Double Handshake

China and Venezuela signed a US$7.5 billion agreement yesterday that will include constructing a 468-km railway in the South American country. A Venezuelan official said the project, to be completed by 2012, will be the largest non-oil investment project in the history of the country. Reports of the deal cite Chinese newspaper Global Times as breaking the story, but I haven’t been able to track it at either the paper’s English or Chinese language site. New portal Sina has a Chinese language version here. Here are some details of the deal from a translation done at China News Wrap:

According to Russian news agency reports on 31 July, Venezuelan government officials stated in interviews with RN Television that the Tinaco-Anaco railroad would be 468 kilometres in length, and link together agricultural and oil-producing areas in two different states. The project is expected to be completed within 40 months. The railroad is designed for speeds of 220 kilometres per hour, and will carry 6 million passengers each year, and 10 million tonnes of goods.

Venezulan government officials said of Chinese investment in the railroad project that this is the largest investment project in the history of Venezuela outside of the petroleum industry. Venezuela and China will jointly create Latin America’s first railroad factory and railcar manufacturer. This will create 7500 jobs for Venezulans, and 100 Venezuelan engineers will be travelling to China for study.

I’m not sure if investing in a railway that connects oil-producing areas is entirely “outside the petroleum industry,” but this is still a significant development.

Other sources quote Venezuelan Public Works Minister Diosdado Cabello as saying the project will use “Venezuelan iron and Chinese technology,” to build train wagons, sleeper cars, switches and rail-welding equipment. Both countries will set up a series of joint ventures for the project, with Venezuela holding a 60% stake and state-owned China Railway Engineering Corporation holding the remaining.

As I mentioned last week, for all the press China-Latin American trade figures have gotten in recent months, China still lags far behind the US when it comes to investment dollars in Latin America – only US$22 billion by China firms in 2007, compared to US$350 billion by US firms. If this railway deal is a sign of things to come, it may not be long before China begins closing this gap as well.

Ever since China surpassed the US to become Brazil’s top trade partner earlier this year, the table has been set for a media-inspired heavyweight bout between the Asian country and the US for dominance in Latin America. Judging by the headlines, China is landing jabs and hooks left and right.* Take a McClatchy July 8th article, “China makes its move as the US falls back in Latin America,” for example:

China has moved aggressively to fill a vacuum left by the United States in recent years, as the U.S. focused on wars in Afghanistan and Iraq and the global economic crisis sapped its economy.

“China is rising while the U.S. is declining in Latin America,” Riordan Roett, a professor of international relations at Johns Hopkins University, said by telephone while visiting Sao Paulo. “China is all over this region. They are following a state-driven policy to expand their peaceful presence.”

It’s a fine and well-researched article, filled with good examples of China’s growing economic, political, military and cultural influence in a number of Latin American countries. In economic terms, China’s soaring trade numbers (largely reflecting Latin exports of raw commodities) over the past decade speak for themselves: US$10 billion in bilateral trade in 2000 compared to US$140 billion last year.

Ten-fold growth is stunning, but how does it compare to the champ? US-Latin American trade last year was US$560 billion, four times more than Sino-Latin trade. European-Latin American trade stood at US$280 billion, twice as much. In addition, with foreign investment in Latin America, China will not pass the US anytime soon. US companies invested US$350 billion in Latin America and the Caribbean in 2007, compared to only US$22 billion by Chinese firms.

These remaining gaps, coupled with the US’s still far-dominant technological and innovative advantages are why Miami Herald columnist Andres Oppenheimer cautions us: Don’t believe all the China-Latin America hype:

The latest figures showing that China is emerging from the global crisis sooner — and more vigorously — than anticipated is triggering speculation that China will soon overtake the United States as Latin America’s top business partner. Sounds very interesting, but don’t bet on it

…

Many economists say that’s not going to happen in their lifetimes. While China will continue to be a major Latin American economic partner, the latest trade figures have to be taken with a grain of salt because they are distorted by the sharp drop in U.S. imports due to America’s worst economic crisis since the 1930’s Depression, they say.

Oppenheimer gives a sprawling list of other reasons for US’s likely business dominance in Latin America for the forseeable future. Average incomes in China need 47 years to catch up with those in the US. Asia’s combined military budget will only equal the US’s in seven decades. American inventors filed 92,000 patents last year, while Chinese inventors issued only 1,225, a fact that presumably means the US will maintain tech-business advantages over China for a long while. China’s population is aging as well, which will negatively impact its economic prospects in the coming years.

I personally find it refreshing that Oppenheimer takes a slightly contrarian position on China’s Rise, but most of his arguments have little to do specifically with the country’s business prospects in Latin America. I also tend to shy away from arguments involving China needing x-amount of time to close any kind of economic or social gap; the country tends to beat projections.

