Will Asia and Latin America’s blossoming trans-Pacific relationship stay strong in the face of a potential slowdown? Eleanor Wragg reports.


Ten years ago, Latin American trade with China was barely worth mentioning. Today, thanks to Europe and North America’s economic woes and its own insatiable appetite for the commodities Latin America has in abundance, the Middle Kingdom has overtaken the United States and Europe to become the largest export destination for Brazil, Chile, and Peru and the second-largest for Argentina, Costa Rica and Cuba.

The European retreat from emerging markets has also left bank-shaped holes in the finance of Latin American trade flows – gaps which China’s financial institutions, keen to set up footholds in the region, are starting to fill.

But as China’s economy cools, weakening demand for the raw materials that go into building its roads and railways, should Latin America be nervous?

Over the past few years, Latin America’s links with China have gone from strength to strength. The Asian giant’s breakneck quest to join the developed world has meant huge increases in trade volumes and investment in the region. According to the UN Economic Commission for Latin America and the Caribbean, Chinese direct investment in the region surged to US$15bn in 2011, up from US$7.33bn in 2009, while trade volumes have grown 30% annually to hit US$241.5bn from just US$10bn in 2000. Exports have mainly been concentrated on raw materials, including copper, iron ore, lead, tin, soya and sugar.

However, there are some signs that the party may be over: July last year saw the International Monetary Fund (IMF) strike a sombre note with its statement that the world’s second-largest economy could be in for a hard landing. While China’s manufacturing purchasing managers’ index’s recent four-month rally has allayed those fears somewhat, research firm Nomura said in January that it expects the country’s growth to slow to 7.7% this year, with much of the slowdown occurring in the second half of the year, when growth will slip to 7.3%.

“If China is ever to have a hard landing – which I don’t believe it will – it would affect everyone,” points out Antonio Alves, principal regional head of short-term finance at the IFC. “Everyone is currently dependent on China, especially export-driven economies. Of course [a slowdown] would affect Latin America. It would have a huge impact on the region.”

But not everyone is concerned. Luis Schmidt Montes, Chilean ambassador to China, said in a recent interview with Chile’s El Mercurio newspaper that lower Chinese growth would represent a “great opportunity” for his country. He highlighted the Chinese government’s policy of strengthening internal demand, which would favour Chile’s exports, especially copper, due to infrastructure, construction and telecommunications work. “Copper prices will continue to be high,” he continued, adding that Chile’s food exporters will also see more growth. “In fact, my biggest worry is how to give the Chinese better opportunities to reach our products,” he concluded.

Michael Pettis, a finance professor at Peking University and a senior associate at the Carnegie Endowment, has a more negative take on China’s prospects, predicting a sharp Chinese slowdown, although he concedes that while this leaves him very bearish about non-food commodities, he is less so about food, as consumption growth, while set to fall, will not weaken by nearly as much.

Jan de Laat, managing director of trade and commodity finance at Rabobank, is of the same view: “To be honest, I don’t really see a slowdown in demand for agri-commodities in China. From our perspective, we still see opportunities and increased business on our books,” he says.

“The soft commodities sector in Latin America as a whole and particularly in Brazil is still performing well,” adds Angela Martins, who was until recently the managing director of Brazil’s Banco Pine.

“The sector’s companies are in general very healthy and there is no forecast of deterioration of any kind – in contrast to what we see in the capital goods industry.”

For now, even if the gloomiest of predictions were to come to pass, the Chinese economy is still tipped to grow at a rate that would turn any European government official green with envy. BBVA research estimates that the country will contribute almost 30% of global growth up to 2021. And with that growth comes increased trade. Over the next five years, Premier Wen Jiabao’s stated aim is to expand the current volume with Latin America to US$400bn – a lofty, but extremely realistic goal. Increasingly, these growing trade flows are creating a need for financial institutions to develop new solutions to service the needs of companies doing business in south-south trade corridors.

In June last year, Citi opened a Latin America trade desk in Shanghai, launching letters of credit denominated in renminbi (Rmb) for Latin American clients, while Bank of America Merrill Lynch is opening Rmb-denominated accounts for Latin American exporters in Asia.

Their erstwhile European competitors, however, are less visible, and in many cases, entirely absent from the finance of trade between Latin American and China.

Chinese financiers

Amid a squeeze in dollar funding and a firesale of assets to meet stricter capital requirements mandated by the Basel Committee on Banking Supervision, Europe’s banks have slunk home to shore up capital, leaving the door wide open for the new banks in town – the Chinese.

“Everything started in the summer of 2011 with the crisis in Europe,” says the IFC’s Alves. “The European lenders started pulling out, which provoked a series of implications specifically in the Latin American markets, because 80% of the lenders to Latin American banks were European banks.” He adds that once this link was broken, the IFC was called upon by the region’s banks to help find new sources of funding elsewhere.

“Since last November, we’ve had tremendous interest from Asian banks to fund trade transactions originating in Latin America, but particularly from Chinese banks. Our volume of trade-related funded transactions between Asia and Latin America has multiplied by at least five times compared to what it used to be. We are doing an average of two or three transactions a week with Chinese banks right now, some of which are first-time transactions,” he continued.

