Saturday, June 7, 2008

The Emergence of a new economic order -- Influence of emerging markets and BRIC economies grow as Western Economies Slow

***Note I do not mean to violate any ownership rights on the below information -- this website is designed to pick and choose relevant information pertaining to commodity trade, trends and the growth of exchange or possible growth of new forms of exchange between Asia (predominantly China) and South America. I then also combine my own analysis and forecasts / theories to add personal substance.

This presentation was delivered by Eric Coffin, co-editor of the Hard Rock Analyst, at the New York Hard Assets Investment Conference, held 12-13 May 2008 at the New York Marriott Marquis on Times Square.

NEW YORK (Resource Investor Conferences) -- Morning, ladies and gentlemen. My name's Eric Coffin. My brother David and I publish a series of services newsletters, The Hard Rock Analyst publications. We're going to run through a couple of presentations here relatively quickly. I'm going to do mine, which is basically our rationale, our reasoning. It's not entirely dissimilar to some of the things you've heard from Lawrence [Roulston] about 10 minutes ago.

I mean, Lawrence and I are friends, and we agree on a number of things, including why the market's going to do what it's likely to do over the next little while, why it's done what it's done this decade. I'll go into that a bit. My brother will then follow with some talk about your grandfathers mining portfolio, and hell explain what that means and why we mean that. Its one of the other ways that this cycle is different from the last few, and how you can take advantage of the fact that its different from the last few.

This is where we start. This is basically the centerpiece, if you will, of whats gone on for the last 7 or 8 years, and what's likely to go on for the next 15 or 20. This is basically a short list that tells you where the growth is and where the growth isn't in the world economy. And we're talking about annual growth rates.

If you look at the West, and by West were really referring to the more developed countries, if you will. This years growth estimates and those are going to be revised a lot. I'm kind of hoping some of them will be revised in the right direction on the left-hand side, but the jurys definitely still out on that. But the U.S., you're looking at 1%, maybe, this year. Euro areas a little bit better, 1.7% to 2% is the last estimate I've got, but I suspect that's actually going to come down a little bit. Japan, I think, is going to come up a little bit. I think Canada will come up a little bit. But the bottom line here is all of those numbers are below 2% growth for this year.

This is obviously subtrend growth. If you look on the right-hand column, the picture�s decidedly different. China�s growth rate estimate this year is 9.8%. I think that one�s probably going to be revised up based on recent stuff I�ve seen. India�s just under 8%, southeast Asia�s 5% to 7%, Russia�s 7% - a lot of that�s oil, of course, but still, growth is growth. Brazil is 4.3%; that�s actually a very good number for Brazil. Brazil�s doing better now than they�ve actually done for a long time. And the Andes countries in South America are also doing significantly better in the last couple of years than they�ve done for a long time.

And the next slide here is - this is a graph that I pulled off of a Macquarie report, actually. It�s a very interesting graph because something I�ve heard again and again and again, especially coming out of commentators based in this city, is the whole decoupling thing is nonsense, it doesn�t work, there is no decoupling. Everybody else goes down the tubes with the States if we have a bad year. You know, we get the sniffles, everyone else gets pneumonia.

There�s two things you�ve got to keep in mind about that. Usually the people writing those commentaries, generally they�re people that focus on markets. And there isn�t much doubt that the epicenter of the world�s equity markets is in this city. And it does impact all other markets. But you�ve got to take a long-term perspective, and if you want to make money in markets, you�ve got to be looking at what�s going to happen going forward. And going forward, the important part of the story for us is if you take a look at these two graphs, basically what you�re looking at, the red line [hyphenated], the red graph, is U.S. growth. The green [dotted] is the rest of the world.

If you go back through the last 25 or 30 years, you�ll see that they pretty much hung together. There was a very strong correlation between the two of them. And in particular, there was a correlation, a positive correlation, in the sense that U.S. growth numbers tended to push world growth numbers. In other words, the old line - �When the U.S. gets the sniffles, the rest of us pneumonia� - was in fact true.

