China;s $110 billion Latin America investment

Sao Paulo, June 25,  – Chinese investments in Latin America amounted to a total of $110 billion  during 2013 and 2016 and will continue to grow in the coming years, given the high quality of raw materials, infrastructure needs and demographic trends favorable in the region, says Moody’s Investors Service in a new report.

While the increase in Chinese investment in the region offers opportunities for growth, especially for smaller countries, it also intensifies certain risks.

In the beginning, the objective of Chinese investments in the region was natural resources, although over the years the scope became increasingly diverse and ranged from raw materials to services, including financial ones.

Although there are different ways of investing, either through foreign direct investment or loans, the flow of resources from China to Latin America continues to increase, with different impacts throughout the region.

“China’s loans to Latin American governments and state entities have especially favored countries with limited access to financing,” says Marianna Waltz, Managing Director of Moody’s for non-financial corporations in Latin America. “However, a reliance on highly discretionary loans introduces possibly adverse elements into the credit profiles of some sovereigns, such as higher debt burdens and weaker trade balances and, therefore, increases the risk of refinancing.”

“During 2005-16, China granted credits for some $222,000 million to governments in Latin America and the Caribbean (Brazil only received 53% of this amount), about half were allocated to infrastructure projects and a third to energy projects, “says Waltz. Since 2015, Chinese companies invested more than $ 20,000 million in the electricity, sanitation and transportation sectors throughout the region, taking advantage of the financial difficulties of local infrastructure groups and governments’ control of public spending.

Most of the Chinese investments in Latin America are destined for Brazil, where loans from Chinese banks are mainly used to finance infrastructure, energy and mining projects. These investments reflect an interest in fostering the growth of Chinese companies in Brazil, as well as trade between the two countries. Along with direct investment in mergers and acquisitions or new projects in Brazil, loans from Chinese banks also generate capital flows.

Although Chinese investments represent a diversity of financing for Latin American countries, in the case of large economies such as Brazil, they will not have a significant boost in economic growth, although they can be at the regional or subnational level, Moody’s notes.

But there are risks, including the creation of debt and the concomitant credit risk, when the projects financed with debt do not generate enough income to pay it. On the other hand, to the extent that the projects have import requirements, the funding can be allocated to most to finance imports, increasing current account deficits.