---

Alicia García-Herrero is simultaneously an adjunct professor at Hong Kong University of Science and Technology (HKUST), a senior research fellow at Bruegel (a European macroeconomic think-tank), and Chief Economist for Asia Pacific at French investment bank Natixis. Her work has focused on Chinese investments in Latin America: She has traveled extensively around the region in previous roles, including covering Latin American investments for the IMF, and while serving as Chief Economist for emerging markets with Spanish banks Santander and BBVA. The Wire China traveled to Natixis’s offices in Taipei to discuss China’s influence in Latin America.

Q: When we talk about “Latin America” we mean roughly 20 countries stretching from the Texan border to Antarctica. That makes for a lot of variety in their approaches to China. Can you outline the different camps? 

A: I would say the more populist the government, the more likely it is to be closer to China. 

Mexico is probably the most wary about China. It was the last country to lift the veto for China to enter the World Trade Organization [in 2001]. Mexico was always very worried about China taking over part of their manufacturing role with the U.S., this has always been in the media there. Despite being just as leftist as President Lula in Brazil, Mexico’s President López Obrador has been much more concerned about China. For example, Pemex [Mexico’s state-owned petroleum company] is in a very difficult situation financially but when China proposed around $5 billion in investments in 2014, it was refused. Same with lithium: Mexico has decided to nationalize its lithium mines as a consequence of a Chinese company’s attempt to buy their largest mine. 

Then there are the countries that I call close to rogue states. Venezuela, Cuba: these countries are very close to China because they don’t have any institutions that can stop China’s growing control of their resources. Those are the countries in Latin America that have the largest debt with China: Venezuela has around $60 billion in loans from China’s development banks, by far the largest debt with China in the world. 

Beyond Cuba and Venezuela, I would say the third closest to China has in the past been Argentina. Ever since the governments of Néstor and Cristina Kirchner [the husband and wife who both served as President of Argentina, the former from 2003 to 2007, the latter from 2007 to 2015] China has had huge influence, especially under Cristina. These governments were not only populist, but heavily in debt. Every time there was a subsequent switch to a right-wing government, you would have a new development program, which would then have to borrow from China to pay for that program. This has also involved major concessions to China, whether it’s on critical raw materials or oil exploration. 

Many years ago Argentina discovered more oil reserves in a new excavation called Vaca Muerta. This area already belonged to the Spanish company Repsol, because it had purchased YPF [Argentina’s former state-owned oil company]. It thus had control of those unexplored reserves, whose potential had been badly underestimated. So the government of Cristina Kirchner decided to expropriate Repsol and re-nationalize half of YPF in 2012. Since then, YPF has been selling subsidized oil to China. So China has gotten a lot out of Argentina due to its economic problems, and therefore its FDI and loans from China are proportionally among the largest in the region after Venezuela. 

In many cases a country’s relations with China also depend a lot on the stance of the previous government — countries tend to have pro-China governments, generally leftist, followed by a pro-U.S. (or at the least, not pro-China) government on the right. The region also knows having closer ties to China is basically a way of saying ‘no’ to the U.S. So it could be that it breaks into different parts in future: a populist part, very much linked to China, and the rest increasingly linked to the U.S. in response. 

What will the new Milei administration mean for Argentina’s relationship with China?

Javier Milei is an ultra-liberal and, therefore, ideologically very far from China. In addition, his opposition to the previous government means rejecting the open door policy to China, which Milei intends to stop, or at least, mitigate. Argentina’s access to funding from the renminbi swap line with the People’s Bank of China (PBOC) makes a decoupling from China highly unlikely unless other sources of funds are found. Furthermore, Milei has expressed a desire to strengthen Argentina’s ties with the United States, which could lead to a more cautious approach towards China. He has also criticized China’s human rights record, which could further strain relations.

What is Latin America’s importance to China, how has it gained influence there over the past decade, and what problems has this thrown up? 

Originally, Latin America was a good student of the so-called Washington consensus [the term applied to a set of post-Cold War beliefs in free markets and fiscal restraint], right up to the Mexican financial crisis in 1994 and Argentina’s financial crisis of 1994 and its depression in the late 1990s-early 2000s. As a consequence of those crises Latin America started to become a lot more economically heterodox, even before China came into the region. But then the region’s trade with China began to increase a lot faster than that with the U.S.: it went from around 2 percent of total exports before China entered the WTO, to $180 billion in 2010. Now, we’re talking about $450 billion in trade by the end of 2021. 