Curiously, what I find to be the most compelling argument against China’s unbridled trade growth in Latin America is absent from Oppenheimer’s laundry list: China’s trade relationship with Latin America remains very one-dimensional (skewed toward commodities and natural resources) and thus vulnerable. China’s hunger for oil, iron ore, copper and soya is boundless now, but who’s to say which resources will be hot in ten years, and at what prices? The astonishing ten-fold trade growth from 2000 to 2008 coincided with a huge price increase in a number resources that were central to the trade relationship, and this will not always be the case going forward.

Regardless of who you have your money on, if the US and China are locked in for a title bout over Latin America, we’re only in round one.

*In some sense, this whole boxing metaphor is dumb, and I’m using it half-ironically. The two trade relationships are not mutually exclusive, and overall increased trade is good for everyone in a global economy.

One of life’s joys is the Wall Street Journal’s front-page middle column,* often quirky news stories ranging from belly-dancing to gator wrestling. Yesterday’s gem was “For Sale: One Leopard-Skin Rolex and Maybe Some Frozen Sharks,” a piece about Mexico’s Asset Administration and Disposal Service (SAE), which is tasked with getting rid of the emerald-encrusted pistols and albino tigers from the estates of Scarface-esque drug lords when they are arrested.

The article spends a number of paragraphs looking at the case of  Zhenli Ye Gon, a Chinese-Mexican businessman (born in Shanghai, Mexican citizen since 2002) who was arrested in the US in 2007 on charges on producing a precursor to methamphetamine. Ye stands accused of acquiring crystal meth ingredients through his pharmaceutical company and has been linked to the Sinaloa Cartel in Mexico. However, in January of this year, US authorities were getting ready to drop charges of Ye for lack of evidence. Ye’s lawyers are fighting to keep him from being extradited to Mexico to face similar charges.

When Ye was arrested in 2007, what did SAE find at his Mexico City house? Not as exciting as underground hot-tub lairs and exotic menageries, but lots of cash. 207 million US dollars; 18 million Mexican pesos; 200,000 euros; 113,000 Hong Kong dollars; Mexican gold bullion and “a great amount” of jewels. The picture at right is only a portion. It was hidden in a secret room behind his dressing-room mirror. Ye has claimed most of that money is part of a political party slush fund. Versace dinnerware, Baccarat wine glasses and Lalique Champagne flutes were still in boxes, having recently been shipped there.

So, how is the estate being dealt with since Ye’s arrest? From the WSJ:

His (Ye’s) lawyers also say they are pleased with the SAE’s stewardship of Mr. Ye’s property, which their client can recoup if his name is cleared. But they are less happy that the Mexican government already spent the $205 million seized from him, as is permitted under Mexican law.

The globalized drug trade can put SAE agents in tricky diplomatic situations. When a delegation of Chinese investigators interested in the case came to Mexico, Victor Aznar, a senior SAE official, said it was all he could do to keep the Chinese from pocketing dragon statuettes and other objects during a tour of the house.

“They kept pleading with me that it was evidence they needed to take back to China,” says Mr. Aznar. “I politely told them, ‘no.’ ”

Nice. “Well, you see, we need this jade dragon as, um, evidence because Mr. Ye was once a citizen of our country, and China is directly affected by a case involving an arrest of a Mexican citizen in the US.” I don’t get it. And since when is it legal for the Mexican government to spend your US$200 million before being found guilty of a crime, I wonder? If he is acquitted, the man gets to keep his dinnerware and dragon statues but not his money?

*Now more of a below-the-fold teaser under Murdoch, but same principle.

Images: WSJ, Wikipedia

Here’s an article from Fortune magazine published late last month on Chinese telecom suppliers making inroads in Latin America I’d meant to link to earlier. The gist: Chinese companies Huawei and ZTE are moving into the Latin American market following their success offering low-cost cell phones in Africa. Both companies have done very well in the latter continent – Huawei now has a 29% market share of the phone-company gear industry there, nipping at the heels of market leader Ericsson, with 30%. ZTE, an 11-year-old company, is now the world’s six-largest handset seller.

Indeed, on the streets of Lima, the cheapest cell phone model belongs to ZTE, which goes for about 80 soles (US$27) if memory serves. Like so many Chinese-made products, low-price usually translates to questionable quality. Buying my handset there, I remember the sales girl convincing me that I should spend the extra US$7 to buy the second-cheapest handset, a Nokia, which was much better quality, she assured me. It will be interesting to see how the company fares offering its up-market ZTE i766, which boasts mobile television.

