China and Latin America in 2014

Poeloq / CC BY 2.0

Announced some 15 years ago, China’s “going out” initiative opened the way for the rapid building of economic bonds and a growing partnership in many areas with Latin America. Year by year, China’s relations with Latin America have widened and deepened, and have become increasingly routine. Because of the large role they play in Latin America, Chinese activities continue to command considerable attention, but there is no longer much surprise when China announces major new investments in Latin America, expansion of trade with different countries, high level visitors to the region, or regular participation in regional forums. Today, China is viewed as a vital enduring fixture in Latin America’s economies and its external affairs.

China’s engagement with Latin America was particularly intensive this past year, highlighted by President Xi’s extended visit to the region in July. But it was also a year of economic retrenchment for most Latin American nations, severe setbacks for some, and a continued slowing of the Chinese economy. These trends, if they persist, could alter China-Latin American economic ties in fundamental ways. Some important shifts are already taking place.

President Xi’s first stop in Latin America was Fortaleza, Brazil. He was welcomed by President Dilma Rousseff who, just days before, had hosted the final game of the 2014 World Cup soccer championships. The Chinese leader came to Brazil to participate in the sixth summit meeting of the BRICS group—which turned out to be the most productive of its meeting so far. Clearly on display was the increasing global influence of this five-nation association of a particularly powerful group of developing countries, which besides China and Brazil, includes India, Russia, and South Africa. The member countries made real progress toward establishing themselves as a genuine bloc or alliance. By creating the new BRICS bank to finance international development initiatives, and a special reserve fund to deal with future financial crises, the BRICS are seeking to open a new chapter in the evolution of global economic arrangements. The lion’s share of the funding for these institutions will come from China, at least initially.

President Xi next traveled to Brasilia, where President Rousseff honored him with an impressive, well-orchestrated state visit. The two leaders signed a series of agreements that are expected to lead to substantial new Chinese investment in Brazil’s transportation, energy, mining, and agricultural sectors—and expanding trade between the two countries. Perhaps the most ambitious project on the agenda was the Two-Ocean Railway that would link Brazil to Peruvian ports on the Pacific. The new railroad would substantially reduce the time and cost required to get grains from Brazil’s vast farmlands to Chinese consumers.

In Brasilia, the Chinese president and other BRICS leaders participated in a lengthy roundtable discussion with every one of South America’s 12 presidents—and subsequently met individually with most of the South Americans. An especially significant meeting was organized between Xi and the leadership of CELAC, the Community of all 33 Latin American and Caribbean States. It is expected that China’s meetings with CELAC principals will continue on a regular basis, and serve as a region-wide forum on which to build an variety of Chinese ties, political and economic, to Latin America and the Caribbean. The next session will be held this coming January in Beijing.

Following five days in Brazil, President Xi traveled to three other Latin American countries—Argentina, Venezuela, and Cuba—and was also honored by state visits in each of them. This series of tributes is evidence of the high priority Latin American nations assign to their relations with China.
The three countries are today facing exceptional difficult economic challenges. (Brazil’s economy, too, has been faltering, but its overall macroeconomic situation is far superior to that of the three other nations visited by Xi.)

  • Venezuela is on the verge of economic collapse. Coupled with years of mismanagement, the sharply falling price of oil (which accounts for some 95 percent of the country’s exports) has devastated the economy. Venezuela’s inflation is the highest in the world, its credit rating is among the lowest, and predictions of imminent default are becoming more and more frequent.
  • Argentina, already in technical default, is also suffering a shortage of investment and foreign exchange—and very high inflation. None of these problems are likely to be resolved before next October’s presidential election.
  • Cuba’s shrunken economy and meager standards of living are in considerable danger of further decline if Venezuela, because of its own economic troubles, is forced to reduce its assistance to the island. The rising prospects of a growing normalization of ties with the US could now help Cuba, however.

The fact that all three of the countries have turned to China for financial support in one form or another is not surprising news. And several other Latin America countries confronting economic reversals, Ecuador for example, are also seeking the assistance of China. What is unclear is the extent to which China is responding to these needs. There are reports that China has helped Venezuela by both extending someloan repayments into the future and possibly by offering new loans. Indications are that China is moderately increasing investment in Cuba, and delivering some new investment capital to Argentina. Skeptics, however, suggest that Chinese efforts are mainly to protect the country’s investments and contracts and that it is unlikely that China is prepared to take major risks should these vulnerable economies continue to deteriorate.

Venezuela, Argentina, and Cuba are Latin America’s most deeply troubled economies. They are special cases. But most other Latin American economies are also weakening and several are stumbling badly. For the past four years, for example, Brazil’s economy has been largely stagnant and inflation has been rising. A major change is taking place in the underlying economic context of Chinese-Latin American relations. It is a change that could profoundly affect future ties.

By and large, bonds between China and Latin America developed during a period of economic success. Growth was robust for both. Today most Latin American nations—including five of the six largest economies of the region—are suffering from slow or no growth and confront a variety of structural obstacles to economic revival. China’s rapid growth which helped fuel Latin America’s gains by keeping demand and prices of commodities high, has dipped below seven percent. The crucial, unanswered question is what effect these changed economic circumstances will have on the relationship. How will relations evolve during a period when growth and prosperity in both China and Latin America are at risk—and the strong mutual economic interests that bound them together are weakening. What happens to relations when both China and Latin America no longer offer strong market for each other’s exports?

As we look forward, two other issues have recently emerged that may importantly affect the course of Chinese relations with Latin America. One concerns China’s evolving relationship with Mexico, which has been growing stronger in recent years, particularly following President Xi’s visit to Mexico in 2013. Toward the end of last year, a setback occurred when Mexico’s president, following rumors of a tainted bidding process, decided to cancel a multi-billion contract with a Chinese company to build a high speed rail. Although China was clearly angered by the decision, the consequences are still very uncertain, particularly since the Chinese may well bid once again, and could be re-awarded the contract in a new competition. Second, in December, Nicaragua formerly broke ground for the building of a new transoceanic canal on its territory. The $100 billion-or-so canal project is managed by a wealthy Chinese entrepreneur. There is increasing speculation, but little hard information, about the role and objectives of the government of China in the canal’s development. The canal project is a huge and risky undertaking that has become increasingly controversial, and could have an effect on wider Chinese relations in Latin America.

China today is an extremely active and influential actor in the economies of Latin America, and appears likely to become more of a presence in the years to come. Chinese relations with Latin America will almost surely become more complex, extending far beyond the economic sphere. In some places it could well provoke increased tension and disputes, particularly in light of the more troubled conditions of Latin America’s economies and China’s evolving economic outlook. At the same time, however, China and Latin America have considerable experience in working with each other and are better equipped today than ever to find pragmatics solutions to problems that do arise.