Chinese “revenues” from building infrastructure in exchange for oil successfully applied in South America

4 June 2012

Chinese “revenues” from construction of infrastructure in exchange for resources such as oil, used in the last decade in Angola, are now being successfully applied in South American countries and adapted to local realities, according to analyst Ana Cristina Alves.

In a study entitles, “China’s Search for Resources in Brazil,” published recently by the Portuguese International Relations and Security Institute (IPRI), the analyst noted the difficulties faced in establishing this model in South American countries, especially the continent’s largest economy, Brazil, but said that this scenario had changed due to the financial crisis.

“Signing a number of loans for infrastructures from 2009 to 2011, together with direct mergers and acquisitions, suggests that the reviewed infrastructure-for-oil formula remains a useful instrument to pursue its interest in resources in South America,” Alves said, in the study obtained by macauhub.

In these new loans for infrastructure, “the workforce is largely local, as is most of the content (contractors and equipment), although the engineers supervising the operations are Chinese,” she said.

The South American governments are still keeping a majority share in the capital of partnerships with Chinese state companies responsible for exploration of resources, “a trend that is explained by the nationalist nature of a number of regimes in the region.”

In Brazil’s case and in a majority of the countries, with Venezuela the most notable exception, the loans will not be paid back in oil, although supply contracts are a guarantee in the Brazilian and Ecuadorian cases, amongst others.

This type of, “positive economic statism,” appears to, “focus on oil producers in South America and so far has left out large mining producers such as Chile and Peru.”

The wave of acquisitions in 2010 and 2011, according to the analyst, suggests that expansion of Chinese assets related to natural resources is becoming, “rooted in market rules.”

After an initially difficult period in establishing this model, the financial crisis led to greater difficulties in access to capital by some of South America’s largest companies.

This was the case with Petrobras, which the “economic crisis placed face to face with China when it needed cash to develop the pre-salt reserves.”

The US$10 billion loan granted in 2009 by China to Petrobras is associated to an oil supply contract for the loan repayment period, as well as the Brazilian oil company having offered a partnership with Sinopec in oil activities in two deep water wells as a guarantee.

Adapting to local needs, Alves said, meant that the loan was not granted to the Brazilian government but directly to Petrobras at an unsubsidised rate, and the fact that the capital was used to develop reserves rather than being paid back in oil.

“China had to adjust its infrastructure-for-oil formula to the South American institutional constraints,” the analyst said.

“In this process, which has largely been helped by the context of a global financial downturn, the entry of its companies (into the markets) has become less dependent on financial stimulus from Beijing to the target market,” she added. (macauhub)