China experienced explosive economic growth in the past few decades that helped it rise to the position of the second-largest economy in the world. It now aims to transform itself from a regional to a global hegemon, effectively challenging the US in its backyard, Latin America. The country’s Belt and Road Initiative (BRI) facilitated its ambitions by mobilizing over $575 billion worth of investments worldwide, with a seemingly innocent promise to connect continents and spur development. While 19 Latin American countries (LAC) have signed the BRI, the largest economies of Latin America, mainly Brazil, Argentina, and Colombia, have skirted formal recognition under the BRI due to their relationship with the United States. This has, however, not stopped China from forging strong ties with these economies, with the Asian superpower dramatically increasing its investments in LAC since the early 2000s.
Over the past twenty years, bilateral trade with China grew twenty-five times, from $12 billion in 1999 to $306 billion in 2018, placing China as Latin America’s second-largest trade partner, after the United States.[i] Additionally, The China Development Bank (CDB) and China Export-Import Bank (Exim Bank) provided over $140 billion in finance to LAC since 2005.[ii] Moreover, lending by the CDB and China’s Exim Bank to Latin America and the Caribbean has been larger than lending from the World Bank, Inter-American Development Bank (IDB) and CAF Development Bank of Latin America combined and over 90 percent of this has gone to four countries – Venezuela, Brazil, Argentina, and Ecuador [iii] Majority of these loans primarily focused on energy and infrastructure, especially as China initially pursued its agenda of energy security before expanding to other areas such as transport, telecommunications, and infrastructure. [iv] Thus, this article scrutinizes Chinese influence in the largest economies of Latin America through the lens of the energy sector and how these investments have helped China gain strong political influence that it often underplays when brought into question.
Venezuela has the largest proven oil reserves in the world while China is poised to become the world’s largest energy consumer, making the growing relationship between these two countries seem very logical. Venezuela has witnessed the largest inflow of Chinese investments since 2007 than any other Latin American country. Its relation with China was further strengthened when it became an official signatory of the Belt and Road Initiative. Of the $62 billion invested, $55 billion have been towards the energy sector, which is the heart of Venezuela— economically, politically, and socially. Oil accounts for 95 percent of the country’s exports and provides the cash to import everything else. China’s focus on the energy sector can be potentially viewed as a “power play” to gain influence over the political and social structures of Venezuela, along with its extensive oil reserves.[v]
Historically, China invested significantly in the Orinoco Belt, one of the world’s richest oil areas, which produces extra-heavy crude oil and sits across central Venezuela. In 2010, China’s national oil company signed a 25-year land grant for a 40 percent stake in one portion of the Orinoco Belt. One of the major drivers of large investments in Venezuela has been China’s offer of ‘quasi-collateralized’ loans of over $50 billion, with an option to pay in oil. As a result, China currently owns $23 billion worth of Venezuela’s foreign debt, making it the country’s biggest creditor.
Although one might notice China’s investments have reduced to a trickle in recent years, its financial support has been critical for a Maduro regime that is facing crippling sanctions from the United States. Beijing continued maintaining diplomatic ties with Caracas and opposed Washington’s oil sanctions, a position that might have elevated existing tensions with the United States, if not for the scaling down of Chinese financial support due to the said sanctions. Beijing’s’ clear support for Maduro’s regime was visible when it recently announced a $3 billion investment to construct “Jose”, a new oil blending plant, located in Barcelona, Anzoátegui State. This project will be run by the Sinovensa joint venture, which is 49% owned by China’s CNPC and 51% by PDVSA.[vi] Extra-heavy grades from Venezuela’s Orinoco Oil Belt will be blended into Merey (a type of oil blend), which has been quite popular across Asian importers. Thus, while the US has imposed crippling sanctions on Venezuela, China’s support, although not as substantial as before, has been critical for the current regime.
