Double Handshake

Zhou Xiaochuan, the head of China’s central bank, has been one of the headline-grabbers from the Inter-American Development Bank (IDB) summit, which is wrapping up today in Medellin, Colombia. Zhou was the new guy at the meeting; China only became a member of the IDB in January, shelling out a US$350 million loan to join.

Zhou swallowed his butterflies and made his first address at the meeting, duly talking about the “huge potential” in China-Latin American trade and cooperation and reeled off some eye-catching statistics: 30% annual growth in bilateral trade since 2001, from US$15 billion to US$140 billion.

Earlier in the week, Zhou made waves by voicing his concerns about the US dollar’s supremacy as the global currency, proposing that the International Monetary Fund consider adopting a basket of currencies to replace it as “super-sovereign reserve currency.” Barack Obama didn’t warm to the idea, but US Secretary Treasury Timothy Geither seemed to. Presumably Zhou and Geither had a bit of time to discuss it further in the de-Pablo Escobar-ed setting.

As if to drive his point home, Zhou announced a US$10 billion currency swap (that is, US$10 billion-worth of yuan and pesos) between his country and Argentina at the IDB meeting. It is the first currency swap between China and a Latin American country. Argentina has an election coming up on June 28, and having the extra funds will give them a measure of security in controlling the peso’s value.

Argentina’s central bank president, Martin Redrado, was quick to point out that the deal is a contingency plan; the country doesn’t need it at the moment. And, another asterisk behind the deal:

“The fact that China represents such a small share of Argentina’s total trade (less than 12 percent) suggests limited impact on FX, but is an important political gimmick at this time (convertibility will remain an issue),” RBS wrote in a research note issued on Tuesday.

Gimmick or no, Zhou proved that even in an international setting like the IDB summit, China will look for ways to extend its reach (and currency priorities).

Image: China Daily

Lima-based blogger Stuart Starrs has a nice post on Chinese restaurants in Peru, or Chifas, over at his blog en Perú. He rightly points out that while chifa food is largely considered an affordable staple to most Peruvians, there are glitzy exceptions. Buen provecho!

Image: en Perú

El Salvador has a new president-elect, as of last Sunday. Mauricio Funes, of the left-wing Farabundo Marti National Liberation Front (FMLN), won a narrow victory over Rodrigo Ávila of the right-wing ARENA party. The Washington Post tells us what to expect:

Among other things, he has said that he will respect private property, preserve El Salvador’s free-trade agreements and its use of the dollar as its currency, and seek to preserve close relations with the United States. As his political model, he has cited not Mr. Chávez, but Brazilian President Luiz Inácio Lula da Silva, who has led his country leftward while honoring democracy and the rule of law.

Making fewer headlines outside the US, however: Funes has promised to switch his country’s diplomatic ties from Taiwan to the PRC when he takes office June 1. Currently, El Salvador is one of the island’s 23 remaining diplomatic allies. Despite Taiwanese president Ma Ying-jeou’s calls for a “diplmatic truce” with the PRC over stealing each other’s diplomatic partners, many countries have switched over to the PRC for economic reasons.

Though these reasons are usually enough to convince most countries to switch to the PRC, in the case of El Salvador, there are other reasons as well. From the Taipei Times article linked above:

The FMLN has never forgotten that ARENA founder Roberto D’Aubuisson, who organized and led the death squads which tortured and killed thousands of civilians and who directly ordered the assassination of Archbishop of San Salvador Monsignor Oscar Romero on March 24, 1980 that sparked the civil war, was trained in “police techniques” in Taiwan.

Moreover, unlike Nicaragua, Guatemala or Paraguay, Taiwan has been unable to develop solid political dialogue with the FMLN even under DPP President Chen Shui-bian.

So, while Taiwan has been able to maintain ties with Nicaragua, Guatemala and Paraguay as their governments have taken a left-ward turn, El Salvador will be a much mightier task.

Is there, then, any course of action for Taiwan to stop this from happening? Could the island salvage “dual recognition”, meaning that El Salvador would recognize both the PRC and Taiwan? Not likely. When Francisco Ou, Taiwan’s foreign minister in El Salvador, told reporters the island would indeed be willing to accept this scenario, he was was quickly overrulled by President Ma himself, saying dual recognition “unrealistic.” Beijing has routinely demanded that its diplomatic partners recognize the “One China” principle.

It seems that Ma is wary of ruffling too many feathers in Beijing over El Salvador, even if it means losing one more country from its column.

Image: Tim’s El Salvador Blog

Things have deteriorated for Doe Run Peru since last week. Bloomberg reports that now 95% of operations at the company’s smelter in La Oroya has stopped, including copper refinement. Luis Castillo, general secretary of Peru’s Mining Federation, said the company may close its entire facilities today if it can’t broker a deal with banks and suppliers. The company does not have the capital to see it through the collapse of metals prices, and banks have cut off its lines of credit since February 24.

