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Analysis: Surge in Chinese investment reshapes Brazil ties
August 10, 2010 / 5:41 PM / 7 years ago

Analysis: Surge in Chinese investment reshapes Brazil ties

RIO DE JANEIRO (Reuters) - Surging Chinese investment in Brazil is reshaping ties between the countries as companies seek to secure resources and tap the rising consumer class in Latin America’s largest economy.

From virtually nowhere, China has rocketed to become the biggest foreign direct investor in Brazil this year with purchases ranging from iron ore mines to vast tracts of farmland and the electricity grid.

Following similar forays in Africa and other parts of the globe, Chinese firms backed by cheap state financing are seeking a permanent foothold in Brazil, aiming to diversify their income and meet Brazil’s acute need for new infrastructure.

Brazil’s hunger for capital is an obvious draw for China, which has more than $2 trillion in foreign reserves and faces low returns on its massive U.S. Treasury holdings. Brazil’s large and buoyant consumer market is a welcome contrast to stagnant demand in China’s traditional export markets in the United States, Europe and Japan.

“China’s interest in Brazil has gone from looking for assets in resources to infrastructure. Its aim is to create a stronger middle class so Brazil becomes a stronger customer and partner for China,” said Eduardo Centola, the Americas chief executive for South Africa’s Standard Bank.

The boom in Chinese investments in Brazil underlines a shift of global economic power as funds increasingly flow between fast-growing emerging markets and leave out the West.

The huge investments in Brazil announced this year are not all confirmed, but compare to just $83 million in 2009.

AUSTRALIA, CANADA, AND BRAZIL

Ties between the emerging market giants have long been dominated by China’s voracious demand for Brazil’s commodities.

Now, Chinese firms want a presence on the ground so they can reduce their vulnerability to supply problems, and Brazil has emerged as a favorite as its economy has stabilized and boomed under President Luiz Inacio Lula da Silva.

“What they’re looking for is countries that offer attractive natural resource assets and which are politically stable enough to invest in, which is Australia, Canada, and Brazil,” said Thilo Hanemann, a China analyst at the Rhodium Group advisory firm in New York.

Big deals have come thick and fast, from Wuhan Iron and Steel Co’s 600005.SS around $5 billion investment to build a steel mill in Rio state, to Sinochem Corp’s $3 billion stake in Brazilian deep-water oil fields. Chinese investors are buying up hundreds of thousands of hectares of farmland in Brazil’s northeast to export grains and produce biofuels.

The investment has gone beyond the natural resources that China needs to feed its industry and people to areas focused on domestic demand in an economy that is forecast to have the world’s fifth-biggest consumer market by 2014.

State Grid, China’s biggest electrical utility, is paying $1.7 billion for seven Brazilian electricity transmission companies. Construction machinery maker Sany Heavy Industry (600031.SS) is building a $200 million plant as Brazil ramps up infrastructure plans ahead of the 2014 soccer World Cup and 2016 Olympics. Chinese firms are among the front-runners to build a $19 billion “bullet” train line between Sao Paulo and Rio de Janeiro.

BUYING UP BRAZIL?

Not everyone is welcoming the new Chinese wave. The big purchases of natural resources, especially politically sensitive land, have raised hackles among some who worry that Brazil risks losing control over its own resources.

Antonio Delfim Netto, a former finance minister who has advised Lula, said in an interview with the Estado de Sao Paulo newspaper that Brazil’s government was being shortsighted by allowing China to “buy” Brazil as it had “bought” Africa.

“The Chinese investment is welcome, but not with much enthusiasm because it is creating hardly any jobs and not having much impact on increasing our exports,” said Roberto Giannetti da Fonseca, head of international relations and trade at Sao Paulo business group FIESPI.

The investment push comes after years of mounting concern that China’s cheap manufactured exports and its imports of commodities are hollowing out Brazil’s industry. Investing more in industries on Brazil’s turf, sharing technology and hiring Brazilians could help alleviate some of that tension.

But China, which last year displaced the United States as Brazil’s biggest trade partner, isn’t investing to be “nice,” said Kevin Tang, director of the Brazil-China Chamber of Commerce and Industry in Rio. Securing more supplies of resources such as iron ore is part of a strategic plan to reduce its dependence on multinationals such as Brazil mining giant Vale (VALE5.SA), he said.

“It’s doing what it believes is in its best interest and helping Brazil in the process,” Tang said.

As it eyes Brazil’s consumers, China is following in Japan’s footsteps as it moves from exporting components to building its own brands.

Zongshen Power Machinery (001696.SZ), for example, spent $80 million last year to take over Brazilian firm Kasinski and produce 90,000 motorbikes a year in the Amazon city of Manaus. It aims to double that in the next two years.

On Tuesday, it unveiled a new line of electric scooters in Rio and announced it was investing 20 million reais ($11.4 million) to build Brazil’s first factory for electric bicycles and scooters in the state.

“Zongshen wants to become a major global motorbike maker, competing with the Japanese, and you can’t think about achieving that if you leave out Brazil,” said Claudia Rosa, Kasinki’s president.

$ = 1.76 reais

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