CHAPTER 6 CHINA'S ECONOMIC ENGAGEMENT WITH LATIN AMERICA

• Jurisdiction: United States

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2015)
CHAPTER 6
CHINA'S ECONOMIC ENGAGEMENT WITH LATIN AMERICA
Gaston P. Fernandez ¹
Partner
Hogan Lovells U.S. LLP
Miami

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GASTON P. FERNANDEZ is an associate in the Infrastructure, Energy, Resources and Projects group of Hogan Lovells, and his practice focuses on project development and finance matters involving China and Latin America. Mr. Fernandez received his B.A. in applied mathematics/economics from Brown University in 2002, and his J.D. from Indiana University (Bloomington) in 2005. He resided in China from 2005-2011, working at a prominent Chinese law firm for a year before joining the Beijing office of Hogan Lovells. In 2010, Mr. Fernandez worked on secondment at the in-house legal department of an international bank in Hong Kong, and he transferred from the Beijing office to the Miami office of Hogan Lovells in 2011. Mr. Fernandez is fluent in Spanish and Mandarin, in addition to his native English. He often represents Latin American national governments and state-owned entities, and has worked on matters involving Chinese investment in a number of countries in the region, including Ecuador, Honduras, and Venezuela. Mr. Fernandez has worked extensively on projects in the petrochemical, power, transportation and mining industries. He has directly negotiated credit facility arrangements for Latin American national governments and state-owned entities with U.S., European and Chinese banks, including China Development Bank, the Export-Import Bank of China, Bank of China and Industrial and Commercial Bank of China.

1. Introduction

Economic growth in China has become crucial for the continued growth of the world economy in the 21st century, and has been transforming the trajectory of development in Latin America as well. China's gross domestic product (GDP) has grown from US$1.2 trillion in 2000 to US$9.2 trillion in 2013, accounting for approximately 19% of global economic growth since the year 2000.² This shift in global economic weight has resulted in increased savings in China, growing from US$443.4 billion in 2000 to US$4.6 trillion in 2013, and accounting for approximately 27% of global savings in 2013.³ A corresponding boom in infrastructure development has accompanied China's dramatic economic growth. For example: (1) China's current Five Year Plan calls for the increase of domestic hydropower capacity from 200,000 MW in 2009 to 380,000 MW by 2020,⁴ and an increase in wind power capacity from 31,310 MW in 2010 to 200,000 MW by 2020;⁵ (2) since 2007, China has built over 10,463 km of high-speed railways, a network larger than the entire high-speed railway network in Europe;⁶ and (3) China will have built over 108,000 km of highways by the end of 2015.⁷ China's combination of rapid recent economic development, excess savings, and proven experience in the construction of large-scale infrastructure projects make it a natural and mutually complementary partner for countries in Latin America, which have favorable demographics and growth potential, but in many instances lack domestic companies with experience developing large-scale projects and/or sources of capital investment to finance the infrastructure required to fully realize this potential.

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China's "going out" policy, adopted in 2001, prioritized increased engagement in economic affairs abroad, and this commitment has been followed through with action. Since announcing the "going out" policy in 2001 until the end of 2013, China has directly invested over US$80 billion in Latin America, with the region accounting for almost 13% of Chinese foreign investment.⁸ These investments by Chinese banks include many of the largest infrastructure projects currently under development in Latin America, as well as many other significant projects contributing to economic development. Much of this investment has been through lending from China's state-owned financial institutions, primarily the Export-Import Bank of China, China Development Bank ("CDB"), Bank of China and Industrial and Commercial Bank of China ("ICBC").

In the mining sector, China's investment in Latin America has been increasing, with a series of recently published deals and high-level announcements of the intention for further cooperation. In 2014, a Chinese consortium led by MMG Limited and including China's Citic Metal, purchased Glencore Xstrata's Las Bambas copper mine in Peru for approximately US$6 billion, in an all-cash deal, marking the latest in a series of major Chinese investments in Peru's mining industry.⁹ The Las Bambas transaction is one of the largest foreign acquisitions by a Chinese mining company: the mine is expected to produce more than 450,000 tons of copper a year in its first five years, vaulting Peru back into the second position among the world's largest copper producers by 2016.¹⁰ In Venezuela, China committed to invest US$691 million for surveying and exploration of minerals in Venezuela, as the first phase of development of a gold and copper mine in the southern part of the country.¹¹ In November, 2014, during the most recent visit of Chilean President Michelle Bachelet to China, the two countries agreed to expand bilateral cooperation in many industries, including mining.¹² In the same month, during Mexican President Enrique Peña Nieto's visit to China, the two countries announced a US$14 billion investment package, including a bilateral investment fund for energy, mining, infrastructure, technology and tourism, with an initial investment of US$2.4 billion and the potential to grow to US$9 billion. As part of this package, the investments of Chinese mining companies in Mexico are likely to focus on iron ore, other base metals, gold and silver.¹³

In the hydroelectric sector, China's contractors and financial institutions have supported the development of many landmark projects across Latin America. For example, in Ecuador the

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1,500 MW Coca Codo Sinclair hydroelectric project,¹⁴ the 487 MW Paute-Sopladora hydroelectric project,¹⁵ the 270 MW Minas San Francisco hydroelectric project,¹⁶ and a system of substations and transmission lines connecting these projects to the national grid¹⁷ are being constructed by Chinese contractors and financed by export credits from the Export-Import Bank of China. These projects are part of a national program to construct six large-scale hydroelectric projects, which together will satisfy over 85% of Ecuador's domestic electricity demand upon completion, allowing the country to reduce CO2 emissions and dependence on fossil fuels, meet growing domestic demand, reduce domestic energy subsidies and export renewable electricity to its neighbors. The proposed development of two hydroelectric projects on the Santa Cruz River in Argentina, with a combined total capacity of 1,740 MW and investment of US$4.1 billion, would greatly reduce Argentina's dependency on foreign energy imports and improve the country's balance of payments.¹⁸ Similarly, the development of the 104 MW Patuca III hydroelectric project in Honduras, also to be constructed by a Chinese contractor and financed by ICBC,¹⁹ will be the largest infrastructure project in...