While the US and Europe have been struggling with the economic downturn as a result of the financial crisis, China’s relationship with Latin America has strengthened.
This news was first published on Dialogue Online.
China is one of the biggest buyers of commodities like oil, minerals and metals - and Latin America has those to offer.
According to statistics from the UN’s Economic Commission for Latin American and the Caribbean, China’s exports to the region grew by 11% to reach US$131 billion 2012. And Latin American exports to China grew by 5% to US$125 billion.
Sebastian Herreros, economic affairs officer at the United Nation’s Economic Commission for Latin America and the Caribbean’s trade and integration division, says China is the biggest export nation for a lot of Latin American countries and one of the most important suppliers for nearly all of Latin American countries today.
“If you look at projections on where future growth is going to be in the world you immediately come to the conclusion that China and Asia in general are going to grow more important in coming decades,” Herreros says. “This explains why we have devoted so many resources and time in recent years to that relationship.”
Herreros says China’s increasing presence in Latin America is to be welcomed, but believes the terms of direct investment, which is about US$9 billion and US$10 billion a year, and finance should be more conducive to development.
“Commodities has been the main driver of bilateral trade and bilateral investment,” Herreros says. “But Latin America is beginning to be interested in exporting other things, such as manufacturers or processed commodities, to China.”
Increasing presence
As exports to China from Latin America expand to include other goods and services, James Wills, senior business manager, banking initiatives and standards at Swift, says the traditional letter of credit is in less demand in Latin America as a means of financing trade.
“We are now seeing a greater demand for open account relationships between buyers and sellers, where both parties trust each other to fulfill their obligations at the end of the transaction.”
Wills says Swift is also seeing greater interest from China on the use of the bank payment obligation, which is a less costly payment method between banks to support trade between a buyer/importer and seller/exporter.
“The American banks are very conscious of this,” Wills says. “They have a wide presence and know what to do to be competitive. The area that is evolving in Latin America is around indigenous banks.”
Chinese banks have increased their presence in Latin America, particularly in Venezuela and Ecuador, but their presence in the region is still in its initial stages.
According to Herreros, the Chinese banks are mostly helping to finance trade and investment relationship with China itself, but views the development as positive nonetheless.
“It’s always good to be able to diversify your trade partners, your investment partners and your sources of finance,” he says.
Financing support
Salvador Palma, CEO of consultancy firm Alyar, which specialises in facilitating investor access to Latin America, says the Chinese are offering “amazing financing capabilities” in the region.
“In Peru, for example, if you want to bring Chinese equipment in the country, the Chinese would finance 95% of the cost,” Palma says.
“When compared to other banks, the financing difference is really big, as the Chinese want to infiltrate the marketplace. The US and Europe have been in Latin America for hundreds of years, so China needs to catch-up.”
Palma expects the gap between Chinese and Western banks to disappear over the years.
“China will no longer be able to afford having that little spread. I think the rate is going to start slowing down and the market place is going to start to even out,” he says.
