By Brian Winter and Caroline Stauffer
SAO PAULO, Nov 1 (Reuters) – For Chinese investors, Brazil
is no longer the promised land.
After making a big push into the South American giant in
search of raw materials such as iron ore, as well as a promising
market for their consumer goods, Chinese executives have grown
frustrated with stagnant economic growth, heavy costs and what
they see as a political and popular backlash against their
presence.
As a result, Chinese investment is falling, and as much as
two-thirds of the roughly $70 billion in projects announced
since 2007 is either on hold or has been canceled, according to
recent studies and interviews with Chinese and Brazilian
officials.
The unexpected decline, which investors and analysts say has
little hope of reversing itself anytime soon, will deprive
Brazil’s struggling economy of what once seemed like a sure-fire
source of growth for years to come.
“The ardor for investment in Brazil is fading. Operating in
Brazil is a huge challenge,” said Zhang Dongxiang, chief
executive of the Brazilian unit of Bank of China Ltd
, one of China’s four largest state-owned commercial
banks.
In a rare interview in his Sao Paulo office that included
some of the sharpest criticism of Brazil by any Chinese business
leader to date, Zhang complained of growing hostility from the
Brazilian public as well as “protectionist” policies passed by
President Dilma Rousseff’s left-leaning government.
“Public opinion sometimes seems to be against foreign
investment … as if it makes local industry less competitive,”
he said. “There are some antiquated ideas.”
While some Chinese companies are succeeding in Brazil, he
said, “many are having doubts.”
BIG ANNOUNCEMENTS, SMALLER RESULTS
The shrinking investment flows between two of the world’s
biggest emerging markets raises questions about the strength of
the so-called “south-south” capital movement, and comes as China
undergoes a broad shift away from investment-focused policies
and toward a more consumer-based economy.
To be sure, Chinese investment in Brazil remains well above
what it was last decade. Companies such as CNOOC Ltd
and China National Petroleum Corp, which last week bought rights
to drill for oil in Brazil’s huge Libra offshore area, continue
to see opportunities in Brazil.
Others with an eye on expansion include China Construction
Bank Corp , which reached an agreement this
week to buy 72 percent of Brazil’s mid-sized lender Banco
Industrial e Comercial SA for 1.62 billion reais
($726 million).
Also, China remains Brazil’s largest trading partner, thanks
to demand for its commodities, and exports have been steady.
But the euphoria of three or four years ago, when
politicians hoped Chinese investment would fundamentally reshape
Brazil’s trade flows and generate billions of dollars’ worth of
badly needed new infrastructure, has clearly faded.
And while investors from all over the world have become less
bullish on Brazil in recent years, evidence suggests the rise
and fall in Chinese interest has been particularly abrupt.
The outcome is especially disappointing for Brazil’s farming
sector, which until recently saw China as its most likely savior
for a dilapidated network of roads, railways and ports that make
it very challenging to export crops.
“I don’t know of a single Chinese infrastructure project
that has gotten off the drawing board,” said Edeon Vaz, who
monitors logistics for Aprosoja, the country’s largest
cooperative of soybean growers.
HARDLY AN ASIAN TIGER
The recent Chinese experience in Brazil seems to be one of
high expectations, followed by second thoughts.
After years of sending trade missions to Brazil but mostly
keeping their wallets closed, Chinese companies abruptly
announced a flurry of billion-dollar bets in 2010. That was the
year Brazil’s economy grew a torrid 7.5 percent, and seemed to
have entered a new era of Asian tiger-style growth.
The investments went beyond the extraction of commodities,
traditionally China’s focus in Latin America.
Companies such as automaker Anhui Jianghuai Automobile Co
, otherwise known as JAC Motors, and telecoms
supplier Huawei Technologies Co Ltd announced big
investments focused on selling to Brazil’s rapidly growing
middle class.
Most analysts agree that the sudden spurt, which was led by
state-owned companies, was part of a strategic decision by
Beijing to diversify its consumer markets abroad following the
2008-09 financial crisis and the ensuing stagnation in the
United States and much of Europe.
Since then, though, little has gone right.
Brazil’s economy cooled sharply, growing just 0.9 percent
last year, and its consumers are burdened with debt. Meanwhile,
the government has taken several steps that have made many
Chinese investors feel unwelcome.