Latin America’s largest economy in terms of GDP, Brazil, has witnessed a large flow of Chinese investments. Although not a formal signatory of the BRI, Brazil has strong bilateral ties with China. Brazil’s energy sector received US$26 billion in investments since 2007 from China’s development banks. Chinese investments in this country are diverse, including fossil fuel development through investments in pre-salt oil flats of Brazil, as well as ensuring that China’s stake in developing cleaner energy sources for the country. Even before BRI, Chinese companies invested in the Libra oil field, a large ultra-deep-water pre-salt oil prospect located in the Santos Basin. The first contract for the production sharing agreement for Libra was signed in 2013 and was owned by a consortium of five companies, of which China National Petroleum Corporation (CNPC) and China Offshore Oil Corporation (CCNOOC) each held 10 percent. Furthermore, in 2019, 63 percent of Brazil’s total crude oil exports went to China, particularly as Asian markets are predisposed to buy the lighter type of crude, such as that offered by Brazil.[vii]
Chinese influence deepened further when the State Grid Corp of China, the world’s largest utility company, became the largest power generation and distribution company in Brazil in 2017. Established as State Grid Brazil Holding (SGBH) in Rio de Janeiro in 2010, the company engaged in the investment, construction, and operation of power transmission assets in Brazil. SBGH has invested more than $20.9 billion in Brazil’s electric sector so far.[viii] It controls 14 out of a total of 48 hydro-plants in Brazil, amounting to 8% of the nation’s total hydropower capacity, as well as 11 wind farms. By the end of 2019, SBGH owned and operated 15,761 kilometers of transmission lines, accounting for 13% of Brazil’s high-voltage grid assets.[ix]
Finally, the China General Nuclear Power Group (CGN) became one of the largest providers of clean energy in Brazil, acquiring two solar power plants – that includes the second largest in Brazil, along with six wind farms in 2019.[x] Thus, according to an analysis of public records by Diálogo Chino, Chinese companies now own 16% of Brazil’s wind power capacity and 21% of its solar capacity, or 2,822 megawatts in total. These investments have been crucial for Brazil as they have reduced the country’s dependence on hydropower, especially as in the past year it confronted lower water levels in its reservoirs.
Argentina is yet another country in Latin America that isn’t an official signatory of the Belt and Road Initiative but harbors strong ties to Beijing. China lent US$ 29.4 billion to the Argentine government for projects mainly focused on the transport and energy sectors between 2007 and 2017. While these investments have brought a multitude of benefits for the development of the country, it also provided China the latitude to manipulate the Argentine government in its favor.
China’s interest in Argentina’s energy sector was initially focused on the fossil fuels sector, however, in the last six years, it also began investing in hydropower, as well as solar, wind, and nuclear projects. Beginning with the traditional source of energy, the CNOOC became the second-largest oil company in Argentina after a series of acquisitions that included Bridas, Pan American Energy, and Esso Argentina between 2010 and 2011. To strengthen China’s hold even further, in 2011, the Sinopec Group of China also purchased the entire Occidental Argentina Exploration and Production, and in January 2013, CNOOC partnered with state-run YPF for the exploitation of oil in the giant Vaca Muerta unconventional oil and gas reserve in January 2013. [xi]
In the hydropower sector, China has been behind a controversial project to build two dams in Patagonia on the Santa Cruz River, a project approved during the administration of Cristina Kirchner (2007-2015) and ratified by the following President Mauricio Macri. The China Development Bank decided to lend US$4.7 billion to Argentina to build the dams that have a total projected capacity of 1,310 MW.[xii]Although the dams have a plethora of negative environmental implications, the government of Argentina has decided to move forward with them. A key reason for this has been due to a clause included by the lender China Development Bank, that made other infrastructure projects in Argentina conditional on the approval of the dams. Aware of this, the Macri government which was initially against the dam, gave a green light to the project. This has proven to be a plain example of China utilizing its investments to gain immense influence on the workings within the Argentine government for its benefits.
Lastly, China also became a central partner in deploying nuclear energy in Argentina. China will finance and build the Atucha 3 nuclear power plant on the outskirts of Buenos Aires. The nuclear plant expected to come online in 2021, required a US$10 billion loan from the Industrial and Commercial Bank of China (ICBC) and would cover an estimated 85% of the plant’s expected construction costs.[xiii] The project will not only rely on Chinese financing but also its technology with the deployment of the Hualong One pressurized water reactor. While these powerplants will certainly help advance the electricity sector of Argentina, one cannot forget that the country is once again restructuring its debt after its ninth default. Financing a US$10 billion-dollar nuclear powerplant and US$4.7 billion dams is not the best idea given the economic position of the nation.
