Double Handshake

I recently interviewed Peruvian chef and restaurateur Eduardo Vargas for an upcoming story in China Economic Review magazine about food at this year’s Shanghai Expo. Vargas has lived in Shanghai since 2002 and launched a number of restaurants around the city with lots more planned.  One of Vargas’ upcoming projects is that he will run the Peruvian Kitchen restaurant at Peru’s pavilion for the Shanghai Expo. I only used a few brief quotes from Vargas for the story, but the full Q&A transcript is fairly interesting.

Q: What do you have planned for the Peruvian pavilion?
A: The restaurant will be a representation of the culinary traditions in Peru now. Peru is now the most trendy, most fashionable food in Latin America at the present moment. What the Spanish are in Europe, the Peruvians now are in Latin America. In Spain, you have many famous chefs doing modern cuisine, and there is a similar situation in Peru in Latin America. All the winners of best restaurants of the year in Latin America for the last three or four years have been Peruvian restaurants. Peru has very rich influences from Africa, from China, from Japan, from Europe, from the Andes. The result is very interesting food. We have a huge coast, so we have a lot of seafood. So, a lot of food is based on that. So, the food we’re going to serve at the Expo is a combination of that. We’re starting with our national dish, ceviche.

Q: Are you planning on serving all the classic Peruvian dishes like ceviche, causa, lomo saltado, anticuchos?
A: Yes and no. We will use Peruvian ingredients, Peruvian flavors and Peruvian techniques, but served in a contemporary way. So, we will use rojoto or ajia marillo like before, but maybe we will make a foam from it. We will do a causa, but will add a contemporary twist on it. We will present it as it would be in a contemporary restaurant in Peru. In a trendy restaurant in Peru, you don’t eat what mama and papa cooked 20 years ago. I’m bringing over five young star chefs from Lima to Shanghai in the next two weeks, all Cordon Bleu-trained and who have been working with the best chefs in Peru. I went to Peru to handpick them. My good friend (well-known chef and restaurateur) Gaston Acurio introduced me to two young chefs from his restaurant Astrid & Gaston. (This is possible because) in Peru, chefs are very united, and we have a common goal, to promote Peruvian cuisine, to make it as well-known as Mexican food around the world. We believe our food is better than Mexican, but unfortunately Mexican food is more wide-spread, everybody knows it. The only way to do that is to help each other to promote where ever we can, and the Expo is a perfect opportunity.

I had a chance to bring these young chefs over to China and work for me for a couple years. They will live in China, and we will eventually have five-star chefs from Peru working in Shanghai for awhile.

Q: So, the five chefs will come for the Expo and stay in China afterward?
A: Yes, they’ll stay for a couple years. I want to use them as much as I can.

Q: Are you making changes to the menu to adapt to Chinese tastes or the market?
A: No, not really. At the Expo, I believe each countries’ restaurants want to demonstrate what happens and how food is from their home. Therefore, our food will be authentic. We have many dishes in Peru that are influenced from Chinese dishes in the past. Lomo Saltado is basically a stir fry of beef that Chinese brought with them to Peru 100 years ago and then added some Peruvian ingredients. Now it’s a classic Peruvian dish. Another dish is a sort of stir fried rice using Peruvian chilies with it and a lot of seafood. We’re going to make this fried rice Peruvian style. I know it’s going to be acceptable to the local market.

Q: Are you sourcing ingredients from China or importing from Peru?
A: The main ingredients are coming from China. We’re importing about 3,000 kilos of chiles, the corn, the potatoes and some other important ingredients. The meat and the vegetables are all coming from China.

Q: Are the logistics difficult? Have you had issues with poor quality on the China side?
A: I’m doing my own importing. I flew to Peru, found the suppliers and bought them and now it’s in the boat. I already have a few restaurants in China and already work with suppliers, so it’s all right. Today, the situation is much better than a few years ago. Now, the standards of products in China are now at a standard level.

