In Brazil’s Red Corner

China’s investment in Brazil has taken off like a catamaran surfing across the Pacific. While one might associate this trend with a Chinese desire to earn returns and pump capital into a fellow BRIC country, a look at the Chinese approach suggests otherwise. China does not have the variety or quantity of natural resources to supply its population of 1.3 billion while maintaining economic growth of 8-9%. Therefore, the PRC has carefully built a loop of foreign assets in resource-rich places such as Australia, Indonesia, and Africa. Brazil has been recently and rapidly added into the sphere. However, in the next phase, China will seek to provide reciprocal opportunity for Brazilian firms, while simultaneously building its own presence in the Brazilian consumer market and maintaining an advantage over these Brazilian firms abroad.

China is now Brazil’s biggest export market, and has been Brazil’s biggest trading partner since 2009. From 1990 to 2009, Brazil represented 3.5% of Chinese foreign direct investment (FDI). In 2010, the figure was 63% and in 2011, 43%. When I speak of “China,” I really mean the state-owned enterprises (SOE’s) supervised by the State-Owned Assets Supervision and Administration Commission (SASAC). Through SASAC, the Chinese government has been able to focus large Chinese investments into Brazil’s energy, agribusiness, and mining sectors. 8 large SOE’s, part of a group known as the “Dorsal Fin of China,” have also invested in Brazil.[1] Examples include the Chinese oil company Sinopec purchasing 40% of Spanish oil company Repsol’s Brazilian business, and Chinese utility State Grid’s $989 million purchase of 7 electric transmission concession holders.[2] For 2010, Chinese investment in Brazil has been estimated at $35 billion.

The first example provides a source of oil for China; the second, an investment in growing demand for electricity in Brazil. This shows the PRC’s multifaceted approach, which is funded by long-term, low-interest loans from Chinese banks. Wuhan Iron and Steel Group has used such financing to buy into joint ventures with Eike Batista, Brazil’s richest man.[3] One such JV will create a steel plant in Rio de Janeiro State. What’s less clear is why Brazil’s government and corporate leadership have been so unabashedly receptive to Chinese FDI.

This is partly because with Chinese money comes expertise, and preferential rights for Brazilian companies in China. Brazil wants to benefit from Chinese skill in developing its vast oil and natural gas resources, and in June, China granted Brazilian regional jet maker Embraer the right to manufacture in China. Brazil’s infrastructure has a long way to go to support a developed economy, and that opens the door. In Porto do Acu, about 175 miles north of Rio de Janeiro, Chinese investors are building a steel mill, shipyard, and factory for oil field equipment.  The Chinese perspective, however, is summarized by Li Jianqiang, director of China Shipping’s South American operations: “Brazil used to look to the U.S. and Europe, but then one day they discovered us and they realized how far behind they were. Money talks, and we understand that. If you have money, people respect you, and then you will have political power.”

While Brazilians eye development as a national necessity, the Chinese see it as a path to expanding foreign infrastructure specifically designed for exports to China. That’s where Brazilian oil, coffee, iron, and soya beans will go. It’s no coincidence that Brazilian exports to China in 2010 were 30 times the amount of 1996.

Interestingly, Chinese investments have largely not come in areas where there will be competition with Brazilian industry. The China Brazil-Business Council has noted more Chinese investment in areas with high technology content, which will allow Chinese companies to win business from the Brazilian consumer market. An example is the auto industry, where independent Chinese car makers such as Chery believe they have a competitive advantage. Chery has signed up 73 Brazilian dealerships. Chinese and Brazilian businesses will also be competing across Africa, particularly in Portuguese-speaking countries like Angola and Mozambique that have been targeted by Brazilian companies. Cement company Camargo Corrêa and construction conglomerate Odebrecht are suitors. China, for its part, set up a $5 billion fund in 2006 to invest in infrastructure in Africa, and sources a third of its energy supplies in Africa.

It remains to be seen if these two will become rivals or warm bedfellows.[4]