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The New Trade Routes: Brazil & China (Financial Times)

The New Trade Routes: Brazil & China (Financial Times)

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The New Trade Routes: Brazil & China (Financial Times)
The New Trade Routes: Brazil & China (Financial Times)

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Published by: Bruno Quadros E Quadros on Jun 03, 2011
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The New Trade Routes
Monday May 23 2011
Drawn into an ever closer embrace
his month thevessel that willcome to define early21st century tradebetween Latin America andAsia arrived in GuanabaraBay, the picturesque har-bour of Rio de Janeiro.The Vale Brasil, commis-sioned by Vale, the Brazil-ian miner and the world’slargest exporter of iron ore,is the first of a new breed of bulk carrier, known as theChinamax. With a capacityof 400,000 tonnes and meas-uring 362m in length and65m in width, this goliathcan carry twice as muchiron ore as most vesselsnow plying the routebetween Brazil and China.Just as the caravel sym-bolised the age of discoveryand early colonial tradebetween Portugal and Bra-zil, the Chinamax encapsu-lates China’s growing hun-ger for the naturalresources of Latin Amer-ica’s largest economy.As these two leading emerging economies draweach other into an evercloser embrace – one of thefirst overseas trips by Bra-zil’s new president, DilmaRousseff, was to China – few doubt that the world iswitnessing the birth of oneof the great commercialrelationships of the future.“Brazil will export a lot of the strategic commoditiesthat China needs and Chinawill export manufacturedgoods and invest in assem-bly plans in Brazil,” saysCharles Tang, head of theBrazil-China chamber of trade and industry.But far from being asmooth passage, it is a rela-tionship that will befraught with challenges andmisunderstandings along the way. It would be diffi-cult to find two large coun-tries in the modern worldthat are less familiar witheach other than China andBrazil or that are more dif-ferent socially, politicallyand culturally. Alreadythere are growing tensions,with most of them originat-ing from the Brazilian side.While Brazil welcomesChinese demand for itscommodities, it is angry atan influx of cheap Chinesemanufactured imports thatit says undermine Brazilianindustry. Brazilia alsoaccuses Beijing of closing its market to imports fromBrazil and of maintaininan artificially cheap cur-rency to make its exportsmore competitive.“China has a clear posi-tion on what it wants fromBrazil,” says Geert Albers,general manager for Brazilof Control Risks, a consul-tancy. “But Brazil needs toclarify somehow what itwants from China.”The speed with whichthis relationship has devel-oped has meant that mostpotential flashpoints areonly emerging now.Between 2000 and 2009,Brazil’s exports to Chinarose 18-fold, driven by com-modities such as iron oreand soya beans. In 2009,China surpassed the US asBrazil’s biggest trading partner, accounting for 12.5per cent of the Latin Ameri-can country’s exports.Bilateral trade rose a fur-ther 53 per cent last year to$56bn, while Brazil’s tradewith the US increased 30per cent to $45bn.When it comes to com-modities, Beijing has dis-covered that Brazil offerssomething of a one-stopshop. Latin America’s big-gest economy is the world’slargest exporter of iron oreand of a host of agriculturalproducts, including coffee,sugar and – of special inter-est to China the “soyacomplex” of beans, oil andmeal.Brazil’s discovery of vastoffshore oilfields, which areset to catapult it into thetop ranks of the world’s oilproducers, are also of increasing interest toChina.