China Bails Out Brazil In $50 Billion Regional Power Grab

In early April, we asked if the $3.5 billion in financing the Chinese Development Bank provided to heavily indebted Petrobras was indicative of how China intends to invest once the Beijing-led Asian Infrastructure Investment Bank is officially up and running. We also noted how interesting (and ironic given how we’ve characterized the AIIB), it is that Beijing is investing in Washington’s backyard, effectively slighting the original Monroe Doctrine even as China tacitly implements its own take on an official policy of regional influence and control. 

Three weeks later, we documented Xi Jinping’s historic trip to Pakistan where the Chinese President pledged to invest $46 billion in a variety of infrastructure projects including the long-delayed Iran-Pakistan natural gas pipeline as part of Beijing’s ambitious (to say the list) Silk Road initiative. As a reminder, the $46 billion is 53% more than the US has invested in Pakistan in 13 years and six times as much as what Washington promised under a recent program which the New York Times called a “dramatic failure.” 

It’s against this backdrop that Chinese Premier Li Keqiang is touring Brazil, Colombia, Peru and Chile, and as Bloomberg notes, “China’s interest in Latin American isn’t just about oil and agriculture anymore.” It sure isn’t, because in a set of agreements worth as much as $54 billion, Beijing has just effectively bailed out AIIB member Brazil, further entrenching China into the economic and political future of Latin America in the process. 

Via Reuters:

Chinese Premier Li Keqiang came to the rescue of Brazil's slumping economy on Tuesday with trade, finance and investment deals worth tens of billions of dollars in energy, mining, aviation and the upgrade of dilapidated infrastructure.

 

On his first official trip to Latin America, Li saw a raft of agreements signed, ranging from a $1 billion purchase of passenger jets made by Brazil's Embraer to the lifting of an import ban on Brazilian beef and a long-discussed plan to build a railroad over the Andes to the Pacific.

 

"A new road to Asia will open for Brasil, reducing distances and costs, a road that will take us directly to the ports of Peru and, across the Pacific Ocean, China," President Dilma Rousseff said, inviting Chinese companies to build it. Brazil and China agreed to study the feasibility of the rail link that would allow Brazilian exports to avoid the Panama Canal.

 

Li put the value of Tuesday's agreements at $27 billion, while Rousseff said they totaled $53 billion, a ballpark figure that aides said included past and future funding.

 

The injection of capital from China could not come at a better time for Brazil, which is sliding into recession following the end of a commodity boom last decade that was fueled by voracious Chinese demand for its main exports, iron ore and soybeans…

 

The two leaders announced that the Industrial and Commercial Bank of China Ltd (ICBC), the world's largest bank by assets, will set up a $50 billion fund with Caixa Econômica Federal, Brazil's largest mortgage lender, to invest in infrastructure projects in the South American country.

 

The fund was another sign of China flexing its financial might in Latin America, a region that used to be dominated by the United States but where China lent more than the World Bank and the Inter-American Development Bank combined last year.


Here’s more from The Latin Times on the massive cross-mountain rail undertaking:

Peru, Brazil and China are moving forward on a transcontinental railway that will cut across the Andes and connect port cities in the Pacific and Atlantic coasts of South America. The agreement was announced during a four-country Latin American tour by Chinese Premier Li Keqiang. The mega rail project will cost an estimated $10 billion dollars. Technical studies are now underway and specific timelines are expected to be revealed in the coming months. The railway is expected to reduce the cost of exporting agricultural goods from Brazil to China, and bring new business to Peruvian ports.

 

Brazilian grain is a top item on China’s wish list, as are iron and other raw minerals. Agricultural goods like corn and soy currently leave Brazil by boat heading south down the Atlantic coast, rounding the southern tip of Argentina, and heading back up the Pacific coast on it’s way to China. An overland route would shave off a few days from the trip, and lower transport costs by an estimated $30 per ton. That might not seem like much for a $10 billion dollar project, but Brazil exports millions of tons of grain to China each year.

And a bit more color from FT:

International rail contracts are a political priority for Beijing, which sees exports as a solution to China’s burdensome overcapacity in steel, rail, construction and engineering services as the economy slows. Chinese-built rail projects have been proposed for Thailand, Indonesia and central Asia.

 

A rail programme fits Beijing’s preference for government-to-government infrastructure deals that can be allocated to state-owned companies, which remain wary of complex Latin American tax and labour laws. China engineered a merger in its two state-owned rail companies late last year to prevent them from undercutting each other in international tenders.

 

The concept of a trans-Andes rail link is ambitious, with cost estimates ranging from $4.5bn to $10bn for a northern link through the Amazon. That route is almost certain to face opposition from environmental and indigenous rights groups as it would cross primary forests. A longer alternative through Peru’s southern deserts would have to include Bolivia but would justify large port investments in the south of Peru.

 

Via Folha

As is abundantly clear from the above, China is very serious about taking an opportunistic approach when it comes to expanding China's influence in regions Beijing views as strategic. In Pakistan, China has an interest not only in bridging trade routes, but in facilitating the flow of Iranian gas and combating the spread of extremism along its western border. Now, Beijing is set to seize upon the commodities bust and invest in Latin America while conditions are ripe in order to both facilitate trade (China needs to do anything it can to combat decelerating economic growth) and cement Beijing's regional power grab in what is supposed to be Washington's strongest sphere of influence. 

