursuing economic and diplomatic cooperation with Brazil, given the volume of trade between the two nations and China’s significant OFDI in Brazil. China’s investment in long-term infrastructure projects by prominent state-run companies demonstrate the Chinese government’s interest in staying in the country long term. China’s Belt and Road Initiative aims to connect the world through infrastructure and maritime ports, and given that Brazilian foodstuffs are important to feed China’s growing population, better infrastructure within Brazil would greatly facilitate these exports. The China-US trade war only makes good relations between China and Brazil more important, given China’s huge proportion of world soya bean imports and Brazil’s abundant supply. China’s increase of M&A and greenfield investments within the country and involvement in an increasing number of sectors, are part of China’s broader goals to further integrate it into the world economy and modernize. Positive relations between the governments of Brazil and China within the past few decades have led China to create multi-billion dollar funds for investment in Brazil. And despite protectionist threats coming from Brazil’s president-elect Jair Bolsonaro and pushback from prominent environmentalists and indigenous groups, China’s presence in Brazil will continue to be a strong one, given the mutual benefits to each nation.