“The economic benefits of Brazil’s and China’s traderelationship remain high,”wrote Standard & Poor’s,the credit rating agency, ina paper late last year.The trading relationshipis rapidly being duplicatedin investment. Last year,China became Brazil’s larg-est foreign direct investorfor the first time.China accounted forabout $17bn of Brazil’s totalforeign direct investmentinflows of $48.46bn in 2010,up from less than $300m in2009, according to Sobeet, aBrazilian think-tank ontransnational companies.This FDI, much of whichwas channelled through taxhavens such as Luxem-bourg, was related to com-modities and energy. Thebiggest transaction wasChinese oil major Sinopec’s$7.1bn purchase of a 40 percent stake in Repsol Brazil.The growing commercialrelationship with China wasfostered by Brazil’s previ-ous president, Luiz InácioLula da Silva, a proponentof the rise of the so-calledBric nations, which asidefrom Brazil and China com-prise India and Russia.For Mr Lula, the rise of trade with China providedthe economic tailwind thathelped him win re-electionin 2006 after this first four-year term and then to pro-pel his protégée, Ms Rouss-eff, to office last year.With billions of dollarsrolling in from commoditiesexports and Chinese invest-ments, Mr Lula was able tostart a credit-fuelled eco-nomic boom in 2009 and2010 without having toworry about the currentaccount deficit.For the first time, thelower middle classes hadmoney to spend. At thesame time, they could sud-denly afford to buy house-hold goods thanks to a floodof cheap imports fromChina. For Mr Lula’s Work-ers Party, trade with Chinaprovided a seductive for-mula for staying in power.“The long Chinese boomhas affected virtually everypart of the world. But Brazilis arguably the countrywhere it has made thegreatest difference,” wrotePerry Anderson in an essay,“Lula’s Brazil”, in the Lon-don Review of Books.Today, there are growing signs that the honeymoonis over. While Brazilreported a trade surpluswith China of $5.2bn lastyear, this was because of commodity exports, accord-ing to industry lobby Fiesp.On the industrial front,imports of manufacturedgoods from China rose bywhat Fiesp called a “devas-tating” 60 per cent lastyear. The deficit in manu-factured goods was a record$23.5bn, up from only $600mseven years ago.Today, it can be hard tofind something made inBrazil. About 80 per cent of costumes used at Brazil’scarnival festival this yearwere imported, nearly all of them from China: from themore traditional creationsflaunted by competinsamba schools to the lesstraditional Osama binLaden masks. And it is notonly textiles that are beinmade in China. Braziliansteel producers suffered asharp fall in prices lastyear, which they blamed ona sharp rise in cheapimports, mainly fromChina.Brazilian manufacturerswarn the country faces“deindustrialisation” if itdoes not introduce moreprotection measures in theface of what they call thedumping of artificiallycheap Chinese products inLatin America. Of 144 anti-dumping investigationsstarted by Brazil in thefourth quarter of last year,50 were against China.During her recent trip toChina, president Rousseff urged Beijing to acceptmore Brazilian industrialgoods. Beijing agreed to buymore regional jets fromBrazil’s Embraer, while aTaiwanese company withextensive operations inChina, Foxconn, said itwould invest $12bn in amanufacturing complex inBrazil to make iPods.Like the US before it,which became addicted toChinese credit and cheapmanufactured goods, someare arguing that Brazil ison course for a full-blowneconomic crisis if it doesnot rein in an excessivespending spree drivenby its new-found commod-ity wealth. The IMF calcu-lates that if commodityprices were to moderate to2005 levels, Brazil’s currentaccount deficit could doublefrom a comfortable 2.3 percent today to a worrying 5per cent.China also representsother challenges for Brazil.
 To a large extent, it is a relationship of opposites, fraught  with challenges andmisunderstandings, writes
Joe Leahy 
More on FT.com
China’s yuan is kept artificially lowwhile Brazil’s realsoars. Whatare theimplications?