The US' waning influence is now on full display in its own backyard.

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Press release and full list of new agreements between China and Brazil (note the underlined projects):

Steeped in close coordination and fluid that marks relations between China and Brazil. Thus it can be defined the visit of Prime Minister of China,  Li Keqiang, to Brazil, when he signed with President Dilma Rousseff a Joint Action Plan between the two countries in the period 2015-2021. 

During the visit of the Chinese delegation, on Tuesday (19), have signed a total of 35 agreements covering infrastructure segments, manufacturing, trade, strategic planning, infrastructure, transport, agriculture, energy, mining, science and technology, trade, among others. Also, joint statements on the results of the Prime Minister's visit and climate change were held.

"The Joint Action Plan 2015-2021, which I signed with the Prime Minister inaugurates a higher stage in our relationship. It is expressed in the various agreements in multiple government and business agreements signed today, especially in the areas of investment and trade " said President Dilma Rousseff...

Brazil and China have important bilateral investment flows. Trade between the two countries reached US $ 77.9 billion in 2014, with Brazilian surplus of $ 3.3 billion. On the Brazilian side, the highlights are the aviation, banking, machinery, auto parts and agribusiness. It has been noted, too, diversification of Chinese investment in Brazil for energy, electronics, automotive and banking.

According to José Alfredo Graça Lima, political undersecretary-general of the Foreign Ministry, "bilateral relations between Brazil and China point to a new type of cooperation between the two countries, with much more focus on investments in increasing production capacity, with Chinese contribution in technology for different areas. "

35 agreements signed between the Brazilian and Chinese governments on Tuesday (19):

FOREIGN AFFAIRS

  • Joint action plan between the Government of the Federative Republic of Brazil and the Government of the PRC (2015 - 2021)
  • Memorandum of Understanding for implementation of projects to promote investment and creation of business opportunities between the two countries.

COMMUNICATIONS

  • Memorandum of Understanding on remote sensing, telecommunications and information technology
  • Collaboration agreement for funding and Project Free Wifi 4G operation
  • Agreement between Vivo and Huawei on the Tech City Project to expand the coverage and signal in the downtown area of ??Rio de Janeiro and Porto Maravilha region
  • Agreement on joint center of innovation in the mobile area
  • Memorandum of understanding on strategic cooperation fixed and mobile solutions

PLANNING, BUDGET AND MANAGEMENT

  • Framework Agreement for the development of investment and cooperation in capacity area and the early harvest program of investments and cooperation in capacity area between Brazil and China

TRANSPORT

  • Memorandum of Understanding on feasibility studies for the Transcontinental Railway Project
  • Framework Agreement on financing the purchase of 40 Embraer aircraft
  • Operating lease financing agreement for the Blue Airlines

SCIENCE AND TECHNOLOGY

  • Additional Protocol on research and joint production of satellite earth resources China-Brazil (CBERS) 04a
  • Scientific cooperation agreement
  • Memorandum of Understanding on providing training in information technology to scholars of Science Without Borders program

AGRICULTURE AND LIVESTOCK

  • Health and quarantine protocol requirement on the export of beef from Brazil to China
  • Cooperation agreement on animal health and quarantine
  • Framework Agreement for trilateral cooperation between the government of Mato Grosso do Sul state, the China Development Bank and the China BBCA group on corn and soybean processing

SPORTS

  • Memorandum of Understanding for cooperation in the sport of table tennis and badminton modalities

ENERGY

  • Memorandum of Understanding on cooperation in the nuclear technology field
  • Conclusion of agreement EDPR shares transfer to the Three Gorges Group on wind power project
  • Memorandum of Understanding on cooperation in promoting trade and investment for the construction of photovoltaic solar panels

PETROBRAS

  • Framework Agreement for cooperation for the Petrobras project financing worth US $ 5 billion
  • Framework Agreement for cooperation for the Petrobras project financing worth US $ 2 billion
  • Cooperation Agreement for the creation of long-term relationship

FOREIGN TRADE

  • Memorandum of global financial cooperation between the Valley and ICBC to offer financial services worth $ 4 billion
  • Contract of purchase and sale of Banco BBM SA shares by the China Communications Bank
  • Cooperation agreement for preferential partnerships and access to the Brazilian capital market

INFRASTRUCTURE

  • Charter agreement between Vale and Cosco
  • Memorandum of Understanding aiming at the creation of the Polo Car of Jacarei / SP
  • Cooperation Agreement for the steel complex facility in Maranhao
  • Financing memorandum about purchasing project of 14 tonnage of iron ore ships of 400 000 tonnes
  • Financing memorandum about purchasing project of 10 tonnage of iron ore ships of 400 000 tonnes
  • Memorandum of Understanding for the acquisition of four ships of Class large ore carriers
  • Framework Agreement between China Merchants Shipping and Vale for shipping iron ore

ENVIRONMENT

  • Memorandum of Understanding for private partnership with a view to preparing project within the Amazon integration program to renew and expand the current Amazon Protection System (SIPAM)