How bad is the economic crisis hurting mining concerns in Peru? It depends on who you’re asking.

Chris Kraul at the LA Times has the latest on Chinalco’s US$2 billion copper mine project at Toromocho, including an interview with the Chinalco Mining Peru’s president Gerry Wolfe. The gist: China is still cash-flush despite the global crisis and hungrier than ever for natural resources like copper. Wolfe is optimistic:

“They (China) went through the last 10 years selling things and piling up billions of dollars in surplus reserves, which they are now using to finance an expansion into the world.”

And, as for the issue of falling demand for commodities like copper, he takes the long view.

“They (Chinese people) want to become similar to the U.S. or Europe,” Wolfe said. “They have a long way to go, but it cannot be done without metals and other natural resources. Domestically, there are 1.3 billion Chinese, and all of them want cellphones, cars, appliances — just like you and me. And that takes copper, lots of it.”

Contrast this with another news story that broke late last week: Doe Run Peru, subsidiary of US-based metals producer Doe Run, halted all non-copper production at its giant smelter at La Oroya, Peru. The La Oroya smelter processses copper, zinc, lead, silver and gold, and is the country’s fourth-largest exporter. The company’s finances have been hit hard by a drastic drop in demand.

“The company doesn’t have any working capital despite making money over the past four years,” Castillo said. “We will meet with Energy & Mines Ministry officials to find out if the company can be saved.” Belaunde, the Doe Run Peru spokesman, said the company is working on a solution with banks and declined to comment further.

The company is not alone. Prices of copper, zinc, lead and silver have fallen at least 24% since last July. According to Bloomberg, the crisis has shuttered about 30 other mining companies across the Peruvian Andes. At Oroya, thousands of jobs have been cut, and confusion abounds.

“Everything’s apparently on hold pending a government bailout,” Roiberto Guzman, a Doe Run Peru metallurgical union spokesman, said by telephone from La Oroya, Peru. “The union has requested an interview with Doe Run management, as we can’t go on with this suspense.”

Thanks to a few well-placed links in high places (a dozen hat tips to all of you), Double Handshake has seen a rather astounding spike in traffic in the past few days. For new readers wondering how they’ve landed on a blog about China-Latin America relations, well, the internet is a funny place. I had no idea guinea pigs would bring us together either.

I thought I’d offer up a few well-liked previous posts from this admitedly tenderfoot of a blog. Here’s hoping you stick around awhile!

On the viability of exporting guinea pigs from Peru to China My, erm, “instant classic” laying out the reasons Peru needs to consider sending cuy to China’s kitchens.

Mandarin, QQ and the Fuwa: Young Peruvians’ hunger for China A first-hand account of how China’s soft power is alive and growing among South America’s youth.

When to be a “journalist”: Peru vs China Some Socialists are media-friendly, others are not.

The guano chronicles Peru, China and the history of bird guano that binds them together.

To answer that question and how it relates to China, consider Liu Bin. Liu, a 32-year-old from Beijing, sells Shenzhen-made combine harvesters and power tillers in the Peruvian countryside for around US$8,000 a pop. An ex-PLA soldier, he speaks softly behind wire-frame glasses and chain smokes 好日子 cigarettes from the cartons he brought with him for his trip to Peru. He showed me glossy brochures of Shenzhen Shenlang Enterprise Co, Ltd’s product line and told me sales have never been better in Peru, despite the global crisis.

“In the countryside, many people don’t even know there is a financial crisis going on. They’re just concerned with their own daily life,” he told me. Peru is the company’s biggest market in South America.

I thought about Liu reading through the wave of upbeat predictions on Peru’s economy that have surfaced recently. First, from a senior World Bank official recently quoted by Reuters:

“I think the one (Latin American economy) that will escape recession is Peru,” said Marcelo Giugale, the World Bank’s director for Poverty Reduction and Economic Management in Latin America and the Caribbean.

For other countries across the region, including Brazil and Chile, Giugale said growth rates were likely to be “so close to zero that whether it’s positive or negative will be touch and go.”

A Morgan Stanley report released last week said Peru’s economy, while by no means thriving, would still best other economies in the region. Via Bloomberg:

Peru’s economy probably will be the only one of the seven economies tracked by Morgan Stanley in the region to expand. It may grow 0.9 percent, the bank said.

Finally, The Economist has gone ahead and labeled Peru’s economy outright “Recession Proof.”