If you take a look at the graph for the last couple of years, it�s actually quite a bit different. The growth rate came out of 2000, got much higher in the rest of the world than in the U.S., and more to the point, if you look at the right side of that graph, although there was a bit of pull-down last year, by and large the rest of the world�s economy has not, in fact, slowed down as the U.S. did. And the projections right now are that it probably won�t. It will slow down some, but the slowdown�s going to be fairly minor in relation to what�s happening in the U.S. In other words, the rest of the world right now is the growth engine, not the U.S.

Something that we want to talk about when it comes to metals in general: the story�s slightly different from one metal to the next, but the overall story is much the same. This is something David and I have harped on for years and years, largely because we come out of the mining business. We came out of the mining side of it, not the market side of it, when we started doing these newsletters.

And one thing we understood was that the mining business went through 25 years that were very ugly. They were very, very nasty. It wasn�t a lot of fun. You saw short bull markets where companies would manage to make enough money to knock off some of the debt they�d accumulated in the 3 or 4 years before when prices were crappy. Guys were getting overloaded and building stuff that had low marginal return close to the top of these short cycles, just to get their head handed to them a year and a half later when things dipped again. And 25 years of that has an impact. And basically, what happened was the entire sector got gutted.

I mean, no one was going to university to take geology. No one was graduating as mining engineers. A lot of the assay labs went under. A lot of the companies that build equipment for mines went under. These are all specialized companies; they aren�t the kind of thing that gets off the ground in 6 months.

So what we�ve been saying for a long time is, it�s the supply, stupid. It�s not just about demand. Don�t get me wrong. The Asian demand story is real, and it�s a very important part of the picture. But part of the reason why we�ve been bullish and felt that we�d see historically high metal prices for a very long time is that the supply side of the equation has been stressed very, very heavily by 20 years of bad markets for most of these metals.

And even now, when times are really good, companies are pushing really hard and having a very difficult time getting stuff done, getting equipment delivered, getting exploration finished, getting lab results. I mean, you can pick anything in the sector. That has an enormous impact on it because it�s stretched out delivery times for all of these mines enormously.

And that�s really part of the reason why you�re seeing prices hold up better than a lot of outside-of-the-sector analysts expected them to because there�s an expectation outside of the sector that someone�s going to wave a magic wand and 20 large-scale mines are going to appear on the horizon next month.

Well, I�m here to tell you, it ain�t gonna happen. This is a very - I love this chart. This is a very interesting chart. There�s a copy of a previous talk I did on our website that has this. And I�ll take this talk when I get back to the office and turn it into a PDF and put it up on the website in the free article area, if you guys want to pull the slides up that way and save yourselves some writing.

This is a very interesting graph that was put together by Xstrata a couple of years ago. And this is basically what it tells you. If you look at the curve over on the left, they start each year - they took the projections of mines to come on stream, basically anticipated supply. And what they did is they pulled a bunch of mining analysts. They pulled together industry reports on �This is what we think is going to come on stream in the copper market,� and then next year and the year after and the year after.

The left-hand curve is 2001. Every year as you go over, you see the revised expectations each year for what they thought would come on stream. The important thing to note is if you look at the 2001 graph, you take it right up to about 2007, they�re showing 7 million tonnes of copper is what they thought would come on stream by 2007. What actually came on stream by 2007 was about 20% of that, about 1,400 tonnes. And that�s basically the picture going forward. The simple truth is this stuff just isn�t coming as fast as people thought it would. But demand is still rising very quickly.

This is probably the most important base metal chart, in my opinion, that you can see. Because it�s the big picture. It�s not going to tell you what a stock price is going to do next month, but this is the big picture in terms of this decade, next decade, and perhaps the one after that.

This is what�s called an intensity-of-use chart, and again, this one�s for copper. But they�re similar basically for all base metals. They�re pretty much the same. What this chart tells you is it�s a timeline. Each one of those colored lines is a country going through a timeline, its per-capita use of a given metal. In that case, copper.

Basically, the story is fairly simple, and that�s as people move up the line in terms of per-capita GEP, people get wealthier. They move into - the average person in country X moves to lower middle class or middle class status. People want stuff. They buy stuff. They buy cars, they buy houses with wiring and plumbing, they buy air conditioners, they buy refrigerators. All of that stuff takes metals. And basically, countries that were big manufactures at the same time - maybe one of the steepest curves there is the orange one for Korea, and that�s because Korea, as well as going through a real upward shift in their wealth, also went through an upward shift in their industrialization.