 www.ft.com/brazil­china­trade­2011 | twitter.com/ftreports
Brazil’s discoveryof vast offshoreoilfields is alsoof increasinginterest to China
Martin Wolf
Brazilfaceschallengesas thecentre ofthe globaleconomyshiftstowards Asia
Page 3Infrastructure
Private companies aretrying to improve thesystem
Page 2Profile
Vale’s new chiefwill have to steer adifficult course
Page 2Financial flows
The extent to whichBrazil will allow Chinato invest in strategicresources is still to bedecided
Page 2Profile
CDB isthedrivingforcebehindChineseinvestment overseas
Page 3Profile
Hong Kong­based ZTE saysmanufacturing locallymakes sense
Page 4Olympics
Lessons tobe learnt from Beijing’shosting of the games in2008
Page 4Richard Lapper
Rise ofChina has enabledBrazil to rise
Page 4Beyond Brics
Aselectionof relatedstoriesfrom theFT’semergingmarketshub
Page 5Online
Embraer hasfaced difficulties gettingapproval for its aircraftin China
The people of both coun-tries are painfully ignorantof each others’ customs.Unlike most cities inEurope and North America,it is difficult to find oneChinese restaurant on thestreets of São Paulo.While Brazil and Chinaoften see eye-to-eye in inter-national forums on issuessuch as the unrest in theMiddle East, it is unclearhow long this will last. Bra-zil is a liberal democracythat increasingly wants touphold human rights, whileChina is authoritarian andbrutally repressive of dis-sent. Brazil wants to be thedominant power in LatinAmerica, while China’sincreasing trade with theregion is turning it into acompetitor. But others sayit may be too soon for Bra-zil to press the panic buttonon its relationship withChina. While trade betweenthe two has grown fast, ithas been from a minimalbase. Today, it comprises 15per cent of Brazil’s interna-tional trade.“Brazil has diversified itsexports it is also a bisupplier to Europe. It isn’tas if it’s only dependent onChina,” says Pamela Cox,vice-president for LatinAmerica and the Caribbeanat the World Bank.That may be so, but withevery new shipload of resources that leaves Brazilfor China, this dependenceis set to increase.Vale says that, while itsfirst seven Chinamaxes willcome from South Korea, ithas ordered the next 12from China. The vessel of early 21st century trade willcarry Brazilian naturalresources, but the shipitself will be made in China.For Brazil, the messagefrom the metaphor is clear.China is at the helm of theglobal economic super-tanker of the future. It is upto Brazil to decide what roleit will play in the voyageand how it wants to pay forthe ride.
Shoulder to shoulder:Dilma Rousseff andHu Jintao meet in Beijing
MONDAY MAY 23 2011
The New Trade Routes
Brazil & China
Mining giant must keepgovernment onside
With its own 10,000kmrailway network, nineprivate port terminals andrevenue last year that wasbigger than the grossdomestic product of Bulgaria, Vale appearsmore like an empire thana company.The Rio de Janeiro-basedminer is the world’sbiggest producer of ironore and one of Brazil’slargest companies. If itwere not for Vale’s exports,the Latin Americancountry would have run atrade deficit last yearrather than its $20.3bnsurplus.However, the sheer sizeof Vale has proved to bethe company’s biggestchallenge. The miner’sAmerican depositaryreceipts are trading at upto a 30 per cent discount toits peers, partly because of concerns that Brazil’sgovernment will not sit byand let such a strategicallyimportant company followits own path.Murilo Ferreira took overthis month as Vale’s chief executive, replacing RogerAgnelli, who was in effectforced out by thegovernment. Investors arewaiting to see if thecompany’s loyalty remainswith its shareholders or isshifting to the state.“It’s too early to tell forsure, but I don’t thinkmuch will change. Theyhave so many big investment projects on thego that will double the sizeof Vale. I’ll think they’ll just get on with it,” saysPedro Galdi, a mining analyst at SLW Corretora.The government retaineda majority stake in Valeafter it was privatised in1997, but grew increasinglyfrustrated at how thecompany was run underMr Agnelli and earlier thisyear put enough pressureon the remaining shareholders that hiscontract was not renewed.One of the government’smain complaints has beenthat Vale is turning itsback on Brazil byexporting ever more ironore to China rather thandeveloping a domestic steelindustry.In the first quarter of this year, Asia accountedfor about half of Vale’srevenues, with 29.7 percent coming from China.The company’s insistenceon building many of itscargo ships in Asia ratherthan Brazil also made MrAgnelli few friends in thegovernment.This month, Valeannounced that it hadreceived delivery of theworld’s largest iron