Peru’s growth has exceeded that of most other countries in the region during the last seven years, driven by high global minerals prices and expanding output from the natural-resources sector, including from the huge Camisea natural-gas field. In 2008 only Uruguay’s spectacular rate of growth of 11% eclipsed that of Peru. Yet all economies have been slowing since the latter months of last year in response to deteriorating external conditions, a tightening of credit, and more cautious consumers and investors. Many will slip into recession this year. Peru will not be one of them.

So, why is everyone so bullish on Peru? Prices and demand for its minerals – 80% of Peru’s exports – have fallen off precipitously in the last year. Domestic consumption is down; unemployment up. What gives? The Economist offers an explanation:

Nonetheless, with sound public finances and a still-substantial cushion of international reserves, the Peruvian authorities are in a strong position to provide a significant counter-cyclical boost to the sharply decelerating economy. An aggressive fiscal stimulus plan will cushion the blow of an expected contraction of private investment and slowing private demand growth. Most of the government spending will go to infrastructure projects, the building of low-cost housing and other social programmes. Also, the central bank has been easing monetary policy, and began a cycle of interest-rate cuts in February.

Sound familiar to another world economy readers of this blog may be familiar with? Indeed, the bedrock of Beijing’s plan to achieve its all-important 8% GDP growth this year is largely composed of similar strategies for dealing with the crisis (ie. infrastructure and social program spending, monetary lever-pulling, etc). Both countries came into this year with a good amount of money in their reserve arsenals following years of open foreign investment policies and booming export growth. Both countries have been GDP all-stars of their respective regions; so much so that, a mere one year ago, slowing galloping inflation was the first priority of both Beijing and Lima.

China, as Peru’s second-largest buyer of minerals (the backbone of Peru’s economy), will play a big part in how badly the South American country gets hit by the crisis. Though prices of copper and iron have fallen, as has the current demand for them in China, this has also seemed to whet the appetite of Chinese firms looking for overseas investments. Last month, for instance, while most mining companies around the world were scaling back their investment projects and cutting costs, Chinese mining company Shougang Hierro Peru announced a US$1 billion expansion plan for their iron-ore procession plant in southern Peru.

I’m hesitant to label any country’s economy “recession proof” in the current climate, but China’s undiminished interest in Peru – from selling tractors to mining copper – can only bode well for the Andean country’s chances this year.

Image: bitquill.net

The Jamestown Foundation, a Washington DC think tank , has published a very good backgrounder on China and Latin America by R. Evan Ellis. Ellis is an associate with Booz Allen Hamilton and author of the forthcoming book China in Latin America: The Whats and Wherefores, to be published next month. Read his 2008 statement before the US House Committee on Foreign Affairs on China and Latin America for more proof that the guy knows his stuff.

The article begins in 2004, with Hu Jintao’s visit to Santiago, Chile for that year’s Asia-Pacific Economic Cooperation Forum (APEC) summit. Since then, China has burst onto the Latin American scene: bilateral trade has increased to US$102 billion by the end of 2007 from US$10 billion in 2000, three free trade agreements have been signed, and multi-billion dollar Chinese investment deals in commodities are now common place – as have official government visits between the two regions. China has wooed countries like Costa Rica to switch diplomatic ties away from Taiwan, and it has joined the Inter-American Development Bank. Military ties have quietly grown as well.

The article rightly points out that China and Latin America’s relationship has matured beyond simply commodities trade. Latin America has been and will remain a growing destination of Chinese manufactured goods.

As factories in the PRC produced more items and Latin American traders became more sophisticated in dealing with those factories, China has complimented its offering of labor-intensive manufactured goods such as clothing, toys and footwear with a broad selection of Chinese motorcycles, cars, heavy machinery, appliances, and consumer electronics.

But, when it comes to Latin American goods entering the Chinese market, things seem to be going less-than-swimmingly. Latin America’s retailers face the same trade balance headaches that foreign countries have had with China since the Opium Wars: What can we sell China in return for all that we buy?

Beyond commodities, select Latin American companies such as Grupo Modelo, FEMSA and GRUMA have made some progress building markets in the PRC, selling recognized brand name products to the growing Chinese middle class … Nonetheless those governments and producers have discovered that despite such efforts, traditional products such as coffee and fruits have not sold well in the PRC. In addition to issues of Chinese tastes, these perishable products and the labor required to harvest them makes them uncompetitive against closer, lower-cost producers such as the Philippines.

I’m a bit surprised to hear that the makers of Corona, Negra Modelo, Tecate and Dos Equis are making “some progress” in China given their products really suit a type of food largely absent on the mainland (ie. Mexican). On top of that, I’ll add that a friend/restaurant owner in Shanghai once told me that buying fake Coronas cost him about a third the price as real ones. His advice: Save your money and order Tsingtaos, because you never know.