China and India are at the early stages of that. The red squares that you see just in the lower left-hand corner, that�s where China is right now. The expectation is 2015 and purchasing power parity, they expect China to get to about $15,000 per capita, purchasing parity income.

In order to get from A to B, based on this graph, and it�s not - the projection most of us are using is not particularly steep in terms of what that curve is going to do. That�s going to take about another 7 or 8 million tonnes of copper in the next 10 years to pull that off. I don�t know where that�s coming from, quite frankly. It�s going to be very, very difficult to do that. And the story�s the same for most metals.

I mean, the short and sweet here is that we expect above-trend prices, far-above-trend prices, for a very long time to come. So there�s definitely room here for companies to make money. There�s room for investors to make money on those companies. This isn�t a story we think is going away any time soon.

People are concerned about how much speculation there is in the metal market. And there is some, there�s not a lot of doubt about it. I mean, as people have been buying in the futures market. They�ve been using base metals, for instance, as an inflation hedge, and when you see the dollar pop up, you can see some of those trades get closed out.

If you go back the last week, in fact, you�ll see a couple of days where copper got whacked because the dollar had a good bounce. I think the dollar�s got potential to go a little bit lower, but we�re not expecting a huge drop from here. And where it�s at, it�s had a pretty big run down so far.

It�s going to be difficult for the Fed to cut rates any more than they�ve cut them already, quite frankly. I mean, they�re down to 2% now. Everybody can see the inflation coming. It�s not a big secret that the government numbers on inflation are a bit of a joke, quite frankly.

The actual inflation rate�s probably more like 5% or 6%, and it�s not likely to stay there for long. So I mean, what you�ve got right now is a negative interest rate scenario. The best analogy to that, I suppose, or the nearest analogy to that is the �70s. Negative interest rate scenarios - and that�s usually a rising inflation scenario.

That�s when you get a long period of negative rates. They tend to be very supportive of commodity prices in general. If you go back to the �70s, that was the last really good period for commodities where it went on for a long time. This period�s very similar. Plus, you�ve got a big demand surge out of two or three areas in the world.

So you�ve got the right backdrop for it. There will be periods where you�ll see funds unloading and you�ll see some short, sharp knocks. But basically, we think the price is going to rebuild itself in most of these cases because, as I laid out in the previous slides, the scenario�s there for long-term high prices.

You should be sensible about it. You want to be buying the dips. You don�t want to be buying the runs. You should be trading stuff. We tell our subscribers constantly to take profits. I think every page on our website on the subscriber�s side has actually got that on the bottom of the Web page. Because that�s the way you have to trade these things. You try to get them when the market doesn�t really want them, and when you get a run on things or somebody gets some good results, you take some money off the table.

Gold and silver, it�s a slightly different story, but I mean, the story�s not that dissimilar. I mean, obviously, there�s been a lot of moves on gold and silver and other precious metals because of the dollar falling. That, like I said, we�re not expecting a lot of drop from here, but although there isn�t a lot of room for interest rate moves to the down side in the U.S., there is some potential for Europe to raise rates. The ECB seems a lot more serious - they�re a lot more worried about inflation; they�re much more inflation hawks than the Fed is. So you may actually see the interest rate spread widen again, and that�ll hurt the dollar.

And the other thing that�s helped precious metals a lot in the last year or two is there�s been a real rise in ETFs because it�s simply a much easier, simpler, cheaper way to play metals. Most people just don�t want to bother buying physical stuff. They don�t want to start opening futures accounts. It�s a pretty painless way to do it.

And that�s been pulling a lot of metal, a lot of physical metal, off of the market. So basically, the base is a lot better than it was a few years ago, thanks to the ETFs. And keep in mind, if something nasty happens, the gold market and the silver market are very small markets. It really doesn�t take a lot of mainstream guys deciding it�s not a bad idea to own a bit of this stuff to really move the prices because these markets are really very small in relation to the rest of the market.

So basically, before Dave goes up to talk about a couple of his things, just the basic points here: This isn�t just a marketplace; this is a fundamental shift in economic power. It�s a fundamental shift in economic circumstances. It�s not a short-term trading thing. The short-term trade�s in it, but this is a 20- or 30-year cycle.

