The relationship between Latin America (LATAM) and China has evolved since the People's Republic of China was founded from a trade-based relationship to a broader exchange of services, goods and investments. Recently, it has grown through increasing investment and financing as well as trade between the two areas forging ties to build a mutually beneficial partnership.
China's role in the world changed from inward development to becoming the second largest economy in the world that is aggressively looking outward. The relationship between China and LATAM changes depending not only on internal politics in individual countries but LATAM's and China's export relationship with the US. Many countries in LATAM, like Chile, Brazil, Argentina and Mexico, have taken to not only looking North for trade but also to the east. This has caused trade between LATAM and China to skyrocket by almost 2,000% between 2000 and 2014. China's Foreign Direct Investment (FDI) into LATAM countries has grown from less than $1bn in 2005 to more than $13bn now, further strengthening the ties between the trading blocks.
What China wants to invest in
China is looking for raw materials and LATAM (as well as Africa) are open to trading for them. For agricultural products, like soy, China is diversifying their sources and LATAM is benefiting. LATAM countries are rich in commodities and agricultural products making it a very attractive market for China. Chinese multinationals are not only looking for raw materials but foreign direct investment in industries, like hospitality, real estate, transportation and infrastructure.
China is investing in large infrastructure projects, like toll highways, windmill farms and also the transport and energy sectors, particularly in Argentina. China's Belt and Road Initiative (BRI) is planning to invest some $8tn in infrastructure projects globally. President Xi announced a commitment for China to invest $250bn into the LATAM and Caribbean region between 2015 and 2019 at the meeting of the Forum of China and the Community of LATAM and Caribbean States (CELAC) in January 2015. He also stressed that the priorities for this investment would be energy and resources, infrastructure construction, agriculture, manufacturing, scientific and technological innovation and information technology. Additionally, China has been providing significant funding in LATAM, providing loans of more than $118bn between 2007 and 2014, with 53% of this going to Venezuela, supported by their massive oil reserves as collateral.
The economy may be cooling and China is investing less abroad generally, but more in LATAM. For example, nine of the 10 largest acquisitions in electric, oil, infrastructure and agribusiness companies were in Brazil and seven involved Chinese buyers. While China only invests 5% of their total FDI into LATAM (compared to 12% in the United States), it is not spread equally around the region, with Brazil being the main beneficiary.
Challenges for Chinese investors
When Chinese investors are thinking about starting a relationship in a country in LATAM, they must understand the challenges that can come with global expansion. According to the Compliance Complexity Index, three LATAM countries are in the Top 10 in the world for compliance complexity, Brazil, Argentina, and Uruguay. Brazil's many procedural changes in registering companies can add complications for business owners along with its excessive amount of tax regulations. Argentina is the most complex jurisdiction in the Americas since the government implemented the new and confusing regulations of filing paperwork and reporting aimed at simplifying corporate governance. Uruguay has implemented global regulatory initiatives such as Ultimate Beneficiary Owner, which has significantly increased the complexity of doing business in the country. Understanding the complexities and partnering with local experts can help to effectively address these challenges.
Understanding the trade
The trade war between China and the US has also led China to look for other options like LATAM markets for sourcing raw materials and for investment opportunities. China is developing new markets and strengthening its position in the US's backyard, in areas that the US has pulled away from. The growing dispute between the US and China benefits the relationship of LATAM and China and their economic ties.
Trade has been growing in both directions with LATAM not only exporting raw materials to China but also importing relatively cheaper goods in the areas of technology. Manufactured goods account for 60% of all of China's exports to the region.
LATAM is becoming even more relevant globally and economically because of the extra investments from China. The increases of capital in the region will help create opportunities and allow for LATAM countries to become wealthier and invest more in public services.
On the other hand, there is some trepidation from the countries in the region about the partnerships with China because of the fear of "colony ownership" by the Chinese. China has decided to invest in LATAM in a way that only benefits some areas of specific countries. This can be seen as a biased approach to trade.
TMF Group can be found in key LATAM countries such as Brazil, Argentina, Mexico and Chile and can assist Chinese companies wishing to enter or expand within these markets and also help LATAM companies that wish to expand into China. The local experts in each country have the knowledge to help support businesses that want to set up new entities, be compliant with all local regulations and to understand the world of global business. Our professionals have an enviable breadth of experience and local contacts to help you with all your accounting, tax, HR and payroll and other business needs that come with doing business around the world. Contact us for more information.
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