Q: Is setting up a temporary restaurant much different than setting up a permanent restaurant?
A: If I hadn’t previously opened restaurants in Shanghai, then I would have big troubles. But now, I have everything. I already know how to set up places. I don’t have problems because I already have years doing this in China, but I believe I believe a lot of restauranteurs coming to China for the first time are having a hard time. I’ve been receieving phone calls from the other pavilions asking me to take over their pavilion restaurants. But I won’t do it because there are too many regulations for the Expo. So, we’ll do the Peruvian pavilion and that’s it.

Image: Shmag.cn

You may remember my sneering at the phrase describing Latin America as “the US’s backyard” a year ago. Well, now, courtesy of a recent Bloomberg article, there’s now some competition. The story is officially about Hu Jintao’s current visit to Brazil, but it’s really a News Story that we shall undoubtedly come to loathe in the coming years: BRIC-clashes. The story has some truly venomous interview quotes describing the high-level meeting as “sleeping with the enemy” and comparing China’s trade with Brazil to Portuguese colonialism in the 17th and 18th centuries. Most importantly, we get lots of territorializing.

When Brazilian President Luiz Inacio Lula da Silva hosts his Chinese counterpart today, he will welcome a leader whose economy is growing faster than his own — and whose exporters are outstripping Brazil in its own backyard.

So, Latin America is Brazil’s backyard. Well, that’s a nice twist on the usual “US’s backyard” at least. Then again, if  you’re being “outstripped” in your own backyard how long can it really stay yours? I wondered. This was cleared up later in the article:

“The world is China’s backyard and Brazilians shouldn’t be so hyped up about it,” Jim O’Neill, London-based chief global economist for Goldman Sachs Group Inc, said in an interview. “There’s a natural symbiosis in trade between the two countries despite Brazil’s legitimate desire to be a manufacturing powerhouse.”

I read this. Then, I read it again. It still doesn’t make total sense to me. I’m not sure if this is a case of sloppy editing, if he was quoted out of context or if Jim O’Neil (who coined the term BRIC in 2001, the article points out) was just speaking bombastically without meaning. I’m guessing O’Neil was arguing that since China exports more goods to other Latin American countries, Brazil “shouldn’t be so hyped about it” because it is no different than any other country whose exporters are being undermined by the Chinese.

Trouble is, the paragraphs leading up to the quote are about China-Brazil trade and investment. Also, the “symbiosis” second half of the quote seems to be about the dynamic only between the two countries – ie. Brazil produces oil and China consumes it, etc. This reading makes sense if you remove the bit about “the world is China’s backyard” first. In other words, “Don’t get worked up Brazil, in fact your trade relationship with China is largely symbiotic.”

But, what about the message: “Relax, Brazil, because the world is China’s backyard and you have a symbiotic trade relationship with it,” makes any sense – logically, geographically or economically? What am I missing?

Don’t blink or you’ll miss the China-Argentina “soybean oil spat” playing out now, which was first reported last week after China stopped approving import permits for Argentinian soy oil imports, one of the countries’ most important trade products. At first, Chinese officials blamed malfunctioning computer systems for the canceled orders. Then, unofficial reports said the Chinese found residues of hexane, a solvent used in the milling of the crop, and blocked imports on health grounds. None of this fooled the wily press, however.

News reports of the “soybean oil spat” concluded that the move was nothing but the latest governmental brinkmanship in an ongoing low-level trade dispute between the two countries. After all,  Argentina is currently carrying out an anti-dumping investigation on Chinese goods like textiles and steel pipes. Last year, President Kirchner imposed new import tariffs on Chinese manufacturers to stimulate “healthy competition” between cheap Chinese imports and local companies that have been undercut. In turn, China – which, let’s face it, wasn’t going endanger its petrol oil imports from Argentina – crimped soybean oil imports this month in retaliation.

It’s a compelling explanation, and I agree that it plays a role. But it doesn’t tell the whole story.