If you go back and look at all these other countries that went through those growth patterns and went through those demand growth patterns, that�s basically, historically, been a 20-year cycle. The average secular commodity bull market is about 24 years, and we�re about 8 years into this one.

The BRIC countries aren�t in a situation like we saw in the �70s or the �80s. Everybody thinks back to the banking crisis. They look back at the Latin American bond crisis, long-term capital, and they go, well, you look at how fragile those markets are. But again, it�s different this time. It has changed because most of those countries are actually in a very strong fiscal position. Most of these developing countries are in far better shape fiscally right now than the U.S. is, quite frankly. They�re the ones lending the U.S. money, not the ones borrowing it.

And resource producers - to echo something that I heard Lawrence say a few minutes ago - some of these guys have done well. We�ve had a bunch of names on our list that have done pretty well, even recently, discovery stores have done well. But there are a lot of producers, smaller producers and development companies, that aren�t getting price to anything like today�s prices.

I mean, the basis of this argument is we expect these prices to stay historically high for quite a long time, and I think the market will come around to this when people get a little less paranoid about the markets in general, when they go looking for sectors where - where�s the real money? Where are the sectors that have actually made a lot of money, not guys that have talked about maybe being able to make a lot of money, but guys that have actually done it? Where there�s profits, where I can have some comfort? The mining companies are that sector.

There�s a lot of companies in the mining sector, especially on the base metal side, that are incredibly profitable companies. They�re hugely cashed up. M&As are going to be a big thing in this market going forward for a long time because this is one of the few sectors in the entire market where guys playing the M&A game aren�t doing it with other people�s money. They don�t need to do it with other people�s money. They can go out and write checks and take other companies over themselves. So there�s a good market for that. We�ve had a number of companies on our list taken over in the last 2 years, and we think there�ll be a few more.

This is basically the publications that we do. I won�t bore you with the details. We do have a table downstairs; I�ll have some handout material there. I do have a thing there you can sign up on if you want to get samples of all of these things. Just give us an e-mail address and we�ll send all of them out to you.

China to become net importer of grain -- more customers for Latin America

China Will Become a Net Grain Importer in the Future

By Interfax-China
05 Jun 2008 at 09:08 AM GMT-04:00

SHANGHAI (Interfax-China) -- China will become a net grain importer due to the country's limited capacity to further expand grain supplies, China's Ministry of Commerce (MOFCOM) said today in a research report.

"We should realize that tight grain supplies in China will be a common phenomena in the future. In the mid or long term, we will become a net grain importing country," the report, drafted by MOFCOM's policy research department, said.

Rapid economic growth has fuelled strong demand growth for grain, but production disruptions caused by climate change and natural disasters, as well as falling inventories, have caused global grain prices to rise as supplies tighten. Soaring energy prices and biofuel projects have only added to the upward pressure on prices.

Over the next 10 years, global cereal prices will grow by at least 10% to 20%, the ministry forecast.

China has grown increasingly vulnerable to price swings on the international market, as the sharp growth of international crude oil prices has pushed up fertilizer and pesticide prices, raising production costs for farmers. Meanwhile, the mood of domestic traders is increasingly affected by fluctuations on overseas markets.

For grains like wheat and corn, China still maintains strong control over prices due to its high self-supply sufficiency ratio of over 95%. But for soybean products, China is particularly vulnerable to swings on the international market as 68% of the country's soybeans are imported, according to MOFCOM.

To face the potential grain supply threat, MOFCOM has encouraged the overseas expansion of Chinese agriculture firms through the development of farms in arable land-rich Africa, Southeast Asia, South America and Russia.


We have been warning since last year that China would become a net grain importer in the future. This is the first time an official Chinese government agency has echoed this forecast publicly.

The agri business is in fact a business of arable land, fresh water and sunlight. On per capita basis, China is facing shortages of both arable land and fresh water. This convinces us that the end of China's grain supply self-sufficiency is just a matter of time.

Indeed, at a recent Interfax presentation, we predicted that China's self-sufficiency ratio would drop to 83.5% by 2020. Varying factors will contribute to this increased dependency, including: population growth, urbanization, land erosion and changing dietary habits. A full report is available to subscribers.