orecarrier. Despite its tactfullynationalist name, ValeBrasil, the ship was madein South Korea and willhelp shift even morechunks of Brazil to China.However, analysts havetaken a relatively relaxedapproach to themanagement shake-up,partly because the sharesare cheap and thefundamentals of the ironore market remain veryattractive.The choice of MrFerreira, a discreet andtechnically minded formerexecutive of Vale, alsocame as a relief to mostinvestors, who had fearedsomeone directly linked tothe government might beput up for the job.In fact, Vale’s realproblem with politics liesacross the Atlantic Oceanin Africa, where thecompany competes withChinese groups to tapsome of the world’shighest-quality iron oreand copper reserves.“The problem, like withall projects in Africa, is thepolitical risk they face – not only with the localgovernment, but also withthe tribes,” says BernardoLobão, an analyst at StudioInvestimentos.In April last year, Valebought a mininconcession in Guinea for$2.5bn, giving it access toSimandou, which isconsidered the world’srichest undeveloped depositof iron ore.However, the project wasthrown into uncertaintyafter Guinea’s transition tocivil rule late last year.Vale also faces thechallenge of building theports and railways toaccess the reserves, as ithas done in Brazil.Geographically, it wouldmake more sense to builda railway through Liberiato the coast but that couldprove difficult because of political instability.For this reason, analystsbelieve the mining giantwill focus on exploiting Brazil’s reserves first, suchas the south side of theCarajás mine in theAmazon region.But Vale’s empire islikely to keep expanding,says Mr Galdi at SLW.“Vale has huge cashreserves, so it could lookfor acquisitions toreinforce its position in theworld, perhaps in the areaof fertilisers,” he says.“It depends what comesup, but with the crisis inthe eurozone, there aresome interesting opportunities around,”Mr Galdi says.
 The new chief will have to steer a difficult course, says
Samantha Pearson
One of thegovernment’s maincomplaints hasbeen that Vale isturning its backon Brazil
Poor logistics present a  problem for  partnership
ith its towering red
gate and graf-fiti of girls in kimo-nos, the neighbour-hood of Liberdade in São Paulolooks like most Japanese out-posts around the world.But over the past few years,packets of seaweed have beenpushed aside to make room forChinese noodles on supermarketshelves, and Mandarin voicesnow fill the crowded streets.“It was mostly just the Japa-nese here before, but then theChinese came and starting buy-ing everything,” says JessicaChen, a Taiwanese shopkeeperin the district who moved toBrazil in 1982. “It won’t be long before China dominates theworld,” she says, laughing.It is not uncommon to hearpeople in Brazil talking aboutthe growing Chinese presence inthe country as an invasion.Looking at the government’sforeign trade data, it is easy tounderstand why.Brazil sent $30.79bn of exportsto China in 2010, almost 30times as much as a decade ear-lier, when it exported only$1.09bn worth of goods. Overthat 10-year period, importsfrom China also surged morethan 20-fold to $25.60bn.Once a relatively obscureforce in Brazil, China is now itsbiggest trading partner afterknocking the US off the top spotin 2009.The speed at which tradebetween Brazil and China hasgrown is even more remarkable,considering the long journeythose Chinese noodles had toundertake to reach São Paulo’ssupermarkets.More than 10,000 miles apart,China and Brazil are separatedby the Pacific Ocean and theAndes, one of the longest moun-tain ranges in the world.Brazil’s infrastructure is alsocreaking under the strain of the country’s rapid economicgrowth, presenting furtherdifficulties for importers andexporters.“The cost of logistics is hugein Brazil,” says Richard Dubois,infrastructure partner at PwC inSão Paulo. For example, it ismore than three times as expen-sive to transport soyabeans,Brazil’s second-biggest export toChina, overland in Brazil than itis in the US, he says.“It is the same for almostevery other commodity,hesays, adding that the main prob-lem is the lack of rail networksand the poor quality of roads.Brazil’s railways have seensome improvement since thenational system was privatisedin the late 1990s, but still onlyabout a quarter of the country’scargo transport went by rail lastyear, forcing exporters on to theroads.