Thus, China’s seemingly innocent development investments have ensured it has a strong influence over the decisions of governments of developing countries, strongarming them to pursue deals even if the negative implications outweigh the positive in the long term. With 19 countries in the LAC already a part of BRI, and multiple others forging strong bilateral ties, countries need to ensure that Chinese investments address the key issues of debt and environmental sustainability, especially in economies that have a high debt to GDP ratio and low governance standards.
Furthermore, as a majority of investments are still moving towards the traditional extractive and infrastructure sectors, it’s critical to channel them to explore new sectors outside this traditional scope in order to promote long term socio-economic development. Diversifying investments will help Latin American countries reduce their dependence on the extractive sectors such as oil and gas and build stronger and resilient economies. Hence, the key point to be made isn’t that LAC should be wary of or halt Chinese investments, rather it should make sure that it balances the opportunities and risks that arise while navigating Chinese investments in a way that promotes the long term development of their economies.
[i] International Monetary Fund, Q1 2019. Direction of Trade Statistics. 2019, data.imf.org/?sk=9D6028D4-F14A-464C-A2F2-59B2CD424B85.
[ii] Myers, Margaret, and Kevin Gallagher. “SCALING BACK: CHINESE DEVELOPMENT FINANCE IN LAC, 2019.” The Dialogue, The Inter-American Dialogue, Mar. 2020, http://www.thedialogue.org/wp-content/uploads/2020/03/Chinese-Finance-to-LAC-2019.pdf.
[iii] Canuto, Otaviano. “How Chinese Investment in Latin America Is Changing.” Americas Quarterly, 1 Mar. 2019, http://www.americasquarterly.org/article/how-chinese-investment-in-latin-america-is-changing/.
[v] Rendon, Moises. “When Investment Hurts: Chinese Influence in Venezuela.” Centre for Strategic & International Studies, 3 Apr. 2018, http://www.csis.org/analysis/when-investment-hurts-chinese-influence-venezuela.
[vi] Katsoulas, Fotios. Crude Oil Trade: Venezuelan Production Expanding and Turning Light with China’s Support. 27 Aug. 2019, ihsmarkit.com/research-analysis/crude-oil-trade-venezuelan-production-expanding-with-chinas-support.html.
[vii] Nogueira, Marta, and Marcelo Teixeira. “Brazil’s Oil Exports Set to Jump This Year, Weakening OPEC Curbs.” Reuters.com, 31 Mar. 2017, http://www.reuters.com/article/us-brazil-oil-exports-analysis/brazils-oil-exports-set-to-jump-this-year-weakening-opec-curbs-idUSKBN1722IW.
[viii] Xin, Zheng. “State Grid Becomes Power in the Land in Brazil.” China Daily, Sept. 2017, http://www.chinadaily.com.cn/business/2017-09/05/content_31573458.htm.
[ix] “State Grid Helps Brazil Harness Power.” China Daily, Nov. 2019, english.scio.gov.cn/m/2017-05/31/content_40931065.htm.
[x] Andreoni, Manuela. “China Bets on Wind and Solar Power in Brazil.” Dialogo Chino, 9 Aug. 2019, dialogochino.net/en/climate-energy/29559-china-bets-on-wind-and-solar-power-in-brazil/.
[xi] Lucci, Juan Jose, and María Belén Alonso. IISCAL, 2019, China and Argentina: Investments, Energy and Sustainability. The Cauchari Solar Park Project, bankinformationcenter.cdn.prismic.io/bankinformationcenter%2Ff0701164-0acb-48db-b647-2ebc09e88d85_iiscal+china+and+arg+i+e+%26+s+-+cauchari+solar+park+project.pdf.
[xii] “China Generates Energy and Controversy in Argentina.” Financial Tribune, 10 June 2018, financialtribune.com/articles/world-economy/87783/china-generates-energy-and-controversy-in-argentina.