This MOFCOM forecast, while representing a definite change of attitude, continues to reflect what we believe to be an overly optimistic view.

We agree that at current production levels, and adequate reserves, China maintains grain security in rice and wheat. However, even here, previous high levels of stockpiles are not being maintained. Of more immediate concern is the extremely tight corn market, which is barely balanced even after restrictive usage policies were implemented.

Unexpected natural disasters, such at that seen in the January snowstorms and the May 12 Sichuan earthquake, may well result in China becoming more generally dependent on grain imports much sooner than MOFCOM is ready to concede at the moment. Look for future statements from the authorities.

� Interfax-China 2008. For further information regarding Interfax China Commodities Daily Reports, contact David Harman at Interfax also publishes a comprehensive China Grains & Soft Special Report, contact David Harman for details.

Thursday, June 5, 2008

Peru hopes to seal free trade pact with China during APEC Summit - 2 years later - big change in diplomacy as noted

Peruvian foreign minister, José Antonio García Belaunde, hopes to reach a Free Trade Agreement with China during the APEC Summit of Leaders in November, taking advantage of Chinese president Hu Jintao's visit to Peru.

“Peru is very interested in establishing a Free Trade Agreement with China. We are already negotiating it and maybe we will have it signed by November this year when Asia-Pacific leaders will meet in Peru at the APEC Summit of Leaders”, he said.

Peruvian FM García Belaunde said that such an important agreement would be a great achievement for the country, because most Peruvian exports go to the United States, Europe and China.

“We hope to sign a FTA with China when (Chinese) president Hu Jintao will arrive in our country on an official visit”, he pointed out.

"We must not concentrate all our efforts on reaching agreements with the United States, but we have to look towards other world's leading economies such as China and the European Union", added García Belaunde.

News source: ANDINA

Americas Summit ends amid controversials - Xinhua News Brief 2005-11-06 09:32:02

MAR DEL PLATA, Argentina, Nov. 5 (Xinhuanet) -- The 4th Summit of the Americas with the participation of heads of state and government and representatives from 34 countries concluded here on Saturday with delegates of the meeting having adopted the final document with partial disagreement over free trade issues.

Describing the summit as "successful," Argentine Foreign Minister Rafael Bielsa, general coordinator the summit, told a news briefing that the two-day summit has agreed "all the contents of the document which has been under negotiation...All the obstacles have been eliminated."

The successfulness of the meeting lies in the fact that delegates of the summit "have reached an agreement over the importance and the necessity of trade integration in the West Hemisphere," Bielsa said.

The Argentine foreign minister also admitted that negotiations over free trade issues are difficult. But he rejected the saying that the agreement concerning the the Free Trade Area of the Americas (FTAA) is dead.

The FTAA advocates elimination of trade barriers from Canada to Chile. "This (FTAA) agreement is not dead in the water," Bielsa insisted.

Speaking of controversial ideas over the FTAA, Bielsa said "there is no condition to continue talks over the issues of free trade in the region."

The theme of the summit, chosen by the Argentine government as host, is "Creating jobs to fight poverty and Strengthening democratic governance." However, mass media has noticed that leaders from across Americas failed to overcome their differences over a push to create a hemisphere-wide trade area.

The failure to reach an agreement at the Americas Summit demonstrated a showdown over differing views on free trade between US President George W. Bush and his Venezuelan counterpart Hugo Chavez, who is leading a Latin American bloc that opposes US trade policy.

The Bush administration is trying to prompt the Americas Summitto build support for reviving the FTAA, which would eliminate trade barriers from Canada to Chile. It has stalled amid opposition from Venezuela, Brazil, Argentina, Paraguay and Uruguay which have been complaining about US farm subsidies.

Chavez, the most strident opponent of US-backed free-market economic policies, vowed to "bury" Washington's plan to expand trade in Latin America.

"Every one of us has brought a shovel, an undertaker's shovel, because here in Mar del Plata is the tomb of FTAA," Chavez told a mass rally organized by anti-free trade activists.