Many people now think China is the region’s largest trading partner, but this is actually not true. It is still the U.S.. True, the U.S. lost a lot of trade with Latin America during the global financial crisis; so 2008 was a very important year for China to step in, because the U.S. was very absent in terms of imports from the region and FDI. But the U.S. is still the largest importer — Latin American countries exported an average of $450 billion per year to the U.S. during the last decade (even more in 2022 with $589 billion). Its maximum exports to China over the same period were only $180 billion. It’s interesting how asymmetrical U.S. trade is. What China is really doing now is exports to Latin America, while U.S. exports are growing at a slower rate and losing out to China in terms of share. 

Although Latin America is currently running a record-high trade surplus with the U.S. and a record-low trade deficit with China, China is proving to be much more influential. It’s a bit paradoxical. When you look at the numbers, the U.S. should have much more influence, as countries should be closer to the economy to which they export the most. The data does not show that China has huge overall influence in terms of its stock of investment in Latin America, or in the current rate of its investment flows. 

…why on earth does China have so much leverage, if trade-wise and investment-wise it’s not a winning game for the region? It’s because Western countries left. 

So the question is, what is China doing that means they exert such amazing political influence, if its economic gains have not actually been as spectacular as people say they are? An extreme case is Mexico, which has racked up a $108 billion trade deficit with China, thanks to growing Chinese imports. Is it because China is supporting the more populist regimes? But even elsewhere, where there are no populist regimes, they seem to have amazing influence given the overall weight the U.S. still has in regional economics and security. 

Some people will say I’m missing the big action, which is in foreign direct investment — that China is investing everywhere. This is no longer true either. China is hardly investing in Latin America: the peak was in 2017 and it has been coming down ever since. The peak period was when all of the utilities companies were being privatized in Brazil, firstly by Lula [during his first period as President 2003 – 2011], but especially under Jair Bolsonaro [2019-2022]. That was a very bad time for Brazil: Lula ended up in prison, Petrobas [Brazil’s state petroleum company] had nearly defaulted. China jumped in, investing around $17 billion. But thereafter, there’s been much less investment from China into the region: certainly not into manufacturing, which you would argue is what governments want in terms of employment creation.

But in terms of influence, Latin America is highly dependent on commodities exports to China.

One of the region’s problems has always been that it’s too focused on commodities and it could never industrialize. During the 1990s, the region tried to create its own manufacturing sector. But then China came along in the early 2000s, fostering demand for commodities and pushing up prices. This led to a new commodity cycle, actually a super-cycle which lasted for much longer than expected, as China’s stimulus package in 2008 increased its demand for commodities even further. While Latin America benefited from large commodity exports, it ended up not diversifying its production structure, with exports highly concentrated in commodities sold to China.

That concentration in commodities only gets worse when you look at FDI. China’s FDI into Latin America is either into utilities, or metals, primarily copper and increasingly lithium extraction. It is not an FDI that in my opinion competes, in terms of wealth or job creation, with FDI that regional countries receive from the U.S. or Europe. So again, why on earth does China have so much leverage, if trade-wise and investment-wise it’s not a winning game for the region? 

It’s because Western countries left. Take Venezuela, the largest recipient of loans from China. Western countries are nowhere to be found, because the West abandoned Venezuela under Hugo Chávez [Venezuela’s leader from 1999 to 2013]. Having had to visit Venezuela at that time every month, I understand why Western companies did so. But every time a non-democratic leader [like Chávez] has come to power in a Latin American country, we would just step out, imagining we could isolate these regimes. But then China would jump into that market and make it totally dependent on them. 

Venezuela has only survived thanks to China. The amount of lending that Venezuela will need to restructure is enormous, and that makes Venezuela amazingly dependent [on China]. Venezuelan imports from China are at a record high, around $1.4 billion, making up 15 percent of its total imports. 

I’m not a U.S. national, I don’t intend to offer lessons. But to me, even if you think that you should pull out of an organization because it doesn’t make sense to you politically, you always have to think about who’s going to come next. And I think the U.S. never thought that somebody else would come in, especially in Latin America which was historically dominated by the U.S.: they probably never thought this could happen. 

Also if you’re a country with unsustainable finances, China has the upper hand because the way they lend is different from the rest of the world. Argentina went through hell when oil prices were very low, like in 2008. I travelled there at the time: the situation was outrageous because oil prices had fallen by 40 percent, and that’s when they started engaging in huge borrowing from China. Everybody thought maybe PDVSA [Venezuela’s state-owned petroleum company] was essentially the collateral for that lending, but we didn’t know, as there was no information [due to the opaque nature of the terms of Chinese loans]. Countries that borrow from China might not need to unveil the amount of debt owed, which is very useful for them — maybe they can avoid a ratings agency downgrade because nobody knows for sure how much they owe. So there’s a lot of advantages in going through China to solve your financial problems. Currently in Argentina, settlements in renminbi are at a record high because that’s the only currency they can get, and they use renminbi to buy everything they need from China. It shows that China can carve out space very easily, even before you even realise. 