The article discusses one major advantage that both Huawei and ZTE enjoy that other foreign telecom companies don’t: a well-connected, deep-pocketed government:

Huawei and ZTE benefit from the fact that the Chinese government holds stakes in dozens of local phone companies. It is not surprising that these telcos increasingly buy much of their infrastructure from homegrown companies. Financially, China’s telecom suppliers also benefit (like some struggling U.S. companies today) from tax rebates and R&D grants. But what really irks rivals are the government’s low- to no-interest “loans” that needn’t be repaid, and the deep discounts local companies get on the energy and raw materials they purchase from other Chinese companies. According to public filings, this year ZTE received a credit line from the government of nearly $15 billion. Beijing bestowed $10 billion on Huawei in 2004.

Chinese blue chips from different industries also offer “bundles” to emerging-market countries: Buy our phone gear and we’ll source your raw materials. “China coupled a Huawei, oil, and magnesium deal in an African package,” says James Mulvenon, author of a famous Rand report on Chinese defense electronics and technology. “Cisco can’t compete.”

Will we see similar telecom, oil and copper “bundles” between China and Latin America in the near future?

Image: unplggd.com

The lede paragraph of a July 5th Financial Times article (subscription needed) on China’s growing influence in Latin America:

When Hugo Chávez first met Barack Obama at the Summit of the Americas in April, the Venezuelan leader could not resist pressing one of his favourite tracts into the US president’s hands. Eduardo Galeano’s Open Veins of Latin America: Five Centuries of the Pillage of a Continent, a staple of student radical literature, tells the story of a continent that has long seen itself as the victim of foreign exploitation. Mr Chávez, though, may have given the book to the wrong leader. It should have been given to the Chinese.

It’s a nice conceit. I should know, I used it for my April 20th post: Did Chavez give ‘Open Veins’ to the wrong president? In fact, at the risk of a lowly blogger sounding unduly self-important, am I the only one that finds the coincidence suspicious?

Last November, just before 2008’s APEC conference in Lima, Peru, China made news by releasing its first policy white paper describing its overall strategy for engagement with Latin American and the Caribbean. It’s a lengthy and far-ranging document, with sections devoted to political visits, trade cooperation and even sports exchanges. One finishes this document thinking: China’s top priority in Latin America may be procuring natural resources, but it has much more planned than that.

What about the reverse? Does, say, Brazil have an overall strategy for engaging with China? Has it been codified in its own white paper? Are Brazilian students flocking to Chinese language programs in Sao Paulo to gain a leg-up for the explosion of Chinese investment that’s to come over the next twenty years? The answers are all no. From Reuters:

China and Latin American specialists speaking at a conference in Sao Paulo said China sees Latin America as vital to its own future energy, food and economic security, but that the region had been slow to develop China policies.

“Latin America is acting toward China’s expansion in the world in a reactive, disorganized or ad hoc fashion,” said David Shambaugh, professor of political science at The George Washington University.

“When I asked Itamaraty (Brazil’s foreign ministry) about its strategy on China, I got blank stares. There is no strategy.”

Shambaugh, who is very well-respected on China-Latin American relations, has talked about Latin America’s unpreparedness for China before. Countries like Brazil and Argentina granted China market economy status years ago, which has created problems as Chinese manufactuers undercut local producers. “It’s almost as if these (countries) didn’t do their homework,” said Shambaugh. “The United States, Europe, Japan and Australia did not grant China market economy status.”

This alleged lack of strategy includes language. The article notes there are only two serious Chinese language studies programs in all of Latin America, one in Mexico City, the other in Buenos Aires. It is telling that in Latin America, the biggest development in Chinese language learning has come from China itself, in the form of its promoting Confucius Institutes abroad. These centers, which promote Chinese language learning and culture, are springing up throughout Latin America and the rest of the world. As of May, 328 institutes had been established, including a new one at Catolica University in Santiago, Chile.

I’ll add tourism to this list as well. Traveling in Peru, Chile and Argentina, I often asked tour operators about the prospect of Chinese tourists. Many of their eyes lit up at the prospect of a billion customers. Like many countries, Latin American countries are anticipating a wave of newly monied Chinese tourists to arrive in the coming years.

Yet, aside from some enterprising Chinese and Taiwanese businessmen I met in Lima, no one I spoke to was prepared to handle Chinese-speaking tour groups. Nearly no one in these tourism industries speak the language or understand the, um, unique demands of the Chinese tourist (hot water thermoses, slippers, casinos, shopping). It seems that when the tourism wave hits Latin America, it will be Chinese-owned (or ethnically Chinese-owned) tourism companies that will cash in.

So, how long will Latin American countries wait before they formulate their own China strategy?