Addressing the Americas Summit, Argentine President Nestor Kirchner also criticized US-backed free-market recipes, which dominated in the region in the 1990s but failed to reduce poverty and inequality.

"We criticize the policies because we saw the results in Argentina's crisis in 2001 and the fall of various democratic governments in the region," he said.

Brazilian President Luiz Inacio Lula da Silva attached importance to free trade in the region, saying "Free trade is very important if we respect equality among nations." However, Lula told reporters that it was "not opportune" to discuss the FTAA before a crucial World Trade Organization meeting next month in Hong Kong, where subsidies would be the top issue.

The 5th Summit of the Americas is expected to be held in Trinidad and Tobago.

The Argentine authorities reportedly have mobilized some 35,000 policeman and government troops to guard against any possible terror attack in the period of the international conference.

However, violence and riots eclipsed the international summit which has been controversial at the very beginning. Tens of thousands of people from Argentina, Cuba and Brazil held demonstrations and a mass rally against US President George W. Bush and US economics policies outside the "exclusive zone" in Mardel Plata where the summit was inaugurated on Friday.

Bush, who arrived here Thursday night to attended the two-day summit, is unpopular among many Latin Americans who oppose the US-led Iraq war and his push for a regional free trade deal.

Clashes between the demonstrators and police occurred soon after the hemispheric political forum started. The angry demonstrators, who tried to break up cordons set up outside the venue of the summit, threw Molotov cocktails towards riot police, smashed the glass storefronts of at least 30 businesses nearby. Heavily armed police in turn fired tear gas and rubber bullets to drive away demonstrators.

Dozens of people, including several policemen, were wounded in the clashes. At least 64 people were arrested in Mar del Plata, according to Argentine Interior Minister Anibal Fernandez.

In addition to violence in the beach resort city, riots also occurred in downtown Buenos Aires where hundreds of protesters took to the street. Several stores and commercial institutions were set ablaze and seriously damaged. At least 85 people were detained in the capital. No death was reported so far.

Streets around the venue of the Americas Summit has turned to be quiet when the summit ends on Saturday. Enditem

Monday, June 2, 2008

Assessing China-Latin Ties

Jamestown Foundation

William Ratliff is Adjunct Fellow at the Independent Institute, Research Fellow at Stanford University's Hoover Institution. Published by the Jamestown Foundation, China Brief, and reprinted with permission.

The explosive growth of China’s links to Latin America in recent years are but the latest developments in a history that reaches back to the Spanish colonial empire in the early-16th century. In some ways the perceived benefits and liabilities have not changed much over the centuries, though they are now on a far grander scale. A Spanish padre wrote in 1669 that “one cannot imagine any exquisite article for the equipment of a house which does not come from China.” At the same time, however, Spanish barbers in Mexico City petitioned the government to relocate Chinese barbers to the outskirts of the city because they worked too much and that constituted “unfair business practice." Only during the militant Maoist decade of the early-1960s to mid-1970s was China’s primary interest in Latin America, which was marginal, to overthrow existing governments.


Some in the United States and Latin America worry that this rapidly rising China poses or will pose a security threat to the United States and the region. Many also worry that the influx of Chinese, with their different culture and institutions, will reduce the prospects for Latin reforms that promote open markets, political democracy, and greater respect for human and civil rights, including the rule of law. Responses to these concerns depend on what the Chinese and Latin Americans want and get from their contacts and on a realistic analysis of Latin America and broader Sino-U.S. relations.

China’s interests in the region include the following: to buy raw materials and foodstuffs and to invest in the production and transportation of those products to China; to export manufactures and other products to the region; to promote stability there so that business contracts will be signed and honored by predictable governments; to support a subtle reduction of the “unipolar” position of the United States in the world; and to win political recognition from the cluster of Latin American countries that still recognize Taiwan as the “one China."

Latin American countries want to sell China raw materials and manufactures to guarantee their historically unstable economies a foundation of assured income; to receive foreign direct investment (FDI) in many fields, including infrastructure, without the “strings” that are attached to funds from Western sources; to reduce economic and political dependence on the United States; and perhaps to get some Chinese ideas on how to develop a national economy under effective elitist leadership.