China also simply has a better narrative in the Global South. They look for our weaknesses. They look at every crack in the U.S.’s history of domination (and there are many) plus western colonialism, and they say, “I’m different”. They say they’ve never invaded a foreign country, which of course is not true. But do you think somebody in Bolivia knows that? Plus that narrative is so appealing to a country that is poor: China is a country from the Global South, it was poor like you, and with their help one day you could be like them. But frankly, I don’t think any Chinese official believes any other country in the Global South is ever going to be like them. 

You have travelled around several Belt and Road Initiative projects in Latin America. How are these projects going and what trends have you identified? 

Latin American BRI projects are very different from Asian or African ones. You don’t have big pan-regional projects, like railways in Africa across multiple countries all very aligned with China. This does not work in Latin America, firstly because some countries in Latin America do not want to engage in these projects, secondly as Latin America has a history of very large debt. Generally central banks or finance ministers tend to be very cautious with borrowing. They borrowed a lot during Covid, and now are not in a position to borrow anymore. 

Culturally it would have been very difficult for China in Latin America, but [the EU] left it wide open and made it so easy for them to gain influence.

There are some projects which have been given the official label of BRI, but oftentimes there will be a lot more investment in non-BRI projects. China’s biggest investments in the region by far are in the metals sector, like in Chile, Peru, Argentina, Bolivia, and Ecuador. These are all extraction projects in individual countries (with no cross-border deals with neighboring countries), big Chinese infrastructure projects that were there long before the BRI. I remember when I was working for BBVA we were co-financing the purchase of a big copper mine in Peru in 2013 by Chinalco [a Chinese state-owned aluminium company]. This was never labeled a BRI project — China only labels projects as BRI that people can perceive as positive. There were huge local protests about the Chinalco deal, the miners didn’t want the transfer of property to China. If you look at the history of Latin America, most of the region’s social unrest has come from the privatization of natural resources, it’s an entrenched idea that they belong to the people. 

This is very different from many of the projects in Southeast Asia, like big electric vehicle factories in Malaysia which create lots of jobs. Why wouldn’t you announce that? But in Latin America, China’s presence does not create jobs. It’s the same story in utilities, the other sector where China is prominent in Latin America. Spain engaged in the telecoms and electricity sectors for years during the 1990s and early 2000s. Then the sovereign debt crisis hit Spain and Southern Europe, and many retrenched because their debt was very high, and they sold assets in Latin America, creating a void. China bought some of those assets, which included new privatizations. 

Do Chinese investors bring Chinese workers in for these resource extraction projects? 

Yes, they do, but less so than in Africa and South-East Asia. Latin American countries have very strict labor laws which come from Europe, but they aren’t implemented across the board, which is why their labor market has lots of unofficial grey areas. When foreigners come, generally you need to be in the official, legal, sector, which is an attempt to discourage migration. China has found this very hard, and has tried to find loopholes, which in the long-term creates problems, especially in terms of negative sentiment of the local population versus Chinese investment. If the government transitions to one less favorable to China, they can start asking questions about how Chinese businesses may have been favored, including on labor laws possibly reverting some of the concessions.

What is the EU doing in response to China’s increasing influence in the region? 

We’re not doing anything. Culturally it would have been very difficult for China in Latin America, but we left it wide open and made it so easy for them to gain influence. Europe has been negotiating a free trade agreement with Mercosur [a South American trading bloc] for 22 years, because countries like France have a very inward-looking agriculture policy – their attitude being “if we import more agricultural goods that will hurt my farmers”. So we’ve done nothing, and now the region is basically in China’s hands.

It’s also very hard to impose tariffs on China like the U.S. has done, because China will create other channels. Mexico is one way China is going to enter the U.S. [overcoming U.S. tariffs on Chinese goods], like a Trojan horse. They’re a big exception to the general lack of Chinese FDI in the region — the country is now receiving a lot of investment from all over the world to produce and export to the U.S.. Around 40 percent of that is Chinese: Solarever [A Chinese-Mexican car company] has announced a $1 billion investment to build an industrial plant in Mexico to produce electric vehicles and batteries, for example. Chinese companies can now export those batteries to the U.S. without tariffs, thanks to Mexico’s USMCA agreement. This is how Mexico makes up for its $108 billion trade deficit with China, by re-exporting to the U.S.. If the batteries are produced in Mexico, then there’s nothing the U.S. can do.

---