China and Latin America

China and Latin America:
Opportunities and Challenges
Alicia García-Herrero - Chief Economist Emerging Markets
Economic Research Department BBVA
Medellin, IADB Annual Meetings, March
2009
BBVA Economic Research Department, IADB Annual Meeting 2009
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Contents
 China & Latin America:
Two Complementary Strangers
 What Are the Opportunities?
 In Trade
 In Foreign Direct Investment
BBVA Economic Research Department, IADB Annual Meeting 2009
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Two Complementary Strangers

China and Latin America:
Two Heavyweights in the World

The paradox of Latin America:
Even if remote, very good partner for China
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China and Latin America:
nearly one third of world’s population
Share of World Population, 2008e
ASIA EX- 17%
GREATER
CHINA
34.6%
88%
GREATER
CHINA
20.5%
LAC
8.4%
ROW
24.4%
EU-27
7.5%
US
4.6%
Source: ERD BBVA, IMF (October 2008)
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Important economic blocs: 1/5 of world’s GDP
China/HK and Latin America’s share of world GDP (PPP*)
%
14
12
17%
9.9
LAC
China+HK
10
11.9
8.4
8
88%
6
8.3
8.1
4
2
2.3
2006
2004
2008e
* Purchasing-power-parity measured. Estimates start after 2007.
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Source: ERD BBVA, IMF (October 2008)
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China’s economic growth spectacular
Latin America’s sharply accelerated in recent years
Real GDP growth in annual % change (2008-9 estimates)
% yoy
20
17%
China+HK
16
12
88%
8
4
0
Latin America
2008e
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
-4
* BBVA forecasts for 2008-2009 (baseline scenario). China and HK growth: PPP weighted.
Source: ERD BBVA, IMF (October 2008)
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Yet, Latin America retains higher per capita income
China and HK vs Latin America: GDP current per capita
(in US dollars)
US$
8000
17%
Latin America
China and HK
7000
6000
88%
5000
4000
3000
2000
1000
2008e
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Source: ERD BBVA, IMF (October 2008)
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Contents
 China & Latin America:
Two Complementary Strangers
 What Are the Opportunities?
 In Trade
 In Foreign Direct Investment
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The paradox of China-Latin American relations:
clearly remote…
•
•
•
•
•
CHINA
High transport and communication costs
Long delivery time
Very different time zones
Few direct air links
Few free trade agreements so far…
10,600 Km
U.S.A
220 Km
HONG
KONG
12,700 Km
20,000 Km
MEXICO
18,800 Km
BRAZIL
CHILE
Source: ERD BBVA
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But bilateral trade agreements increasing
Already two years ago with Chile (Oct 06)
Very recently with17%
Peru and Colombia (Nov 08)
Negotiating with Costa Rica
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Latin America is complementary to China due to
a striking difference in natural endowments
China’s agricultural land per capita is just 1/3 of
that of Latin America!
Selected natural resources per capita, 2005
INDIA
CHINA
LATIN
AMERICA
Source: WDI
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Structure of bilateral trade, thus, highly complementary
China: import/export structure with Latam, 2006
(% of imports/exports flows)
17%
Latam exports
primary products
and natural
resources
manufactures
88%
83%
China exports
medium and
high tech
manufactures
12%
Imports
Exports
Primary products & Natural resources manuf.
Low, Mid and High-tech manuf.
Source: ERD BBVA, ECLAC
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More generally, Latin America exports mostly
commodities and primary products
Exports of Commodities by Country
(as % of total exports )
100
90
2006
80
70
60
50
40
30
20
10
0
Mexico
Brasil
Source: UN-Comtrade
Peru
Argentina
Chile
Colombia
Venezuela
Major Latin American economies, except Mexico, are heavily
dependent on exports of commodities.
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And Latin America’s export growth in recent
years has been driven by Asia
Latin America’s export destinations, 1998 vs 2007
(% of exports)
1998
Intraregional
r.o.w
2007
CANADA
Intraregional
r.o.w
CANADA
JAPAN
JAPAN
USA
USA
ASIA
ASIA
EU
EU
Source: ERD BBVA
Latin America’s exports increased at an annual rate of 13% in the
current decade driven by Asia’s demand for commodities.
