Brazil’s vulnerability is a big opportunity for Chinese investors
Açu superport near Rio de Janeiro was dubbed the “highway to China” by Eike Batista, the now disgraced former billionaire, when he founded it more than 10 years ago.
Little of Mr Batista’s Brazilian business empire survived the end of the commodities boom and he went bust in 2014 in a trail of exaggerated promises and extravagant spending. But one project that has blossomed is Açu port. Revitalised by its new owner, US-based private equity company EIG Global Energy Partners, it has become not only a highway to China but could soon be partly owned by Chinese companies.
Cut into the beaches in the north of Rio de Janeiro state with a pier stretching nearly three kilometres into the south Atlantic Ocean, it already serves as a port for iron ore shipments to China and as a logistics base for Brazil’s large offshore oil discoveries, known as the pre-salt blocks, in which two of China’s biggest oil companies, Sinopec and Cnooc, have an interest.
Now EIG is looking to expand the port and develop new businesses, from container terminals to power plants and a rail connection — many of which have attracted Chinese interest.
“The Chinese are an important partner, in the long run they have such critical mass that you want them to be not just a client, but part owners,” says R. Blair Thomas, chief executive of EIG. The private equity firm is the controlling shareholder of Prumo Logística, which manages Açu port.
The talks by Chinese companies interested in investing in Açu — which has been confirmed by several sources — are part of a surge of investment over the past two years by the Asian country’s biggest companies in Brazil.
Aside from Sinopec, Chinese companies buying assets in Brazil range from China Three Gorges Corporation (CTG), the builder of the dam of the same name, and energy transmission specialist State Grid Corp of China to trading company Cofco and aviation-to-finance conglomerate HNA. Technology companies such as Baidu have also made forays into Latin America’s largest economy. Deals involving Chinese companies have exceeded $10bn this year and in 2016, according to Dealogic.
For Brazil, the Chinese investment boom could not have come at a better time, helping to prop up Brazil’s struggling economy. Gross domestic product has contracted more than 7 per cent over the past two years in Brazil’s worst ever recession as it struggles to deal with a massive corruption sandal.
The flurry of interest in Brazil represents a significant change of tack for Beijing. Since 2005, China has loaned more than $140bn to Latin America — almost half of that to Venezuela. Increasingly, though, Beijing is diversifying away from Venezuela and other traditional allies in the region, such as Ecuador, into countries with a sounder financial footing and greater strategic possibilities — principally Brazil.
Proponents see the partnership as a marriage of two emerging economic powers — China, the fast-rising industrial leader, and Brazil, the agricultural and natural resources powerhouse.
“I think it’s a natural match,” says Marcelo Kayath, former co-head of investment banking for Credit Suisse in Brazil and founder of investment firm QMS Capital. “China has the excess capital and know-how in infrastructure and they need what we have, which is raw materials and food.”
But Brazilian nationalist politicians are beginning to raise the issue of China’s influence ahead of presidential elections due next year. Beijing’s encroachment in the US’s backyard is also raising concerns in Washington.
“If Brazil with all of its economic weight and influence in the region becomes highly wedded to China, that really changes the strategic landscape quite a bit,” said R Evan Ellis, research professor of Latin American Studies at the US Army War College’s Strategic Studies Institute.
Chinese investment in the rest of the world other than Brazil has dropped 40 per cent in the first eight months of the year — after peaking at $170bn in 2016 — as a result of a crackdown from Beijing on overseas investments. Yet the picture has been the opposite for China’s dealings in Brazil.
According to Dealogic, announced Chinese mergers and acquisitions of Brazilian companies in the year to date totalled $10.8bn this year, compared with $11.9bn during the whole of last year. These figures are up from nearly $5bn in 2015 and are the highest since the record of $12.5bn set in 2010.
Analysts say the increased investment in Brazil began around 2010 as part of a state-led directive to increase China’s food and energy security through overseas acquisitions.
“Industries like energy, mining and agriculture are promising and complementary to the Chinese economy,” says Cui Fan, professor of international trade at the University of International Business and Economics in Beijing. “Investing in Brazil can also help [Chinese companies] with exports to the Americas.” In a second phase, around 2014, investments diversified into manufacturing and other industries focused on Brazil’s domestic market, with China looking for an outlet for excess industrial capacity in the steel, automotives and other industries at home.
State-backed Chinese banks set up in Brazil during this phase. Chinese banks and investment groups have also backed the $20bn China-Brazil Fund, a Beijing-managed fund to finance infrastructure projects that was formally launched in May this year. “Currently Brazilian government investments are sluggish.
