China’s economic footprint in Latin America is going beyond trade and financing. The new key component is foreign direct investment (FDI) which brings repercussions for the global balance of power.
A new report launched by the Atlantic Council and the OECD Development Centre —‘Rising Chinese FDI in Latin America: New Trends with Global Implications– found that there has been a “long story of under-reporting” of FDI. Still, FDI flows between China-Latin America are focused on extractive industries: oil, mining and metals, oil. More than 50% of all these flows, in the last 15 years, are related to commodities. But in the previous five years, things started to change. In fact, since 2012, over half of incoming Chinese investments were directed at the service sector.
However, José Juan Ruiz Gomez, chief economist, and manager of the research department at the Inter-American Development Bank warned against optimism towards diversification.
“Most of the investment is concentrated in a handful of countries, the largest economies in Latin America; it’s concentrated in very few sectors.”
What is more worrying for Latin America’s future is the correlation between this investment and the rule of law. Chinese investment does not demand good governance from its partners which could encourage corruption and mismanagement.
Another issue is that the China-Latin America relationship is often viewed as a one-sided issue, and investment opportunities for LAC in China are often overlooked, as are risks concerning China’s potential financial disruptions in the internal bond market and capital account.