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China’s commodity hunger fueled the rapid
expansion of trade with Latin America
LAC: trade with China and HK, 1999-2008e
(USD billion current, index 1999=base )
US$ bn
100
1999=1
20
Exports to China/HK, lhs
Imports from China/HK, lhs
Export Index, rhs
Import Index, rhs
80
79
60
49
40
16
12
8
20
3
4
7
0
2008e
Source: ERD BBVA, IMF DOTS
2007
2006
2005
2004
2003
2002
2001
2000
1999
0
Latin America’s exports to China has grown 163% since 2000;
imports from China 136%.
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China has emerged as a major trade partner
Exports to China at current prices, 2002 vs 2007
(as % of total exports and rank among destinations)
2002 (% of total)
Argentina
Bolivia
Brazil
Chile
Colombia
Mexico
Paraguay*
Peru
Uruguay
Venezuela
4.31
0.56
4.25
7.24
0.33
0.28
0.84
7.97
5.57
0.38
2007 (% of total)
5th
17th
4th
3rd
39th
12th
17th
3rd
5th
31st
9.42
1.16
6.83
15.51
2.62
0.70
1.03
10.94
3.59
0.16
2nd
15th
3rd
1st
7th
10th
15th
2nd
7th
35th
*2006 latest year available
Source: ERD BBVA on the basis of ALADI
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LAC is key supplier of agricultural products,
minerals and metals to China/HK and rest of Asia
Production Share by Region/Country, 2006-2008
(as % of world, selected commodities)
Soybean
US
36.6%
EU
0.3%
Others
7.1%
US
23.7%
Rest of
Asia
0.2%
China
6.7%
Latin
America
49.1%
Oilseeds Rest of
Asia
3.4%
Zinc
China
14.5%
EU
6.0%
Others
21.1%
Source: ECLAC (2008)
Refined Aluminium
China
27.5%
Rest of
LAC
Asia
22.3%
4.0%
US
1.8%
Japan
EU-27
11.6%
9.1%
Others
Oceania
16.8%
6.8%
Rest of Asia
7.7%
US
7.3%
China
28.7%
EU-27
7.7%
Latin
America
31.3%
Others
6.3%
Australia
14.1%
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LAC
28.1%
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Most remarkable, China has become the 1st or
2nd supplier to most Latin American markets
Imports from China at current prices, 2002 vs 2007
(as % of total imports and rank among suppliers)
2002 (% of total)
Argentina
Bolivia
Brazil
Chile
Colombia
Mexico
Paraguay*
Peru
Uruguay
Venezuela
3.70
4.83
3.41
7.16
4.2
3.72
12.64
6.19
3.83
1.93
2007 (% of total)
4th
7th
7th
4th
6th
3rd
3rd
4th
6th
9th
11.46
7.74
10.8
11.44
10.03
10.49
25.70
12.12
9.61
9.68
3rd
5th
2nd
2nd
2nd
2nd
1st
2nd
4th
3rd
*2006 latest data available
Source: ERD BBVA on the basis of ALADI
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Contents
 China & Latin America:
Two Complementary Strangers
 What Are the Opportunities?