China has the advantage of capital, technology and construction capacity,” says Zhang Jun, the head of the China practice for Brazilian law firm Demarest. Lawyers and bankers say a third phase began last year. Rather than focusing on narrow geostrategic objectives, today Chinese companies are beginning to act more like conventional multinationals, looking for competitive returns and investing opportunistically across a broad range of industries.
“They are looking at it with the eyes of investors,” said Reinaldo Guang Ruey Ma, a China specialist with São Paulo-based law firm Tozzini Freire. “We joke that in the Brazilian popular imagination there are two ideas about China: ‘The Chinese have a lot of money and the Chinese will buy anything.’ The first is true. The second is not.”
The most recent wave of Chinese investment has also been supercharged by a corruption investigation that has swept Brazil, analysts say. Known as Lava Jato, or car wash, the probe, which has uncovered a web of bribes in return for contracts between politicians, state-owned companies and private contractors, has bankrupted some companies and forced others to divest assets. One of these, Odebrecht, a large construction group, in July sold its controlling stake in Galeão, Rio de Janeiro’s international airport, to Chinese conglomerate HNA in a R$1bn ($310m) deal.
Lava Jato also deepened the country’s worst recession in history. To shore up the federal budget, President Michel Temer’s government is privatising assets ranging from hydro-electricity companies to even the national mint. “The last and perhaps most important factor is the huge offering of assets from Lava Jato, suddenly everything is for sale, from ports and highways to airports and railways,” says Mr Ma.
“I joke that if the Chinese had said five years ago: ‘I want to buy the largest construction company [in Brazil]’, people would have laughed. Today they say: ‘Sit here, let’s talk.’ The conversation has changed.” The rapid increase and scale of Chinese investment have taken many by surprise. CTG, for instance, has invested R$23bn ($7bn) in a portfolio that includes 17 hydropower plants, some of which it bought from Duke Energy of the US, 11 wind farms and one trading company.
“This is a country that has a strong rule of law, so we feel our investments, our interests are being protected,” says Li Yinsheng, chief executive of CTG Brasil, which represents more than 10 per cent of the Three Gorges Group in terms of revenues. “We are here to stay.” Beijing had once wooed other Latin American countries, such as crisis-ridden Venezuela, as potential leftist allies before becoming disenchanted with their lack of financial discipline.
“Brazil is a comfortable place to operate for them, especially because they are so long-term oriented,” says Oliver Stuenkel, a professor of international relations at the Getulio Vargas Foundation in São Paulo. “China knows the fundamentals of Venezuela’s economy are shattered, and that there’s an irreversible long-term decline.
So they don’t want put their eggs in the Venezuelan basket.” At the moment, Chinese companies are not facing the same political resistance in Brazil to their investments as in other countries, such as Australia, where they have been barred from buying farmland and some transmission companies. In 2009, former president Luiz Inácio Lula da Silva limited foreign purchases of land in a move seen as aimed at Chinese acquisitions of large farms. But this time Brasília is desperate for any investment it can attract.
However, with hotly contested elections looming in Brazil next year, this benign situation might not last. Far-right politician and presidential candidate Jair Bolsonaro, who is currently in second place in opinion polls ahead of the 2018 vote, says: “What we need is to become aware that China is buying Brazil, not buying in Brazil, it is buying Brazil.” He adds: “Even during his last pronouncement the Chinese leader said he is implementing a new communism and does not accept contradictions.
So on the question of the sale of state assets, you have to see to whom you are selling.” Larissa Wachholz, director at Vallya, a consultancy that brings Chinese investors to Brazil, says: “From the moment that the Chinese start to enter into strategic areas in a big way, they will have to think about strategic public relations because they are starting to attract the attention of people who don’t like that.”
“Although it is economic . . . I think there is a political strategic component to it,” Mr Ellis says of the Chinese investment. Brazil might need to start subjecting deals involving Chinese state-owned companies to more scrutiny, similar to security reviews conducted by the US Committee on Foreign Investment, he says, adding that the investments could undermine Brasília’s willingness to be openly critical of China. Mr Ellis points to recent interest by China Mobile, the country’s biggest mobile phone company, in acquiring Oi, an embattled Brazilian operator.
“Brazil may be wanting to look harder at the sectors it is allowing China into. China Mobile, if it gets 64m Brazilian mobile subscribers, that’s probably the biggest step that’s been taken by China Mobile anywhere,” he says. If some politicians have concerns about Beijing’s investment drive, employees of companies acquired by Chinese counterparts are just grateful that their jobs have been saved. Alex Balanceiro has worked for 12 years at Swissport, the baggage handling company, at Galeão airport. HNA has bought Swissport and a stake at Galeão.
“It’s good thing that the Chinese are coming here at this time when Brazil is in a crisis,” he says.
Andres Schipani & Joe Leahy