Drawing these interests together, Chinese Ambassador to Chile Liu Yuqin said in March that “Latin American countries and China … must make joint efforts to face the great challenge of the globalized world” (La Nacion [Santiago], March 2). Chilean President Michelle Bachelet, speaking for many Latin leaders, told President Hu Jintao during a visit to China in April that her country and people realize that the 21st century is in the hands of Asia, and especially China (China Daily, April 14). In 2006 Chile was the first country to sign a free trade agreement with China and in 2007 China replaced the United States as the major recipient of Chilean exports.

Relations between China and Latin America today have progressed beyond commerce, though trade and FDI are still primary objectives on both sides. According to statistics reported by Jiang Shixue, deputy director of the Institute of Latin American Studies (ILAS) at the Chinese Academy of Social Sciences (CASS), one of the most important think tanks advising the Chinese government on Latin American policies, Sino-Latin American trade grew from $1.9 million in 1950—just after the People’s Republic of China (PRC) was formed—to $343 million in 1965. Trade expanded to $475 million in 1975, $2.572 billion in 1985 and $6.114 billion in 1995 (Nueva Sociedad 203, May/June 2006). In November 2004, addressing the Brazilian Legislature, President Hu predicted that Sino-Latin American trade would rise to $100 billion by 2010, but in fact it rose to $102.6 billion in 2007 with a surge of 42 percent over 2006. There are important differences, however, in the spread of benefits in Sino-Latin American trade. Some 60 percent is with Brazil, Chile and Mexico, and the latter has a large deficit (Latin Business Chronicle, March 24). The countries exporting raw materials and foodstuffs, from oil and copper to soya, are the ones with positive balances, while others—including Mexico and some Caribbean Basin countries that rely more on manufactures—are being swamped by Chinese goods, limiting this lucrative relationship for some to a traditional focus on only a few export products.


In April a high-level Chinese official reported that by the end of 2006 almost $22.7 billion of China’s FDI had gone to Latin America (China Daily, April 16). While it is true that billions in FDI has been promised to Brazil, Argentina, Ecuador, Peru, Venezuela, Mexico and other countries, for exploration for and transportation of raw materials and foods that China wants to buy, and other projects, information on actual FDI paid out is “somewhat murky,” as Robert Devlin, a regional adviser for the UN Economic Commission for Latin America and the Caribbean, puts it. A major portion of Chinese FDI in Latin America appears to be “round-tripping,” that is the funds are invested in tax havens in the Caribbean and then sent back to China to take advantage of preferences given to foreign firms.

The most debated issues with respect to China’s expansion into Latin America are (1) the security implications for the United States and the region, with sub-set questions on Cuba and Venezuela, and (2) China’s potential anti-democratic impact on Latin American governments and social systems.


For starters, unlike the United States and Europe, China has no history of invading and colonizing other countries beyond its immediate border, what is today called Greater China. Also, China has publicly tried to avoid alarming the United States because of the critically important Sino-U.S. relations. The deputy director of the ILAS has written that “China understands well that Latin America is the backyard of the United States, so there is no need for China to challenge the American influence” there (Nueva Sociedad 2003, May/June 2006). After U.S. Assistant Secretary of State for Western Hemisphere Affairs Thomas Shannon talked with Chinese counterparts in Beijing in 2006, a top Latin Americanist at the CASS in Beijing, Xu Shicheng, said Chinese policy “has no ideological color nor is it directed against the interests of any other country” (Nueva Sociedad 203). As analyst Gonzalo Paz has noted, China’s activity in the region “hasn’t sparked strong U.S. reactions yet. Washington has either shown indifference or has considered such activity relatively inoffensive” (Asian Perspective, No. 4, 2006). Indeed, in March U.S. Deputy Assistant Secretary for East Asian and Pacific Affairs Thomas Christensen said, “We believe that China can make positive contributions to economic growth [in the region]… through increasing both direct investment and foreign assistance, and can serve as an exemplar of how pragmatic economic policy and trade openness can lead to increased literacy, managed urbanization and poverty reduction” (Testimony to U.S.-China Economic and Security Review Commission, March 19).