 In Trade
 In Foreign Direct Investment
BBVA Economic Research Department, IADB Annual Meeting 2009
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China’s huge and growing reserves have been a
source of financial and direct investment abroad
China’s Official Reserves
(US$ billions and % of GDP)
US$ bn
% GDP
3000
Cumulative end of period, lhs
60
2500
As % of GDP, rhs
50
2000
40
1500
30
1000
20
500
10
0
Q1 2008
Q2 2007
Q3 2006
Q4 2005
Q1 2005
Q2 2004
Q3 2003
Q4 2002
Q1 2002
Q2 2001
Q3 2000
Q4 1999
0
Source: ERD BBVA
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Chinese FDI has ample room to increase further
when compared with its peers in Asia
Chinese FDI stock vs Selected Asian Peers
(outward FDI stock as % of GDP)
% of GDP
14
12
Japan
10
8
South Korea
6
4
2
China
2007
2006
2005
2004
2003
2002
2001
2000
1999
0
Source: ERD BBVA, UNCTAD (2008)
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China’s FDI into Latin America grew 80%
per year since 2003
Chinese FDI into Latin America (non-finance sector)
(US$ millions)
US$ mn
10,000
8,000
6,000
4,000
2,000
0
2003
2004
2005
2006
2007
Source: ERD BBVA, CEIC
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But ample room to increase
in view of a very low starting base
Latin America’s inward FDI, 1997-2001 vs 2002-2006
(stock in US$ millions)
350 000
300 000
250 000
200 000
150 000
100 000
50 000
1997 - 2001
2002 - 2006
Source: ECLAC (2008)
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Moreover, Latin America is important
for China’s outward FDI
Chinese FDI flows by destination (non-finance sector), 2003-2007
(in USD million)
US$ mn
30,000
25,000
20,000
15,000
10,000
5,000
0
2003
Asia
2004
Latin America
2005
Europe
2006
Africa
2007
Other
Source: ERD BBVA, China’s Ministry of Commerce
Latin America has become China’s largest foreign investment
destination outside the Asian region.
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Key Chinese investments in Latin America
RECIPIENT CO.
STAKE
SECTOR
COUNTRY
INVESTMENT
AMOUNT (US$
million)
2008 Jiangxi Copper - China Minmetals
Canadian miner Northern Peru
Copper (NOC)
94%
Copper mines
Peru
356 (C$ 436)
2007 Chinalco
Peru Copper
75%
Copper mines
Peru
860
90%
Copper mines
Peru
186 (GBP 96)
Joint
Venture
Copper mines
Chile
550
PDVSA
Joint
Venture
Crude oil
exploration
Venezuela
10
2006 Minmetals
Government of Cuba
Joint
Venture
Niquel
Cuba
500
2006 Sinopec (China) & ONGC
Omimex
50%
Crude oil
Colombia
55
2005 Minmetals
Noranda
44%
Copper mines
Chile
20
Encana
100%
Crude oil
Ecuador
1,420
Joint
Venture
Crude oil
Bolivia
1,500
14%
Crude oil
Ecuador
100
YEAR
INVESTING CO.
2007 Zijing Mining Group Co.
2006
China Minmetals Non-ferrous
Metals Co
2006
China National Petroleum Corp
(CNPC)
2005
Andes Petroleum, CNPC and
Sinopec
Monterrico Metals Plc-listed in
London
Corporacion Nacional del
Cobre de Chile
2005 Shengli International (SINOPEC)
YPFB
2003 Sinochem
CRS Resources
Source: ERD BBVA, press
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How is the Chinese investment experience
overseas?
Main Challenges Faced in International Operations
(in % of responses, firm survey)
Culture conflict
Slow reaction to changes in local markets
Important or
very
important
Capital shortage
Labor cost
Not
important
Image building
Distribution channel
N/A
Safety of staff and w orkshop
Social disorder
Low localization level
Difficulties in dealing w ith local governments
0
10
20
30
40
50
60
% of firms surveyed
Source: Battat, Joseph, FIAS/ MIGA Firm Survey (April 2006)
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Latin America should exploit geographical
proximity to the US market to attract China’s FDI
Closeness
Complementary schemes
FDI
Transport costs
Inventories (Just in Time)
Intra-industry trade
Add value (complementary schemes)
In order to attract FDI, Latin American countries still has much
work to do in improving their institutions and infrastructure
Latin America is and will continue to be an important market for
China/HK (export diversification and provision of services).
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Latin America needs also to strengthen its trade
logistics in order to lower exporters’ costs
Logistics performance index
(score in the range of 0-5)
Lower logistics costs
Source: ERD BBVA, ECLAC (2008), World Bank (2007)
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To conclude
 Latin America and China are complementary
strangers
 Our bet is that the potential gains of such natural
complementary will be reaped in the next few years
 Ways to foster this process are:
1. Permanent alliances in trade (FTA) to secure
commodities to China
2. Latin America’s gradual shift from the current interindustry trade pattern to vertically integrated trade
with the help of HK and Chinese investors
In the current difficult circumstances, financing will be
key: very few banks operating in both areas
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Thank you
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