“There is also the question of the bottlenecks at the ports,”says Otávio Nese of the ProjectManagement Institute’s Brazildivision. “There has been a lackof investment as well as a lackof long-term planning.”However, there are someexceptions to the poor state of Brazil’s transport infrastruc-ture. China’s insatiable demandfor commodities has led some of the country’s more enterprising companies, and even the Chi-nese themselves, to take mattersinto their own hands.As a result, a handful of ambi-tious construction and infra-structure projects have sprung up across the country over theyears, increasing pressure onthe public sector to catch up.“The exception to the hightransport costs is iron ore,because Vale created its ownrailway and port infrastruc-ture,” says PwC’s Mr Dubois.Vale, the world’s largest ironore miner, has laid about10,000km of track across nine of Brazil’s 26 states, and is nowresponsible for transporting about 16 per cent of Brazil’stotal rail cargo.The Rio de Janeiro-based com-pany has also built nine portterminals. Its Tubarão portcomplex in the south-east of the country is capable of mov-ing 43,000 tons of iron ore anhour.This month, Vale alsoannounced that it had receiveddelivery of the world’s largestiron ore carrier, a ship thelength of about four footballpitches, costing the company$748m and made in South Korea.Eike Batista, Brazil’s richestman, together with China’sWuhan Iron & Steel and SouthKorea’s Hyundai Heavy Indus-tries, are also building Açusuperport, which is set to be thelargest in the Americas on com-pletion.The project, off Rio deJaneiro, is expected to attractup to $40bn in total investmentand should serve both minersand oil companies.Efforts are also being made toimprove road networks.The inter-oceanic highwaytraversing Latin America east towest is expected to be completedthis year, giving Brazil accessfor the first time to Pacific portsand helping to link the countrycloser to China and other Asianeconomies such as South Koreaand India.Meanwhile, one of the favour-ite points of entry for Chinesegoods coming into Brazilremains Manaus, the Amazo-nian city whose duty-free statushelps keep costs low.“The product arrives in piecesand then it’s assembled in thefree-trade zone in Manaus tomake the most of the tax exemp-tions,says Raphael Martello,an economist at TendenciasConsultoria in São Paulo.“Most of the goods from Chinacome in bits and then they’reassembled there.”However, economists andenvironmentalists warn of thedangers of making too manysacrifices, as Brazil opens thedoors to its new top tradinpartner.The low cost of many Chineseimported goods has been blamedfor crushing some parts of Bra-zil’s domestic industry, whilethe new highway across Perurisks encouraging deforestationas it gives ranchers access tomore of the forest.The challenge now for Brazil’spresident, Dilma Rousseff, is tofind ways of making the most of China’s demand for commodi-ties while leaving a positivelegacy for the country.“Brazil has to watch carefullyhow this evolves,” says SérgioAmaral, former minister of development, industry and for-eign commerce.“It’s important we understandthe contribution China is mak-ing to Brazil.”
Private companies are trying to improve the transport system, says
Samantha Pearson
Insatiable demand: trucks carrying soyabeans line up on the highway to the port of Paranagua
‘There is alsothe question ofthe bottlenecksat the ports’
Joe Leahy 
Brazil Correspondent
Jamil Anderlini
Beijing Bureau Chief
Samantha Pearson
Brazil Reporter
Kathrin Hille
Beijing Correspondent
Martin Wolf
Chief EconomicsCommentator
Richard Lapper
Editor, Brazil Confidential
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Commissioning Editor
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Picture EditorFor advertising, contact:
John Moncure
on:+1 212 641 6362;fax: +1 212 641 6544;e­mail: john.moncure@ft.comor your usualrepresentative
Murila Ferreira: new man at the helm of Vale
Commodities are central todefining the relationship
When Repsol sold a 40 percent stake in its Brazilianarm to Chinese rivalSinopec last year, the Span-ish oil producer says thedeal would create one of Latin America’s largestenergy companies. The dealwas a sign of things tocome, as Brazil began theexploitation of the recentlydiscovered oil and gasreserves in the basins off itssouth-eastern coast.“Brazil’s offshore boastsone of the world’s fastest-growing oil and gasreserves,Repsol said atthe time. “The deal high-lights the enormous inter-national interest in thishistoric moment for Brazil.”Repsol could have just aseasily have swapped thewords “international inter-est” for Chinese interest.While every country inthe world wants to invest inBrazil’s natural resourcesand agricultural industry,few are keener than energy-deficient and food-hungryChina.This interest led China tobecome Brazil’s biggest for-eign direct investor lastyear, a position that is onlyexpected to grow. But likeother aspects of the Brazil-China relationship, the twocountries will have to agreeon what form this new part-nership will take – in partic-ular, how far Brazil will bewilling to let China investin its strategic resourcesand agricultural land.