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Beijing backs off in South America

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Beijing’s investment in the region is shifting from oil and other commodities to services

Latin America’s commodities boom has faded, and with it has gone much of the Chinese oil financing that fuelled the good times. In the decade before the 2014 oil-price crash, Beijing pumped tens of billions of dollars into the region through oil-backed loans and direct investment in major oil and gas projects from its state-owned oil companies.

Last year, the only major oil-related deal in the region from Beijing was a $5bn oil-backed loan from the China Development Bank to Brazil’s Petrobras. The state-owned company has relied heavily on Chinese financing since the sprawling Carwash (Lavo Jato) corruption scandal made it more difficult and costly for Petrobras to access international capital.

Petrobras aside, there has been a clear retreat from oil-focused deals in Latin America as Beijing shifts the focus of its investments abroad. China’s state-backed banks are now more likely to invest in clean-energy projects. Beijing increasingly sees a strategic opportunity here to become a world leader, especially as the US under President Donald Trump largely ignores the booming international renewables business. Two of China’s biggest state-backed deals in the region in 2017 were to finance a new solar plant in Argentina and a new hydroelectric dam in Peru.

China’s internationally-minded private and government-backed companies, meanwhile, are turning towards more service-oriented sectors like the automotive and information technology sectors, significant gaps in Latin America’s domestic economies. Major Chinese IT brands like Huawei and ZTE have set up shop in the region, along with the solar panel manufacturer BYD and the car maker Beijing Automotive, among others. Didi Chuxing, a Chinese competitor to Uber and Lyft, bought Brazil’s largest ride-sharer, Brazil 99, for $1bn. The share of services and renewable energy in China’s total investment in the region rose, from 20% in 2003-12 to 50% in 2013-17, according to a recent report from the Atlantic Council, a think tank. That figure is likely to continue rising.

Source: The Atlantic Council

China’s retreat from Venezuela is emblematic of the shift away from oil-focused investment. Caracas was by far the biggest beneficiary of Beijing’s push into the region starting in the 2000s. Venezuela received well over $50bn in oil-for-loans deals from Beijing, while China National Petroleum Corporation and other Chinese producers and oilfield service companies won major contracts in China.

But the Venezuela bet has backfired on China, which jumped headlong into the country without a clear understanding of the risks it was taking on. While PdV has paid back tens of billions of dollars of the loans through oil shipments, the company’s cash crisis and the country’s broader economic collapse have burned Beijing. The CDB has been forced to ease the terms of the oil-for-loans deals, allowing PdV to reduce oil shipment levels, while Venezuela’s oil industry hasn’t proved the bonanza that China’s investors had hoped. The state-backed companies remain major players in the upstream, though their projects are mostly stalled; but smaller private services companies have quietly exited the country.

Beijing itself has mostly sat on the sidelines as the country has sunk further into crisis. Despite intense lobbying for cash from President Nicolás Maduro’s government, China’s state-backed financiers didn’t extend any new credit to Venezuela in 2017 and issued just $2.2bn in new loans in 2016. The financial taps between China and Venezuela have been shut off.

While China isn’t the major force in Latin America’s oil financing that it once was, the legacy of the investment boom remains. The oil-for-loans deals will ensure a steady supply of Venezuelan, Ecuadorian and Brazilian crude flow to China for years to come. China’s national oil companies, meanwhile, remain important investors in key producing areas, like Brazil’s pre-salt and Venezuela’s Orinoco Belt, where any production recovery will require significant Chinese investment; and Peru’s prolific natural gas fields.

New deals are coming. China National Offshore Oil Corporation has nabbed licenses in Mexico’s deep waters and is a minority partner in ExxonMobil’s major finds in Guyana, giving China a foothold in the region’s two most exciting frontiers. But they aren’t on the scale seen in previous years. It’s clear that the region’s producers and governments won’t be able to continue relying on a virtually unlimited gusher of oil dollars from China.

4 Comments on "Beijing backs off in South America"

  1. twocats on Mon, 14th May 2018 8:35 am 

    Very good article. Neither kowtowing to China nor giving the knee-jerk rascist references to their “spreading” to foreign countries. Just the facts maam

  2. Davy on Mon, 14th May 2018 9:20 am 

    Chinese haircuts will continue as the global economy stales. Trade wars are simmering. Rates are going up and debt continues to mount. China will not be able to continue the rate of investment it has had at the beginning of this central bank fueled cycle.

  3. fmr-paultard on Mon, 14th May 2018 9:43 am 

    i’m coming out of temporary retirement to briefly state that there was no “brilliant flashes” and I’m still unable to sleep the next 10 years for fear of eurotard’s PBBM “confederation” plus 22 other contries includig mozambique. This is a threat that our two ginormous atom bombs codename pacific and atlantic can not be adequate defense against eurotard’s batteries powered bombers.

    he’s in alliance with islamists like how fuhrer allied with mufti of jerusalem. he’s mossad.

    also i will be modeling my life after aswang’s …this means i’m searching for bf’s. I don’t know why aswang is ashamed of stating that he has bf’s. if bf’s enrich his life then what’s bad about it?

    oh as i previous say the atoms bombs are also battereis. i stated that supertard’s state of texas winds production is coorelated to sunshine hours. this is long term “storage” for coastal and offshore generating units.

    short term “storage” is inland winds.

  4. fmr-paultard on Mon, 14th May 2018 9:52 am 

    i also wanted to note that zte is suffering due to sanctions. we are to believe that our supertards developed advanced electronics and PBBM + chad and 100 other countries can just do it themselves.

    i’m back to retiremnet. weather has been nice. i wish our supertards a good day

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