A less-reported angle to the China-Argentina soybean oil trade dynamic is the fact that China itself is dealing with a record stockpile of edible oil, not only soy oil, but palm oil and rapeseed oil as well. On top of this surplus, China has been busy stockpiling both domestic and imported soybeans, which it sources from the US and Brazil in addition to Argentina. China can then crush the beans in-country to make its own soy oil, an industry that is currently operating at just half its 94 million-tons-per-year capacity.

In other words, with so much edible oil already sloshing around China, its soy oil imports from Argentina might have been curtailed anyway.

Still, though China’s edible oil stockpile can soften the blow of halted Argentinan imports, it can’t come close to meeting domestic demand by itself. Even if the country does eventually ween itself off edible oil imports, Argentina will still be there to supply the raw commodity. From the Reuters report:

China has not clamped down on soybean imports from Argentina, from where it is estimated to have bought some 2 million tonnes for April-May delivery, as stopping beans would hurt its domestic crushing industry.

“They can’t touch soybeans because China has become too dependent on soy,” the Singapore-based trading manager said. “The factories will be shut if you restrict beans, but they can use bean oil to settle scores as they have enough stocks.”

Analysts and pundits are divided on how long the spat will last. I predict a prompt fizzle to the whole thing in the next few months as China works through its domestic supply. China and Argentina are the world’s biggest consumer and producer of soy oil respectively. The economic pressures are too great for this to get out of hand.

Image: Naturea2z.com

In an effort to clean out my DH story folder in one fell swoop, here are some recent developments I haven’t gotten around blogging about:

First and foremost, for anyone looking for a good China blog in Spanish, look no further than ZaiChina (h/t to Danwei for the heads up). Launched this month, ZaiChina seems to have a very good sense of life on the ground in Middle Kingdom. Article translations, book reviews and pop culture trend-tracking. Here’s hoping this promising blog keeps up the good work.

Way back in the aftermath of January’s earthquake in Haiti, ChinaHush (another great bridge blog) translated a story from Chinese newspaper Southern Weekend about a group of illegal Fujianese immigrants en route to the US who were caught on the island on their stop over. While not about Latin America per se, it’s a eye-opening read on the underworld of “snakeheads” and human cargo network that runs through Mexico and other LA countries as well.

China and Peru officially kicked off their free-trade agreement earlier this month. Officials expect bilateral trade to double to US$15 billion. I’ll keep looking for Peruvian “exports of fresh fruit like grapes, mangoes, citrus fruits and avocados,” on produce stands in Beijing. Meanwhile, China and Costa Rica are in the final approval phase of their own FTA.

There has also been some negative press on China’s economic impact in Latin America of late. The World Bank and International Development Bank said Latin America’s heavy reliance on China as a commodities buyer is full of risk and instability, and advised Latin American economies to diversify. Asia Times published a similarly themed piece last month on Brazil’s trade dealings with China. Brazil’s manufacturing companies have been hit hard by cheaper Chinese-made goods. Jose Augusto de Castro, vice president of the Brazilian Foreign Trade Association, went as far as to call Brazil’s growing trade relationship with China “a step backwards.”

For even more economy action, Latin Business Chronicle published a long, comprehensive look at China-Latin American trade and investment in 2010: Latin America: Year of the Panda?

There have been a few billion-dollar deals signed between state-owned companies as well. China’s largest utility company State Grid announced a 50-50 joint venture with Canadian mining company Quadra to develop copper mines in Chile. State Grid is the largest consumer of copper in the world, and the move gives it greater control over the raw material it desperately needs for power cables. Then, earlier this week, CNOOC, China’s largest off-shore oil company, said it would take a US$3.1 billion 50% stake in Argentinean energy firm Bridas Corp.

Finally, a bit of trivia. What percent of Peru’s current population has origins from China? Answer: 15%, which is the highest percentage of all Latin American countries. All it took was 160 years of immigration. Go figure.

Video: lafloripondio

At the beginning of the new year, I was drawn to headlines touting China “opening its doors to ethanol imports.” The government had decided to drop its import tax on ethanol – a sugar-based biofuel typically used in vehicles – from 30% to 5% starting January 1st.