“There is a big interestamong Chinese executivesin investing more in Brazil.There has to be an environ-ment favourable for foreigninvestment. That way wecan create more jobs inBrazil,” said Chen Deming,China’s trade minister,during a visit to LatinAmerica’s biggest economyin May.China accounted forabout $17bn of Brazil’s totalforeign direct investment of $48.46bn in 2010, up fromabout $300m in 2009, accord-ing to analysis by Sobeet, aBrazilian think-tank onmultinational companies.Mergers and acquisitionscontributed $12.53bn of thistotal, Dealogic, the datacompany said. Aside fromthe Repsol deal, theseincluded a $3.07bn invest-ment by Sinochem, a Chi-nese state-run group, in oiland gas assets in Brazil’sPeregrino Field.Another Chinese group,East China Mineral Explo-ration and DevelopmentBureau, invested $1.22bn inItaminas Comercio de Mine-rais, a mining company,while State Grid Corp of China spent $1bn in an elec-tricity grid deal.Investments by Chinesecompanies in previousyears include a $362manchor investment byWuhan Iron & Steel inMMX Mineracao e Metalicosa Brazilian miner.For Brazil, these invest-ments were at first wel-come. But increasingly,they have become a sourceof concern for policymak-ers. When rumours sur-faced last year that Chinesegovernment-backed compa-nies were looking at buying up tracts of Brazilian farm-land, the government drewthe line. Reinterpreting anexisting law, it introducedrestrictions on FDI invest-ment in farms.These laws were ostensi-bly not directed at China.Brazil was also concernedthat sovereign wealth fundsor companies backed byother governments werebuying farmland. But themain target is believed tohave been China.“I am not the minister of external affairs. I do notwant to create an incident,”the minister of agriculture,Wagner Rossi, told the FTin an interview earlier thisyear. “Some of these coun-tries are great partners inother areas, but having them buying land in Brazilcreates some sort of sover-eign risk for us. This is notpart of our plan and we arenot going to allow that.”In recent months, Chinahas indicated it is preparedto diversify its investmentsinto Brazil beyond theresources and agriculturesectors. During a visit toChina by President DilmaRousseff in April, Foxconn,a Taiwanese company withextensive operations inmainland China, promisedto invest $12bn in Brazil ina facility to make Appleproducts.Mr Chen’s delegationsought to strengthen thisimpression with promisesthat Geely, a Chinese smallcar maker, might build aplant in Brazil. But hestressed that Brazil mustkeep its side of the bargainby reducing the cost of doing business in the coun-try, such as by streamlining its notoriously sluggishports and improving itslogistics.While Brazil might besuspicious of Chineseinvestment, it needs addi-tional inflows of longerterm financing to help fundits growing current accountdeficit.At about 2.3 per cent of gross domestic product, thisis not yet alarming. But if commodity prices were toease, the current accountdeficit could deterioraterapidly, leaving Brazil onthe verge of a debt crisis.Many believe that for thisreason, financial relationsbetween Brazil and Chinaare only going tostrengthen.A key part of this couldbe achieved throughincreasing the use of China’s currency, the ren-minbi, in trade with LatinAmerican economies. Thiscould be done by replacing the dollar with a basket of currencies that wouldinclude the renminbi.Fernando Pimentel, Bra-zil’s trade minister, saidafter meeting Mr Chen: “Wementioned to the ministerthe importance of beginning a discussion in interna-tional forums about thenecessity to change theinternational monetarystandard.”Many analysts believethat the sooner Brazil real-ises that its financial des-tiny is tied to China’s, thebetter. Once Brazil startsproducing oil from its off-shore “pre-saltfields, itscurrency will become evenmore linked to commoditiesand energy prices.China will be one of themain buyers of these prod-ucts, meaning that it willmake sense for Brazilianand Chinese companies totrade in renminbi and even-tually to save in renminbi.Brazil will become part of a “renminbi block” of coun-tries that use the Chinesecurrency to trade.Tony Volpon, head of Latin America research atNomura, says: “Pre-salt oilis one big thing that isgoing to happen in Brazil inthe next few years and it’sgoing to double down onthe China bet:“If you think the Brazil-ian real is a commoditycurrency right now, wait acouple of years – it’s going to be much worse.”
