China Comment

Energy, Environment, and Economy

The Visible Hand of China in Latin America

Off the Shelf:

The Visible Hand of China in Latin America (2007), edited by Javier Santiso of the OECD, is a great pamphlet with a lot of hard data about China’s role in that part of the world.

While much is often stated of China’s trade surplus with the rest of the world, China actually ran a trade deficit with Latin America for much of the 2000s. China is the continent’s third largest trading partner, after the United States.

Eduardo Lora opens the book with a discussion on whether Latin America should fear China. From the data he presents, the answer appears to be “not yet.” He points out several economic weaknesses faced by China.

1.) Allegedly, China still has poor corporate governance and inefficient state-owned companies. Lora notes that the amount of state-run underperforming assets has massively declined over the years, but he makes much of the nonperforming loans and debt that burdened Chinese banks until restructuring and bank sheet balancing resulted in NPLs at only 9.5% as of late 2006. Considering how flush with reserves, investment and other cash China currently is, and how their companies are modernizing business practices, I do not think corporate governance questions is necessarily a crippling problem for China to overcome with investments in Latin America… especially when compared to indigenous Latin American companies’ problems with inefficiency and corruption.

To back up his assertion, Lora goes on to argue (27) that the three largest firms in main economic sectors are state owned and that China is propping up 30-50% of those firms as “national champions” by giving them loads of state support so they will become globally competitive multinationals by 2010 (27). He argues this will lead to inefficiencies.

For comparison for how strong China’s companies are. As of 2007, China managed to get eight companies into Fortune 500’s World’s Most Admired Companies (The US had 135; Japan, 61; Britain, France, and Germany, 26 apiece) . A good amount of the top companies, however, are state owned. [I find it odd though that Huawei, Lenovo, Haier, Baidu, and Galanz were not listed as admired companies– a lot can be said for them as Donald Sull (2005) discussed in Made In China.] And indeed, being listed on Interbrand’s listing of Top Global Brands still escapes Chinese companies. As of 2007, China still had no companies on the list (Here’s the report). The Best China brands are examined here. An easy chart of them is here.

2.) Lora gets a bit technical by discussing how China’s financial system is still undeveloped (28-30). Keep in mind though that a lot he discusses as being undeveloped has evolved since his article was written (in late 2006). He complains how until 2006, foreigners could only buy nonvoting B-shares in several sectors (infrastructure, utilities, and finiancials). Now, he says foreigners can purchase A shares, but to ensure stability they are required to buy over 10% of shares and hold for longer than 3 years. Lora argues this lack of easy-foreign investment will eventually damage Chinese companies’ ability to efficiently expand. (Then again, China has a lot of money even within its country, so maybe it will escape these problems.)

3.) Allegedly 50% of GDP (31) is locked up in savings and investments. Lora states this could be good, but it prevents capital and labor from moving to the most efficient sectors.

4.) Lora points out that 40% of private entrepreneurs with companies that have incomes over $120,000 USD are CCP members (31). This could be a neutral comment, or it could imply possibility that corruption rather than efficiency might govern China’s future capital markets.

Lora then discusses weaknesses that are shared between the countries:

5.) Weak higher education. (More on that in a later article)

6.) Corruption/Weak Rule of Law

As of 2007 there were 122,000 Chinese lawyers at one per 10,650 people [In the US the ratio is 1 per 270]  (“Chinese Seek a Day in Court”, WSJ, July 1, A12) but most judges are retired from the PLA and lack legal expertise.

I don’t particularly believe Lora’s view that China’s companies are doomed to not meet expectations of world-dominance, since China is confronting many troubles he identifies. However, the points he raises have at times been overlooked by people willing to too-quickly crown China the next world hegemon.

Chapter 2, by Jorge Blázquez-Lidoy, Javier Rodríguez and Javier Santiso discuss whether China’s markets complement or threaten Latin America’s.

China’s export-mix competes the most with Thailand, Hungary, and Mexican goods (53). Costa Rica also, to a lesser degree, faces competition (54).

Brazil and China are highly complementary in trade (55).

In a chart on (54), Santiso excellently documents, through use of his own data tables, how Venezuela, Peru, Chile, Columbia and Argentina have very little competitive overlap with China.

Mexico and China share interest in IT, consumer electronics, clothes, and manufacturing. Transportation equipment is Mexico’s only advantage.

Latin America allegedly has too inefficient ports, so they cannot gain in transport cheapness vis-a-vis China in trade with other countries and regions. Customs are too slow, taking up to seven days on average to clear across the region. However, Latin America will still not be overly burdened by China competition since the two regions specialize in different products.

Latin America, for example, gains in trade to China by sending copper, oil, soybeans, and coffee.

According to the article, “in 2004, 1/2 of Chinese FDI went to Latin America, exceeding the 30 per cent that went to Asia (70).” I’m not sure that’s completely true and will have to consult my other sources, but it bears examining, because it’s quite interesting, given all the media attention lavished on China-Africa relations.

In essence, Santiso concludes that “China will benefit other emerging economies in [Latin America in] the long term.” “Latin America faces few if any short-term trade costs” (55), except in Mexico and Costa Rica, of course.

Chapters 3-5 were okay, but didn’t reveal too much of immediate interest. The pamphlet-book is a good read, and I’ll recommend it even though it is fast getting out of date. There simply aren’t that many good articles/books written on China-Latin America relations, but of the ones that do exist, Santiso’s is certainly a gem.

OTHER RESOURCES

* Mohan Malik, writing for PINR has a digestable version of Sino-Latin American Relations.

* There is a 2005 CRS Congressional report on China’s influence in Latin America.

* PBS had a radio program on China-Latin America ties. One Brazilian disagreed with Santiso’s statement that China benefitted the Brazilian economy. He called attention to textile competition.

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2 July, 2008 - Posted by | Book Review, China Business, China Economy, China Future | , , , , ,

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