In December, the two countries’ state-owned oil and gas companies PetroChina and Petrobras signed an MOU to build ethanol production projects in Brazil. The project was specifically aimed at exporting ethanol from Brazil to China, though no numbers were given.

Was China getting more serious about developing its biofuels industries? Would Brazil, the world’s biggest ethanol success story, have a giant role to play? I smelled a scoop.

For Americans like myself, the word “ethanol” brings to mind the US’s controversial foray into corn ethanol production, which began in earnest about 10 years ago. I’m not too interested in rehashing the arguments and data for and against the corn ethanol industry in the US (though, file me under ‘naysayer’). However, Brazil’s sugarcane-based ethanol industry (second to the US by production but far more sustainable, carbon-efficient and wide-spread) is probably worth a paragraph, if not a glance at its Wikipedia page.

Brazil, with abundant land resources and heavy rainfall, is an ideal place for growing lots of sugarcane. It is grown sustainably and not on deforested Amazon land. Sugarcane’s higher sucrose content makes it much more efficient than corn, and government subsidies were phased out completely in the 1990s. Cars (92% of new ones) in Brazil run on a mix of ethanol and petrol. The system has been invested in and promoted for about 30 years. By pretty much all measures, it works.

China’s ethanol industry also has its roots in the 1970s and 1980s, from grain overproduction in certain years. With tons of rotting grain on their hands and no good way to store it, the authorities decided fermenting it and turning it into fuel was a feasible option. Things progressed slowly but steadily (China was even a net ethanol exporter in 2006) until five years ago when the use of food crops for ethanol was banned because of rising food prices and concerns over scarcity.

The same fuel-vs-food debate that made ethanol so contentious in the US had delivered a major blow to China’s industry.

I recently interviewed Rob Earley, an expert on biofuels in China for iCET, for my day job. He brought me up to speed on China’s present ethanol industry (and the serious structural challenges impeding its development). You can read the full interview here (need to first register for free). Here is the exchange relevant to the Brazil-China ethanol connection.

Q: As of the first of the year, China lowered its import tax on ethanol. Do you expect this move to affect the ethanol landscape in the country?

A: You have to look at the fundamental question: Why is China interested in biofuel? The answer, at least in my experience, is completely based on energy security. If they’re importing ethanol, it doesn’t improve their energy security greatly considering that the (world’s) supply of ethanol is probably more limited than the supply of oil at present. In terms of diversifying sources of energy, it’s not a bad thing. But realistically, the biggest source of ethanol is from sugarcane in Brazil, and if China and Brazil aren’t getting along, that supply gets cut off. Since there is no policy push for low carbon fuels in China right now, then there is no carbon rationale for using biofuels in China. I don’t think the import tax is going to make a big difference, but anything is possible.

So, this begs the question: Why do it, then? Earley said he couldn’t offer an explanation.

It’s worth remembering that China and Brazil are already closely intertwined when it comes to energy. Last May, China loaned Petrobras US$10 billion to secure a steady supply of oil. The Asian country also overtook the US as Brazil’s largest trading partner for the first time the month previous. Ethanol will probably never replace oil as a primary fuel source in China nor will it likely even surpass oil in importance in the China-Brazil trade relationship. However, it’s not impossible to imagine ethanol trade significantly changing the two countries’ current energy trade relationship (oil produced in Brazil, exported to China). Consider the following:

Diversifying energy sources – As Earley mentions above, it is in China’s interest to diversify its energy sources. Yes, importing ethanol from Brazil does not change China’s dependence on a foreign country for energy, but ethanol does offer much better price stability.

The table is set – The same energy giants (PetroChina and Petrobras) that are responsible for Brazil-China oil trade would be the ones taking on ethanol. Ramping up ethanol trade would not require new companies cutting in on entrenched state-owned interests. Ethanol would simply become a new stream of business for those already involved.