The IFC has been very active in connecting China to Latin American countries, including Panama, Paraguay, Honduras, Argentina, Chile, Peru, Colombia, Brazil and Mexico. “Whenever you have trade flows either coming out of China or going into China, that’s of interest for the Chinese banks because then they can leverage their client relationship with the Chinese exporter or importer,” said Alves.

One example which closed recently is a US$17mn deal financed by China Construction Bank, which is the lender to a Brazilian bank in a transaction financing Chinese motorcycles, electric bicycles, accessories and parts being exported to the Amazon region in Brazil.

As well as developing significant expertise in the trade finance arena, China’s banks are now making aggressive moves into the region. In December 2012, the Industrial and Commercial Bank of China (ICBC) opened a subsidiary in Peru, its first wholly-owned unit in South America.

This came hot on the heels of its acquisition of commercial lender Standard Bank Argentina, which will give it access to 103 branches across a country which counts China as its top agricultural export market. The transaction marked the first acquisition of a Latin American financial institution by a Chinese bank and also the first time a Chinese bank has bought a commercial bank outside China and Hong Kong. Speaking to the Financial Times at the time of the deal, the bank’s president said that it plans to provide financial services to productive or cereals companies so that they can meet Chinese demands.

Not to be outdone, China Construction Bank has said that it is looking at acquisition targets and expansion opportunities throughout the region but especially in Brazil, while the Export-Import Bank of China (China Exim) has been in discussions with the Inter-American Development Bank about setting up a fund to provide up to US$1bn worth of yuan funding for infrastructure projects in the region. In September 2012, the two banks inked a deal under which China Exim committed to offer up US$200mn to finance trade between the two markets.

For its part, Bank of China has opened an important branch in São Paulo. The objective there is to leverage on the trade and economic ties between China and Brazil. Meanwhile, Wen Jiabao has announced that the China Development Bank will head a special US$10bn credit line to promote co-operation in infrastructure, including railways, highways, ports, power stations, electricity networks and telecommunication facilities.

“This is not an opportunistic movement from the Chinese banks,” stresses Alves. “Chinese companies are investing heavily in Latin America as they look to develop natural resources needed to fuel the Asian country’s rapid growth. Therefore, it’s a strategic decision to take advantage of the trade flows and establish strong connections that will allow them to stay for the long term.”

Potential for rivalry

But do Chinese banks represent a competitor to the more traditional financiers in the region, or are they simply filling in the gaps? “With regard to competition from Chinese banks in Latin America, I have to say that I haven’t seen it yet, but I do expect that the Chinese banks will spread their wings to the places of originating. It is not at the point where we say that this is becoming a threat,” says de Laat, who notes that Rabobank expects to see competition in the region from banks who have survived the financial crisis better than their Western European counterparts.

“The Chinese banks are very well-positioned to take a big share in international trade flows; they have the dollars and they have their home market which is a heavy consumer of commodities so you would expect that they would jump into this opportunity,” he adds.

“The Chinese banks are still very timid in the market,” points out Martins. “Are Chinese financiers pushing out local banks? Definitely not. The local financial system in Brazil and in the region in general is very strong, very well capitalised and the delinquency levels are much lower than the average of the world market. The presence of the Chinese banks is still small compared even with the presence of European banks, and much lower than that of the American banks who have increased their presence in the Latin American market,” she adds.

So far, China’s lending tends to be complementary, rather than competitive, and European banks, with their years of expertise in trade finance and structured finance products, continue to see good opportunities in Latin America.

De Laat says his bank sees increased activity in all the main commodities in Brazil, adding that it is working on a structured inventory product to give it a better collateral position, rather than financing the goods in port or in storage: “Some of our clients have substantial volumes stored in Brazil, so our aim is to take a little bit of market share in that. In Peru fishmeal, coffee and the import of grains is an interesting proposition for us as well, and there is a lot of activity in this region which we would like to capture. Chile is building on the flow of more perishable goods, which is not an easy one but we are also looking at that.”

Kevin Gallagher, senior researcher at the Global Development and Environment Institute (GDAE) at Tufts University, explained in a recent report: “Chinese finance is a new and enormous player in Latin America, at least for some nations. It does not compete but complements international financial institutions in the region. If Latin American countries capitalise on this new finance to provide parallel support for stabilisation funds, innovation, industrialisation and environmental protection, Chinese finance may bring very favourable results.” Chinese money has also been a godsend for countries cut off from raising money on the international markets – in fact, Venezuela and Ecuador have so far received 61% of China’s total loans to the region.

That’s not to say that European banks shouldn’t be concerned. “It’s difficult to predict the possibility and timing of Chinese banks eventually becoming the most important competitors to US and European banks in the region,” concludes Alves, “but what I can tell you after my conversations with different banks in China is that the Chinese banks are very aggressive and are really very willing to come to the region.”

For now, as China proposes to deepen strategic co-operation by setting up a mechanism for regular dialogue between foreign ministers of China and the Community of Latin American and Caribbean States, and its companies – from Sinopec to Chinalco and Sinochem – snap up stakes in the region’s businesses, the Asian giant is set to play an ever-growing role in the future of its partner across the Pacific.