Financial flows
 Ties between the two are only going  to strengthen,says
Joe Leahy 
Deep well: China wants access to Brazil’s oil
Having countriesbuying land inBrazil creates somesort of sovereignrisk for us
Wagner Rossi,Minister of agriculture
MONDAY MAY 23 2011
The New Trade Routes
Brazil & China
Lender with a global reach
When the Chinesegovernment agreed in May2009 to lend $10bn toPetrobras in exchange fora guaranteed supply of oilover the next decade,China Development Bankwas in charge of handing over the cash.In almost every largedeal involving preferentialChinese loans to foreigngovernments or companies,CDB is at the top of thelist of Chinese financialinstitutions distributing the funds.While CDB istheoretically supposed tolend money based oncommercial considerations,these often seem to comesecond when it extendsmega-loans to the likes of Russia, Venezuela andBrazil in exchange forguaranteed supplies of oil.Other favoured recipientsof CDB funding are suchstate-owned groups asPetroChina and Chinalco,which are attempting to“go global” by acquiring overseas companies andassets.China’s outbound foreigndirect investment reached$220bn in the five yearsbetween 2006 and 2010,according to governmentfigures.That is close to 10 timesthe total cumulative $26bnthat Chinese companieshad invested in 150countries at any time upuntil the end of 2005.Most of the newinvestment was funded bypreferential loans fromstate-owned Chinese bankswith CDB leading the way.Under the charismaticleadership of Chen Yuan,the CDB’s chairman – the“princeling” son of aCommunist Party founding father – the bank hasmorphed from a piggybank for state constructionprojects such as the ThreeGorges dam into one of theworld’s most powerfulfinancial institutions.Together with the muchsmaller China Export-Import Bank, CDB has lentmore to developing countries over the past twoyears than the WorldBank, according toFinancial Times research.The two “policy banks” – as they are called in China– signed loans of at least$110bn to other developing governments andcompanies in 2009 and2010, compared with$100.3bn lent by theequivalent arms of theWorld Bank from mid-2008to mid-2010.Unlike most of its state-owned financial institutionpeers, CDB does notanswer to the country’sbanking regulator, butreports directly to the statecouncil, or cabinet.This special status,combined with thepersonal political powerwielded by Mr Chen hasallowed the bank to dothings that other Chineselenders can only dream of.In mid-2007, CDB took a3.1 per cent stake inBarclays Bank as part of an even more ambitiousplan to fund Barclays’unsuccessful takeover bidfor much of ABN Amroand take a nearly 10 percent stake in the combinedentity.Even as the globalfinancial crisis gatheredpace in mid-2008, CDBmade another aggressiveattempt to buy Germany’sDresdner Bank, althoughthat plan fell throughwhen China’s top leadersbecame worried aboutspreading financialcontagion.Similar concerns stoppedCDB from taking a hugestake in Citigroup, as theUS financial groupdesperately sought freshsources of funds.While it did notachieve its goal of globaldomination throughoffshore acquisition, thebank has become anintegral part of China’sincreasingly influentialforeign policy strategy,particularly indeveloping countries inAfrica, Asia and LatinAmerica.The CDB is notpublicly listed and rarelyreleases any figures, butsome analysts believe ithas also served as aconduit for some of thecountry’s $3,000bn inforeign exchangereserves to be lent out tostate companies that areexpanding abroad.