Oil already ties the two together – It’s true that China (and all countries) would rather not depend on foreign countries for energy, but the reality is China has little choice right now. Compared with China’s other oil suppliers (the Middle East, Russia, Central Asia, Africa, Venezuela), Brazil looks pretty good stability-wise. If importing ethanol from Brazil could displace some oil imports from, say, Sudan or Iran, wouldn’t this make China’s fuel portfolio a bit more stable, which is the stated goal?

The cars are a-comin’ – The number of cars on China’s roads is set to sky-rocket in the coming decade. If the country is to realize its goal of cutting energy intensity by 40-45% by 2020, it must keep vehicle emissions within reason. Costs for setting up the infrastructure for ethanol-fueled cars would be significant, but would pay for itself economically and environmentally.

Jump-starting things back home – China’s domestic ethanol industry is not dead, mind you. It’s just not a big priority right now. Working closer with Brazil on ethanol could result in China gaining the technology and experience necessary to revitalize its own ethanol industry, which is all but certain to miss its 2010 production target.

Image: Wired

Venezuela is in serious economic trouble. Production of oil – the backbone of the economy – dropped by 400,000 barrels/day last year due to reduced demand. “Indefinite” four-hour-per-week rolling blackouts have begun in big cities as hydroelectric dams have been hit hard by a drought. And then last week, Hugo Chávez announced last Friday he will devalue the country’s currency, the bolivar, for the first time since it was introduced in 2003.

The Venezuelan people are (rightly) afraid that even more serious inflation will set in. Many rushed out last week after the announcement to buy electronics and other durable goods that would hold their value. Merchants raise their prices as a result – the exact opposite effect a currency devaluation should have.

Chávez is not amused. “‘There is no reason for anybody to be raising prices,’ Chávez said Sunday on his national television show. He explained to listeners that the ‘bourgeois’ in Caracas society would plan price increases but that they would fail. ‘People, do not let them rob you,’ he said. ‘Denounce it,’” the Washington Post reported.

But if that approach doesn’t inspire a lot of confidence in the country’s stability, consider this idea:

A shipment of Chinese home appliances will be sold cheaply in Venezuelan government stores to stop speculation by retailers after the country’s currency was devalued last week, President Hugo Chavez said Wednesday.

“A boat is coming from China. It brings refrigerators, television sets and washing machines we’ll be selling at low prices, as we already do with food products in the Mercal chain,” Chavez said of the government-owned supermarkets opened in 2003.

A single appliance-laded boat from China? Well, that should do the trick for country of 28 million people.

Last month, a group of 15-20 gunman attacked a Chinese-owned copper project in northern Peru at dawn, killing three workers and torching 80% of the site. According to news reports filed in the following days, two other workers were still missing. The US$1.4 billion Rio Blanco copper project (bought by Fujian-based Zijin Mining Group in 2007) has been the site of violence and controversy before. In 2005, before Zijin took over, security guards killed one protester and allegedly tortured two dozen more. Those who oppose the mine argue it harms the environment and has a negative impact on local society.

Like the Bagua protests earlier this year, November’s Rio Blanco attack illustrates the major tensions between Lima’s economic and industrialization development plans for the country and some locals who fiercely resist it. Peru’s president Alan Garcia himself is a perfect example – he is lauded by international businesspeople for his open foreign investment policies and reviled at home, with an approval rating of 26%. Chinese companies, who are heavily invested in Peru’s mines, are caught in the crossfire.

Chinese mines in Peru have been targets of violence before, but I would argue the backlash against Chinese companies in Peru have little to do with them being Chinese. It is fast, polluting, large-scale development, and social and environmental upheaval that protesters are lashing out against. American and European energy and mining companies have been targeted as well.

Conflicts like the one in Rio Blanco are about development – about if and how it should happen, and who whose decision it should be.

In China, of course, fast, unconstrained, top-down development is near Gospel – The Gospel of Fazhan (or development). I’m using “fazhan” instead of “development” from here out because the word connotates so much more than new buildings and roads. You hear “fazhan” everywhere in China; it is a mantra, an obsession. Fazhan is progress, a thing to believe in. Fazhan levels are the way you compare countries. Fazhan is tied closely to national pride and unity. There are those who want fazhan and those who don’t know any better.

