East Meets LatAm: President Xi Moves Quick To Fill The Vacuum Created By Trump 3

China’s leap into Latin America

Over the past few years, Latin American (ILF) nations have found a new trading partner in China. As economic ties with the United States (SPY) turn sour, these countries are banking on China (FXI) for investments and trade.

After President Trump came into power last year, he pledged to re-negotiate the North American Free Trade Agreement (NAFTA) and withdrew the Trans-Pacific Partnership. China moved quickly to fill this void in Latin American trade. Since 2000, trade between China and Latin America has grown 22x while that with the US and Europe has merely doubled.  According to data from the World Bank, a fall in Chinese GDP by 1% would lead to a decline of 0.6% in Latin America’s GDP growth.

In 2015, the country announced plans to increase trade with Latin America by $500 billion and foreign investment to $250 billion by 2025. Two of China’s major banks – the China Development Bank (1062.HK) and the Export-Import Bank of China – together provide more financing to Latin America than the World Bank, Inter- American Development Bank and the Andean Development Corporation annually.

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Foreign investment from China takes places in two major ways:

  • Direct investments in greenfield projects or via mergers and acquisitions
  • Lending by China’s development financing banks — China Exim and China Development Bank.

The largest destination for Chinese investment in Latin America is Brazil (EWZ), which is among the better half of Latin American countries in terms of rule of law. But there is also significant investment in Argentina (ARGT), Ecuador, and Venezuela.

The flipside

Although investments from China have brought about economic prosperity to Latin America, it has also hampered domestic manufacturing in many nations due to the import of cheaper Chinese goods. Further, as China continues to exploit the region’s oil and mineral resources for export, it is causing an increase in environmental degradation.

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