Under ChenYuan, CDB isone of the world’s mostpowerfulbanks
Manufacturing at risk from global shift to Asia
The centre of the globaleconomy is shifting towards Asia. Thispresents both newopportunities and newchallenges for establishedhigh-income countries andfor emerging economies,such as Brazil.In Brazil’s case, theopportunities are evident,because China’scomparative advantage inmanufacturing iscomplementary to Brazil’srelative advantage incommodities.But the challenges toBrazil are quite as big asthe opportunities. Thedynamic source of demandfor Brazilian commoditiesis a good thing, butdeindustrialisation is not.The speed and scale of China’s rise isbreathtaking. In 1990, itsshare in worldmerchandise trade (thesum of exports andimports) was just 2 percent. In 2000, it was below4 per cent. By 2010, it hadreached 10 per cent.Its share of worldexports had risen evenfaster than this, frombelow 2 per cent of worldmerchandise exports in1990 to close to 11 per centin 2010.Amazingly, China isalready a far moreimportant market forBrazil than the US. Theshare of the Chinesemarket in Brazil’smerchandise exports jumped from 2 per cent in1990, to 5 per cent in themiddle of the last decadeand 15 per cent in 2010.In 2002, the US marketabsorbed as much as 26per cent of Brazil’s exports.By 2010, the US marketshare was down to a mere10 per cent. The share of the Chinese market inBrazil’s exports is not sofar below that of the entireEuropean Union, whichabsorbed 21 per cent of Brazil’s exports in 2010,down from close to 25 percent in 2007.The US and theEuropean Union havedominated global tradenegotiations for decadesbecause their markets werefar bigger than those of other economic powers.This is true no longer.Yet the impact of Chinaon Brazil is not just amatter of scale, importantthough that is, but also of composition.China has an open, largeand fast-growing economy.But it is also a middle-income country with ahuge supply of cheaplabour. Its arrival as aglobal economic power hasbeen shifting the pattern of global trade andproduction: in particular, itlowers the prices of relatively labour-intensivemanufactures and raisesthose of commodities.These twin effects of China’s entry into theworld economy are also of huge importance for Brazil.Thus the most striking feature of Brazilian tradeis the shift in itscomposition towards apattern one wouldnormally associate with arather less advancedeconomy. The share of primary commodities inthe country’s exports hassoared from 22 per cent atthe beginning of the lastdecade to 46 per cent inthe 12 months up to andincluding April 2011. If oneadds in semi-manufacturedproducts, the share reached60 per cent. Meanwhile, theshare of manufactures hastumbled from 58 per centof exports at the beginning of the 2000s to just 38 percent in the 12 months toApril 2011.The shift in thecomposition of Brazil’sexports went hand in handwith a big improvement inthe country’s terms of trade – the price of itsexports relative to itsimports.Thus, in March 2011, itsterms of trade were 30 percent about their averagelevel since the beginning of the 1990s, and 34 per centhigher than in early 2003.The final impact of China on Brazil’s tradecomes via its role in whatGuido Mantega, Brazil’sfinance minister, describedlast year as an“international currencywar”. With advancedeconomies experiencing low interest rates andfinancial worries, money ispouring into emerging economies that have brightprospects. China’s massivecurrency interventionsdeflect the impact of thatflow towards othercountries, including Brazil.The swings in the realvalue of Brazil’s currencyhave certainly been large.Between May 2004 andApril 2011, Brazil’s trade-weighted real exchangerate calculated byJPMorgan rose by 119 percent, while China’s realexchange rate appreciatedby just 20 per cent overthe same period.Brazil has been losing external competitiveness toa startling and disturbing degree.In short, China’s rise hasalready had a big impacton Brazil and is likely tohave an even bigger one inthe years ahead: it hasshifted the direction andcomposition of Brazil’strade; it has played a rolein improving the country’sterms of trade; and it hasprobably played asignificant role in theappreciation of theBrazilian real exchangerate, as well.For Brazilianpolicymakers the challengeahead is to position theircountry to benefit from themuch improved trading opportunities, whilepreventing excessiveshrinkage of the country’smanufacturing industry.Brazil is never going tobe competitive in exportsof labour-intensivemanufactures. But, being alarge middle incomecountry, it must manage toexpand its presence insophisticatedmanufacturing.The pressure from arising China is bound tobecome more ferocious.Nor is China the end of the story. India is alsolikely to become a growing source of competition forBrazilian companies.But this is a challengeBrazil has to meet if it isto generate the sustainedrise in incomes itspopulation needs.
China’s rise hasalready had a bigimpact on Braziland is likely to havean even bigger one
Eastern approaches: China is a far more important market for Brazil than the US
Martin Wolf
 Jamil Anderlini
on the bank’s role in the drive overseas

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