South America may prove poor El Dorado for China
China’s conquistadores are blazing a trail into South America. Witness the mooted $7 billion investment by two Chinese state oil firms in Brazil’s OGX, or talk of a Chinese bid for part of BP’s Argentine joint venture, Pan American. At a recent investor forum, one Chinese executive even likened the continent to a new Africa. The colonial comparison is apt, but South America may be a less fulfilling El Dorado.
Today’s explorers aren’t searching for gold, but for resources China needs to feed and house its 1.3 billion populace — notably iron, copper, and farmland. Previously trade was the chosen means of securing them, while investment remained paltry. Brazil has tripled its trade surplus with China to around $15 billion in four years. Copper-rich Chile followed a similar pattern.
Now direct investment is catching up. China is the biggest foreign investor in Brazil this year. Once capital-starved Latin governments welcome the change: Brasilia, for example, has had to run interest rates double the level of inflation. Venezuela and Brazil have both offered up oil flows for investment and loans. Chinese oil firm CNOOC paid $3.1 billion for half of Argentina’s Bridas oil field in March.
China’s Latin love partly reflects rising barriers elsewhere. Canada, Australia and the United States have all erected defences around mined and agricultural resources, or threatened to; the United States has thrown a protective embrace around oil-rich Iraq. Latin America and Africa, by comparison, remain open for business.
But South America’s needs are different from Africa’s. China has wooed countries like South Africa, Ghana, Kenya and Libya by building ports and railways, since what it lacks in resources it makes up for in infrastructure expertise and surplus labour. But South America has those already in abundance. That changes the calculus: the likes of Brazil would prefer a big chunk of China’s $2.7 trillion foreign reserves.
That is a path to overpaying for assets. Take OGX: the group controlled by Brazilian billionaire Eike Batista, has yet to produce a drop of oil. The more finite resources China buys at exuberant prices, the higher the premium sellers will demand. Japan learned that lesson when its 1980s foreign investment surge culminated in crazy bids for trophy assets like Rockefeller Center and Pebble Beach golf course. China’s conquistadores have a clearer strategic goal, but they too may leave behind more treasure than they haul away.