So note how state-owned newspaper China Daily handled the Rio Blanco attack:

Drug cartel behind Zijin Peru copper project attack

A weekend attack on a copper project in northern Peru that left three dead may have been the work of drug traffickers who want to keep the area undeveloped in order to protect their trade, the head of a business leaders group said on Tuesday

…

“There is no dispute or conflict with the community, so this makes you think that criminal interests are behind it, probably drug traffickers,” said Ricardo Briceno, head of Confiep, Peru’s largest business federation. Police said they were still collecting evidence from the attack.

Big mines tend to bring roads, police and development to areas where those involved in the drug trade want to keep a low-profile.

…

The company and people from the business community say townspeople now support the construction of the mine, though violence has broken out before at Rio Blanco.

The Peruvian government has also struggled at times to win the public debate over the benefits that big mines bring to isolated towns in the Andes.

The article is lifted from a Reuters report filed the previous day, which distanced itself a bit from the all-is-well comments from Briceno. Rio Blanco’s violent history disappears, as do mentions of environmental concerns. Indeed, with a few edits, the article becomes China Daily’s perfect affirmation of the Gospel of Fazhan – everyone welcomes fazhan with open arms except for the criminals.

It is much easier for China’s government to convince its own people that fazhan is a universal aspiration. Again, few of them need converting to the Gospel, and there’s no reason foreigners wouldn’t believe in the same thing. For every protest or attack against a Chinese mining interest abroad, China Daily and Xinhua will be there to dutifully explain that the cause was a few bad seeds at odds the vast majority of supporters.

But how does China sell the Gospel of Fazhan abroad to those who might resist it, to those who don’t share the same values? There is no doubt China will continue transform all of Latin America with its resource-buying and fazhan-leading. This reality is settled by governments, by trade agreements and investment policies.

But if China hopes to get along harmoniously with the Latin American people whose lives are being utterly transformed by all this fazhan, it may be useful to recognize and plan for the fact that not everyone is a believer.

Earlier this month, much was made of US president Barack Obama’s decision to impose a 35% tariff on tires imported from China. In retaliation, Beijing threatened to stop buying US-made chicken, causing the typical hyperbolic media to declare the start of a Sino-US “trade war.”

Of course, nothing of the sort has happened, and almost certainly won’t given the two countries’ mutual economic dependence. However, the unresolved question remains of how much (if any) countries should level the playing field when confronted with surging Chinese imports that undercut local producers. And it is not only a question the US must deal with. In countries like Brazil, Argentina and Mexico, low-cost Chinese imports across a range of goods remain a cause of trade tension.

At least one commentator, Latin Business Chronicle columnist Victor Mroczka, is calling for Latin American countries to consider following president Obama’s footsteps and impose their own “China safeguards,” when needed.

Mroczka, an international trade lawyer, argues that the imposition of what he calls “safeguard tariffs” against China are more effective in that they can be implemented much faster than WTO trade dispute rulings, which usually take years to be resolved (For the record, Latin American countries have initiated over 200 WTO investigations against China since 2001). By contrast, Obama’s tire tariff will take effect tomorrow, September 26, only five months after the initial petition was filed.

Second, he points out that as part of China’s 2001 WTO accession agreement, the country agreed to be subject to transitional, product-specific safeguard mechanisms, when facts warranted them, until 2013. When are these safeguards allowed to be imposed? “Where products of Chinese origin are being imported [into a WTO member country] in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers,” according to the WTO. In other words, imposing product-specific tariffs on China, until 2013, is perfectly legal within the terms of the country’s WTO accession agreement.

Finally, Mroczka argues that if one Latin American country imposes a safeguard tariff against China, it may have a knock-on effect for other Latin economies. As an example, he supposes Brazil impose a safeguard tariff against Chinese refrigerator imports:

If China’s low-price exports to Brazil increased 20 percent from 2006 to 2008 and the Brazilian refrigerator industry was losing market share and sales to China, and as a result began to reduce its workforce, the evidence would be pretty strong to initiate a safeguard action.