I first met Roxana a month ago, on a stuffy Saturday afternoon at the Beijing Centro Cultural in Lima’s Lince district. Roxana stood out in the crowd of mostly teenagers and college students who were listening to two Peruvian students talk about their semester at Peking University. She and I got to talking – her Mandarin colored with a strong southern accent – and after an hour or more of listening to her stories, I joked that she had better get started writing her memoirs. She smiled and shook her head.

“If you don’t, then I’ll have to do it, but in English. In fact, I’ll invite you out for dinner and you can tell me your life story,” I said.

“It will take a lot longer than one day,” she replied.

Though Roxana was born in China’s southern Guangdong province, she traces her connection with Peru to her paternal grandfather. He moved to Lima as a young man, worked for a few years in a small shop in Chinatown and returned to China to raise his children there. “He wasn’t going to stay in Peru; he wanted them to have a Chinese education, speak Chinese.”

Roxana’s father had similar ideas, and family’s members didn’t stray far from home. In her late twenties, during the Cultural Revolution, Roxana worked as a middle school math teacher at the same school she had attended as a student fifteen years earlier. She found the work mindless, but there was nothing to be done about it. With China’s Reform and Opening policies taking hold in the late 1970s, Roxana, still unmarried in her 30s, started thinking about her grandfather and his time in Peru. In November 1981, she flew into Lima’s Jorge Chávez International Airport with her younger sister.

Roxana didn’t speak any Spanish, but through the city’s Chinatown network, she found work as a receptionist. And then, with a bit of the language under her belt, she got work at a Chinese newspaper office. Within three years, her Spanish language ability was good enough for her to help translate and edit a book written about Qi Gong, written by a martial arts instructor named Alex Li Chang, also from Guangdong, who had come to South America to teach and popularize Chinese martial arts. The book project went well: the book was published, and the two married in 1984.

Roxana and Alex had a son, and the couple had ten good years together. Alex often traveled around South America for martial arts competitions and demonstrations; Roxana, like her grandfather, found work a small shop in Chinatown and watched after their son. “I’m very lucky when it comes to business and work, but very unlucky when it comes to love.”

In 1994, while he was in Argentina, Alex went to the hospital with cerebral hemorrhaging, likely the culmination of years of head injuries. Roxana flew to Buenos Aires and found the situation was not as grave as she’d imagined. Alex flew back to Guangzhou for treatment and called her in Peru, telling her that he could barely recognize the city he’d left years ago. Roxana’s husband died in 1997.

She shows me his picture from the inside jacket of La Energia Vital y La Fuerza Interna – the book that brought them together. He’s thin with a flat-top, in a white gi, standing battle-ready. She slips the book back in its plastic sleeve and we both make intimations to leave the restaurant. She brightens and tells me that she’s started teaching Chinese to some Peruvian students on top of her six-day-a-week job at the shop. She’s tired after her twelve-hour shifts, of course, but she enjoys it. “It’s always good to be busy,” she says.

I nod and smile, thinking of the dozens of questions and clarifications I still have for her, but which we don’t have the time for now. We shake hands and walk outside. I head left, she right.

San Joy Lao, a Chinese restaurant in the heart of Lima’s Chinatown, gets my award for most Orientalized chifa in the city. Chifas, or Chinese restaurants with Peruvian characteristics, are ubiquitous around the city and catching on in upscale markets abroad as well. The word comes from a transliteration of 吃饭, “to eat”, which Chinese people have been doing in Peru for 150 years. When you ask a Peruvian taxi driver his thoughts about Chinese people, he will likely start talking about chifas.

Chifa food is generally cheap and good. The decor in most restaurants is on par with Chinese restaurants just about anywhere else on earth: reprints of rural landscapes and calligraphy, red lanterns, bottles of soy sauce on wooden tables, a wall calendar, a TV crammed in a corner. To my palate, the food at most chifas tastes more similar to Chinese restaurants in the US than in China (ie. more meat, less vegetables, sweeter, less oily, and, of course, fortune cookies).

San Joy Lao aims a bit higher in its imitation of all things China. Not only do they have bored-looking hostesses standing around in qipaos like China, but there’s erhu music as well. If it’s your birthday, the staff come to your table singing: “祝你生日快乐, 祝你生日快乐!”. The food is very good, but a bit pricier than your average hole-in-the-wall chifa. You’re paying for the ambience.

When I walked by the restaurant yesterday, I noticed a new addition: a banner celebrating Sino-Peruvian friendship. It reads: “159 years of immigration from China to Peru. 25 years of brotherhood between the cities Beijing and Lima.” The latter figure refers to 1983, when Lima and Beijing became sister cities.

And then, above the text, there is a high-quality Photoshopped image of – what else – the Great Wall winding seamlessly toward the ancient Incan city Machu Picchu. Ah, the harmony makes you hungry, doesn’t it?