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.

The China-Brazil trade connection has made headlines this past month as China became the South American country’s top trade partner for the month for April, and the two countries said they were looking into making some trade deals with yuan and reals instead of US dollars. Then, Brazilian President Luiz Inacio Lula da Silva visited Beijing it what was being billed as a meeting between players in the “new economic order.” So, did meeting live up to expectations? Not quite. A reality check on the flurry of China-Brazilian news comes our way from the Global Post (via the Huffington Post) Wednesday.

Seth Kugal notes that though trade volumes are indeed increasing, the variety is not. Raw commodities like iron ore and soya are still far and away the most important facet of the relationship. And this doesn’t look to change anytime soon, despite Lula’s best efforts. A major priority for Lula on his recent trip to Beijing was to diversify his country’s exports beyond raw resources.

Lula’s visit to China was in part portrayed here as a meeting of giants. “No economic discussion is possible that does not take into account China, Brazil, India and Russia,” he boasted while there, and upon his return declared it the most successful of his foreign trips. But all signs pointed to the visit not meeting expectations, at least in the short term. It broke little new ground and largely saw the signing of deals that had been virtually concluded, most notably a $10 billion loan from China to the Brazilian state oil company, Petrobras, and an agreement to allow Brazilian chicken into China.

Other efforts failed: pork exports are still halted, and Brazilian textile industry leaders were unable to squeeze any voluntary reductions in exports out of the Chinese, whose imports have flooded the Brazilian market this year. Efforts to jump-start a stalled 45 plane contract between Embraer and the Chinese were unsuccessful. The trip was shortened to three from five days, and several events were canceled.

“Lula comes home empty-handed from Beijing,” according to a Folha de Sao Paulo newspaper editorial, “without having advanced the objected to diversify bilateral trade.”

And his thorn in Lula’s side raises a very important point for most Latin American economies’ trade with China: What can they offer China in addition to natural resources? Given China’s manufacturing competitiveness, is Latin America doomed to the same role it played for the Spanish, British and US throughout history, to export their resources (and lion’s share of the profits) to be processed abroad?