…

After the imposition of the safeguard tariff by Brazil, let’s assume that Mexico saw an increase of refrigerator imports from China (even a small increase) and feared that large volumes of refrigerators that were originally destined for Brazil would now be coming to Mexico and threatening its refrigerator industry as well. Reacting to this threat, Mexico could bypass the safeguard investigation process and request immediate consultations with China. If, after 60 days, the consultations fail to obtain assurances from China that an increase in refrigerator imports is not coming, Mexico could then impose tariffs or a quota. The same process could be followed by Chile, Peru, Panama, whoever.

To me, the legality of all this seems convincing enough. My question is not “Is this this something Latin American economies can do?” but rather, “Is this something Latin American countries really want to do?” To wit, the answer largely depends on where you come down on free trade and your stake in the countries involved. One man’s “safeguard” is another man’s “protectionism.”

But in the case of Latin America, it’s important to bear in mind that the region has far less leverage when “poking the dragon” as does the US. The region is dependent on China as one of its largest buyers of natural resources, its economies essentially propped up by China through the global crisis. For, say, Brazil to slap a tariff on Chinese-made refrigerators, it must make sure it doesn’t have serious repercussions for the backbone of its trade relationship with China: soy beans and oil. Ditto, Peru and Chile with copper.

Similarly, even though China “invests” in the US in its holding of US$ trillions in T-bonds, I’d argue that Latin American economies are far more palpably influenced by China’s foreign investment decisions than the US. China Development Bank – a government-owned entity – is responsible for US$ billions in loans to Latin American projects this year. In the global downturn, you can’t get that kind of financing anywhere else.

Moreover, as Latin American companies are still struggling to get their footing in the Chinese market, a retaliatory tariff against them is the last thing they need. China’s love of American chicken feet may save the US in their trade bout, but no one in China will likely notice if bottles of Chilean Malbec disappear from the shelves of Beijing because a 40% tariff makes them prohibitively expensive to import.

First off, apologies for the major drop-off in posting on DH lately, things should pick up again in the fall when I’m more settled in my new home in Beijing. Nevertheless…

Latin America and Africa are often lumped together when talking about China’s interest in them – namely, as two gigantic sources for natural resources. While many of the billion-dollar trade and investment deals have been made in oil and mineral resources to keep the furnaces back in China blazing, agricultural resources are also included. China has had a national policy for 95% food self-sufficiency in place for some time, but with 22% of the world’s population (eating increasingly more and more) and only 7% of the world’s arable land, China is looking abroad as it stares down some frightening food-supply pressures.

Unlike the last wave of Chinese agriculture investment abroad (in the 1990s, largely to Southeast Asia), Chinese companies are now flocking to southern Africa to buy up and develop fertile African farmland to grow food for export. By 2007, China had 63 agricultural investment projects in southern Africa, and last year, Beijing promised US$800 million to modernize Mozambique’s agricultural sector. Loro Horta wrote a good overview of the situation for the Jamestown Foundation earlier this year.

But what about Latin America? With some of the world’s richest agricultural regions in the Argentine Pampas, is China buying up farmland there as well? Apparently not.

Reuters published an interesting article last month about China’s noticeable non-interest in buying up Latin American farmland in the same way it has in Africa.

Land prices and mature farming markets in Brazil and Argentina, the engines of Latin America’s commercial farming, make investments in big production projects less of a bargain for China.

“China’s ideas about farm prices are very different from the reality in Argentina’s Pampas. They think they can buy good farmland for $1,000 per hectare.” said Ernesto Fernandez Taboada, executive director of the Argentine Chamber of Commerce for Southeast Asia.

The best Pampas land costs up to 10 times that much.

—

“They wanted to enter but couldn’t after they realized what kind of investment it would take to have their own local infrastructure and logistics to control production,” said Carlo Lovatelli, president of Brazil’s grain crushing association Abiove.

