Economy

Chinese FDI in Latin America: New Trends with Global Implications

China is an emerging power on the world stage, rapidly expanding its influence beyond Asia. Chinese firms are now zeroing in on Latin America, rebalancing the role of traditional partners in the region. China’s engagement abroad is not new, but the resources directed to this “going out strategy” have risen dramatically, increasing China’s global leadership role. This adds up to a major economic and political rebalancing from the West to the East, a phenomenon also known as “shifting wealth.”

Chinese companies are moving rapidly into Latin America, and have invested over $110 billion since 2003, most of it in the last five years (Figure 1). Once the most favored nation for inflows of global foreign direct investment (FDI), China is now looking to acquire assets abroad. Traditionally, Chinese firms focused their investments in Latin America in the extractive sector. Now, more than half of all investments target the service sector, especially transport, finance, electricity, information and communications technology (ICT), and alternative energy, increasing China’s relevance in the region.

FIGURE 1. Annual Chinese FDI in Latin America

Annual Chinese FDI in Latin America.

The increasing influence of China is also a result of reduced engagement by the United States, which is focused on other global engagements. Its recent exit from the Trans-Pacific Partnership (TPP) could suggest that the trend will continue.

With the will to play an active part in the global economic order, China is providing economic and financial assistance to the region— also a way to open doors for Chinese firms to expand.3 By delivering loans, increasing FDI, and building stronger trade ties, China is ensuring its companies maintain market access for its export sector and open new markets for sectors with excess capacity, such as infrastructure.

Maintaining strong economic growth is also important for China’s social and political stability. Part of keeping the economy healthy is securing reasonably priced energy resources and other commodities. State-owned oil firms like China National Petroleum Corp. (CNPC) and Sinopec, China’s first and second largest oil firms, have quickly expanded their activities abroad. These firms are securing the long-term stability of oil exports to China, while also playing a growing role in the financial future of several governments in Latin America.

Soft Power Effects of FDI

In theory, the economic benefits of direct investment for the recipient country are clear: more jobs, higher wages, knowledge transfer, increased productivity, and increased trade. But there are strategic benefits for the investing country as well, and they are also significant. The soft power effects of FDI for the investing country can be substantial, and include improving its image abroad, persuading others to side with it in international organizations, and shaping friendly policies in other countries. As other actors in international investment, China’s firms, with a prevalence of state-owned companies, have the capacity to align economic trends with government priorities. At the same time, China has made explicit its principle of mutual respect and non-interference in countries’ internal affairs.

China’s sudden spike in FDI can be understood as part of a strategy for relevance and collaboration with Latin America. China is also promoting a state-led policy of development in the region, where rising global investments could mean increasing influence in the international arena. Latin America will play an important role in China’s efforts to shape issues internationally. At the same time, Chinese FDI could give the region more leverage when negotiating with traditional partners, such as the United States and the European Union.5