Some measures, such as a tax increase on foreign-made cars
in 2011 that led JAC Motors to threaten to suspend construction
of a new factory in Brazil, were part of a broad protectionist
drive that targeted all countries equally.
But others, including a 2010 law that restricted land
purchases by foreigners, were the specific result of worries
that the Chinese were snapping up too many of Brazil’s natural
resources, legislators said at the time.
In private, Brazilian government officials express concerns
that China is primarily interested in securing raw materials in
a way that barely benefits Brazilians, while also flooding the
country with low-cost manufactured goods.
Meanwhile, trade data shows that just three commodities –
iron ore, oil and soy – and their derivatives – still account
for 80 percent of Brazil’s exports to China.
That has angered officials in Rousseff’s government who had
hoped that Brazilian manufacturers like aircraft maker Embraer
SA would have made greater inroads by now. Chinese
officials have countered that Brazilian industry needs to become
more competitive to sell in China.
Derek Scissors, an expert on Chinese outward investment at
the American Enterprise Institute, a Washington think tank, said
the sudden spurt in investment, followed by a backlash and then
a withdrawal, was “absolutely classic Chinese behavior” that
also occurred in sub-Saharan Africa in recent years.
“What happens,” Scissors said, “is you start getting people
saying ‘Wait a minute, we are running a huge trade deficit with
China. They are investing $20 billion and grabbing up all our
resources. Are we a colony?'”
XENOPHOBIA
It’s not just the government that has lashed out in Brazil.
Unions and industry groups regularly target China. At an
international textiles fair in Sao Paulo last week, hundreds of
protesters gathered to denounce what they called unfair Chinese
trade practices.
Hundreds also demonstrated against foreign involvement in
last week’s Libra oil sale, which saw European and Chinese
companies successfully bid for the right to drill in Brazil’s
biggest-ever oil field. The protests prompted Rousseff to warn
against “xenophobia” that could scare away foreign capital.
Chinese companies have noticed. For various reasons, many
investments announced to huge fanfare in recent years now seem
to be up in the air.
Reuters followed up on several of those projects, including
a $5 billion railroad line in western Brazil that Chinese
companies declared interest in building in 2011. The line has
not yet secured financing from Chinese development banks and may
be taken up by South Korean or European investors, said
Francisco Vuolo, logistics secretary for Mato Grosso state.
The Chongqing Grain Group Corp’s plan to build a $2 billion
soy processing complex in Bahia state, announced in March 2011,
has so far yielded just 15 percent of the planned investment,
officials there say.
“The Chinese delay a lot in doing things,” said Josalto
Alves, a spokesman for Bahia’s agriculture department. “They’re
very set on negotiating.” Attempts to reach Chongqing executives
were unsuccessful.
Huawei, the telecoms supplier, recently moved its regional
headquarters from Brazil to Argentina. A Huawei spokesman said
the move occurred because Brazil’s market is “growing mature.”
All told, of the Chinese investments announced between 2007
and mid-2012, only a third of them as measured by value were
finished or in the process of being implemented, according to a
study published in June by the China-Brazil Business Council, a
Rio de Janeiro-based group.
The remainder – worth some $44 billion – were “still under
negotiation or being evaluated,” the CBBC said.
SALAD DAYS MAY BE OVER
Other countries have not turned on Brazil in the same
fashion. Despite the economic struggles, foreign direct
investment has remained relatively steady since 2010, with
strong flows from the United States, Japan and others.
Scissors said Brazil remains a relatively attractive market
for the Chinese. But, he said, Beijing seems to have shifted its
priorities once again – focusing its investments on the United
States and Canada, in particular, since late 2011.
“You aren’t going to have another rush (in Brazil) for
another few years at least,” he said.
That jibes with the view of Zhang, the CEO of Bank of China
in Brazil.
He said his bank, whose clients include Chinese companies
operating here as well as big Brazilian concerns such as
Petroleo Brasileiro SA, seeks to increase its capital
by some $100 million in coming months. He called that a “good
stimulus” for future growth in Brazil.
Yet, when asked if investment would recover in the next five
years, Zhang was guarded.
“It depends on policies from the government,” he said,
tapping his desk for emphasis. “Brazil is at a crossroads. Will
it grow, or will it cool down?”