The complexity of local farm markets makes it difficult to guarantee that the products of Chinese investments in food here would make it efficiently to China’s ports.

“Today China is offering financing and access to cheap labor, neither of which Brazil especially needs,” said emerging market analysts Trusted Sources in a report.

Local growers are closely integrated with trading companies, which provide credit and inputs like seeds, agrochemicals and fuel. Producers, already carrying heavy debt loads, have little need for additional financing. They also have ample directed government credit.

In Africa, Chinese financing goes a lot farther. The Asian nation also has been allowed to deploy one of its competitive advantages in Africa – low-paid Chinese workers. Entrenched Latin American labor interests would not permit that.

Instead, China has bought Latin American agricultural products (especially Brazilian soybeans) directly. This is possible because soybeans are a major exception of the 95% food self-sufficiency policy described above. According to Reuters’ article, China buys 65% of the world’s seaborne soybean trade, making it the country’s number one import from Brazil.

So, while China may not be buying up Latin American agricultural land directly, Latin American is and will continue to play a major role in what ends up on Chinese dinner tables. Should China’s food self-sufficiency policy start causing hunger pangs (as it may already be doing) – and Beijing open up the country to more agricultural imports – look to the sprawling estancias of Brazil and Argentina to play a major role in becoming China’s “new rice bowl.”

The billion-dollar Chinese investments in Latin America are flying; I can barely keep up. Today, The Wall Street Journal reports (subscription needed) two state-owned Chinese oil companies – China National Petroleum Corp and China National Offshore Oil Corp (Cnooc) – have proposed paying at least US$17 billion for a majority stake in Argentina’s biggest oil company, YPF. The two Chinese firms want to buy an 84% stake in the Argentine unit from its beleaguered Spanish parent, Repsol YPF.

This is literally and figuratively a big deal. If successful, it would be China’s biggest-ever overseas investment. The current largest Chinese investment happened last year, when mining firm Chinalco, along with US-based Alcoa, bought a US$14.3 billion stake in Anglo-Australian firm Rio Tinto.

However, in June this year, Chinalco made moves to buy another US$19.5 billion in Rio Tinto, but the deal collapsed because of shareholder and political pressures. On the oil front, Cnooc bid US$18.5 billion for US oil firm Unocal back in 2005, a deal that was scuppered by US congress. There are plenty of other overseas Chinese investments that have gone a rye.

The central sticking point: When it comes to country’s strategic resources, how much Chinese ownership is too much? The answer varies by country, political climate and desperation of the seller. In Argentina’s case, Repsol YPF has been hit hard by the global slowdown and needs cash to pay off its US$14 billion debt. Argentina’s government does not own any of YPF but has the right to veto important transfers of ownership like this deal. If Buenos Aires decides that Chinese ownership would too greatly affect oil pricing and supply at home, the deal may be canned.

We’re a long way from knowing whether or not this deal will clear all its hurdles, but even if it does, is it a smart investment? Some question why China would go to Argentina to secure energy sources at all. From the WSJ’s Environmental Capital blog:

China is spending billions to gain access to energy resources around the world, from gas in the Middle East, gas and oil deals with Russia, offshore oil deals with Brazil, and more.

But the possible YPF deal is odd, because Argentina’s oil fields are old and tired. Repsol has seen production of both oil and gas fall every year recently, even as production costs have risen. As YPF noted in a securities filing:

“Argentina’s oil and gas fields are mature and our reserves and production are declining as reserves are depleted. In the last two years our proved reserves declined by approximately 20%, and we replaced 51% of our production with new proved reserves during 2007; average daily production in 2007 declined by approximately 4.1% from 2006. We are engaged in efforts to mitigate these declines by adding reserves through technological enhancements aimed at improving our recovery factors as well as through deepwater offshore exploration and development of tight gas. These efforts are subject to material risks and may prove unsuccessful due to risks inherent to the oil and gas industry.”