U.S. policy itself has sometimes thrown the door open to China’s still restrained entry into military contacts in the region, prompting National War College Professor Cynthia Watson to remark, “If Washington is not interested in having a sustained, deep and satisfying, mutually respectful relationship with Latin America, the latter will turn elsewhere” (Testimony to U.S.-China Economic and Security Review Commission, March 18). The security issue must of course be investigated constantly by intelligence agencies and other researchers, but conclusions must be drawn with balance and knowledge of broader issues of Chinese and Latin American history and politics.


China has become deeply involved in Cuba as the island’s second most important trading partner after Venezuela, but also to some degree in intelligence gathering, at a level, however, that does not seem to greatly upset Washington. Without pushing, it also offers an adaptable model for carrying out productive post-Fidel economic reform while leaders retain their political power (China Brief, May 10, 2006). Yet in the words of Mao Xianglin, an ILAS Cuba specialist, “Socialist Cuba can catch up with and surpass others only by moving rapidly to break out of its intellectual straitjacket and intensifying its reforms” (Latin American Perspectives, November 2007). Venezuela’s Hugo Chavez has tried without success to get China to join an anti-American front. Though it is exploring oil and other matters, on balance China has more to lose than gain from Venezuela’s efforts to destabilize the region and promote economic ideas that will certainly only make countries poorer and more unstable (China Brief, March 15, 2006).

Does or will China undermine democracy in Latin America? This is a hard case to make because Latin Americans have had almost 200 years of independence to establish truly representative democratic governments and productive market economies if they wanted them, but they have only rarely and incompletely come close to doing so. Even though a slight majority of Latin Americans say democracy is the best system of government, a considerable majority say it does not work for them (Latinobarómetro, November 2007). Thus, much of Latin America today is again flirting with caudillo (strong-man) populism, exemplified by Chavez in Venezuela, but also by his acolytes in Bolivia, Ecuador and Nicaragua. When one recalls that Mexico and Peru also very nearly went “Chavista” in their last elections, and Argentina is semi-Chavista today, you see the strength of this Latin love affair with paternalism and Messiahs who promise to right the innumerable “wrongs” that have characterized Latin society since even before colonial times. China’s preference lies with governments that succeed, and thus their relations have developed most rapidly and smoothly with Chile, and secondarily with Brazil.


Word has seeped out of Washington that at the Shannon meetings in 2006 the Chinese promised not to meddle in Latin politics. Last year the author asked a top Chinese Communist Party (CCP) official working in international affairs if China wanted to get involved changing political systems in Latin America. He said “No. Why should we? We are perfectly happy with a system controlled by elites that keeps real popular involvement to a minimum, so long as they do not crash and continue to enforce the agreements made with us” (personal communication, April 10, 2007). If Latin leaders, however, ask the Chinese for ideas, Chinese leaders will certainly accommodate them. Indeed, the Chinese make it a point of developing party and legislative connections with leaders of all political inclinations in all countries, if possible. As Jiang Shixue has noted, Chinese and Latin political leaders “exchange views on strategies to improve governance, the management of party affairs, political modernization and socioeconomic development.”

The challenges for Latin American countries in the years ahead include investing the profits from China trade and FDI, and using the inspiration of the Chinese example, to lay a long-term foundation for national well-being, cultivating whatever traditional cultural and civic values do not prevent the development of broadly based economic progress. This will mean both rejecting the temptations of hopeless and disruptive Chavista populism and carrying out more than half-hearted reforms, both changes that would also benefit China and the United States. China needs to reduce logistical problems of long distances, perhaps in part by more joint Latin ventures for the United States and Latin markets, cultivate greater common cultural ground, not least by increasing cultural institutes, and the like. Assuming the continuation of something like China’s current development trajectory, and a lasting major U.S. role in the Western Hemisphere, the two large nations could work together to promote a more stable and prosperous region that would benefit themselves and Latin Americans as well.

Traditionally it has been easier to blame someone else for the region’s seemingly intractable and widespread poverty and inequalities and today many Latin Americans have made the Chinese their "favorite villain," as Korean analyst Won-ho Kim wrote in a Mexican paper in 2004 (Reforma, June 20, 2004). In the end, Latin America’s failure to develop more responsive political—and more productive economic—systems was not Britain’s or America’s fault in the past, and it is disingenuous at this stage to suggest that it will be China's fault in the future.