Analysis: What Assets China Has Bought in Brazil

RIO DE JANEIRO, BRAZIL – It was in 2014 that Chinese insurance company Anbang took control of the traditional Waldorf Astoria hotel in New York. For US$2 billion (R$10 billion), an iconic hotel would become a landmark of Chinese expansion in the West.

Obama, the U.S. president at the time, declared that, for precaution and safety, he would no longer stay at the hotel, breaking a decades-long tradition of presidents staying at the Waldorf when visiting the city.

About four years after the takeover, the Anbang Group, an insurance giant with assets worth around US$301 billion, became the target of a Chinese government operation for financial crimes. As a result, the Chinese government officially became the owner of the iconic hotel, in addition to countless other assets that the company had acquired worldwide.

However, the practice is not isolated. In China, the so-called “gray rhinos” are private groups that expand globally through cheap credit in their own country. Frequently, groups like HNA, Wanda Group, Anbang, face financial hardship given their high leverage, thereby prompting a power shift. Private groups leave, state-owned groups buy the assets.

In Brazil, China has become the country’s leading foreign investor over this century. According to data from the Ministry of Foreign Affairs released in 2019, between 2003 and 2019 the Chinese invested US$72 billion here, or 37.3 percent of the total invested by foreigners.

Despite the smaller number of projects, the Chinese already invest more in Brazil than Americans, Japanese, and Canadians, whose presence in the country has been in place for decades.

Also unlike the Americans, the Chinese have been operating here, at least initially, through the purchase of stakes, either majority or minority, in local projects such as the pre-salt oil fields purchased during the Libra auction.

Of the total invested by the Chinese, only 11 percent was allocated to new projects. The remainder focused on purchases of existing assets.

The purchases also differ from those made through trade. In this area, China overtook the United States, becoming Brazil’s largest trading partner, particularly after its accession to the World Trade Organization (WTO) in 2001.

Through this membership, China has sought recognition around the world as a “market economy”. In practice, this recognition, which not all countries have granted the Asian giant, has a significant impact on its growth and the increase of the Chinese slice of the international trade pie.

Being recognized as a market economy ensures that China’s prices can be considered in assessing practices such as dumping (when a product is sold below its normal price to gain market share).

Many argue that Chinese prices can not be considered, but rather examples from other countries, since prices in China are strongly influenced by the state, so they are not market prices.

This allows fines and anti-dumping blocks to be placed, forcing the Chinese government to negotiate. This is a very significant issue in the world, particularly involving the United States and Japan.

In Brazil, this concern is not present, since in 2004 it recognized China as a market economy and began to consider its prices as “normal in the market”.

Returning to the issue of external investment, however, the country has operated in Brazil on two fronts, with different results. The gray rhinos, the private groups, have bought considerable shares in areas such as aviation, infrastructure, and finance.

For instance, HNA in 2015 bought approximately 23.7 percent of Azul Airlines. In another venture in the sector, the company bought a minority stake in Galeão airport.

As in the case of Anbang, HNA Group suffered from liquidity constraints and had to divest its holdings.

Chinese state-owned companies, however, do not have the same problem. Unlike private groups that take risks in diverse areas through loans, they have exhibited much greater liquidity and consistency in their purchases.

In 2017, the China Merchants Group, a publicly-traded company controlled by the Chinese government, paid R$2.8 billion for the Port of Paranaguá Container Terminal, the second largest in Brazil. In 2020, state funds took over part of the business.

Also in the port area, a sector that has gained interest from the Chinese government, the state-owned China Communications Construction Company (CCCC), is investing R$2 billion to build a port in Maranhão, thus establishing two routes for the flow of Brazilian agricultural production, in the south and north of the country.

The same CCCC is currently negotiating a new project in Santa Catarina, also for the grain area, as in São Luís. The sum involved amounts to approximately R$1 billion.

Having bought the engineering company Concremat, CCCC is also investing in wind energy and, depending on the São Paulo government, it will compete for highway concessions.

Also in the infrastructure area, the state-owned State Grid, the largest Chinese energy transfer company, took control of CPFL, paying US$4.5 billion in 2017 for 54 percent of the São Paulo power company, which is publicly traded.

Another energy giant, CTG, China Three Gorges – owner of the Three Gorges power plant, the second largest on the planet, which disputes the title with the Itaipú hydroelectric power plant – acquired control of eight hydroelectric plants, in addition to other projects in the area, through the purchase of CESP, a privatized company in São Paulo.

The Chinese state-owned company is currently the largest private energy generator in Brazil, ahead of the French-Belgian Engie. Together, State Grid, CTG, and State Power Investment Corporation (SPIC) control 15,600 MW, or ten percent of all Brazilian energy production.

Both companies are also strong competitors in privatization projects, such as Eletrobras and Cemig.

In the oil area, CNPC, the Chinese National Petroleum Corporation, PetroChina’s parent company, is a partner of Petrobras in the pre-salt fields, through the joint purchase of the Libra field at auction. Another Chinese state-owned company, CNOOC, is also a partner in the field (both with ten percent each).

In the largest pre-salt find in 2011, Petrobras is a partner of Shell, and of RepsolSinopec, another Chinese state-owned oil company. In all, the Chinese have a stake in 12 pre-salt fields.

The company also seeks to restart the construction of Comperj, Petrobras’ petrochemical complex in Rio de Janeiro state.

In the agricultural sector, in addition to ports, the Chinese are majority partners with 53.4 percent of Belagrícola, a Paraná producer of machinery and equipment with revenues of R$2.8 billion. Other investments include Fiagril, acquired in 2016 by the same group, DKBA.

Partnerships are also on the Chinese list, as in the case of the one signed with Rede Bandeirantes, owner of the country’s TV and radio network. The company has signed a content production agreement with the Chinese state-owned China Media Group.

The Chinese state-owned company also signed an agreement for co-production and use of 5G technology with Rede Globo.

Investments abroad have been criticized by the Chinese president Xi Jinping, for breeding vulnerability in the country, such as the complications of private groups that have unrestrainedly expanded.

However, at the state level, China has a relatively well-defined focus: to create and secure infrastructure so that the Chinese can import food and other commodities required by their population.

These are legitimate investments and welcome in a country that lacks so much infrastructure. The cheap money that China raises by accumulating resources for its exports can positively impact the country.

However, caution is needed when discussing facilitating exports of commodities to China. Despite the dollars coming in, generating income and consumption for the population, the environmental issue cannot be disregarded.

The impact caused by big projects that facilitate the exploitation of Brazilian natural riches is considerable and our patterns can not yield to the Chinese unbridled appetite.

As China’s southern neighbors already know, the country is not exactly the most concerned with environmental damage in the world. So say those who suffer from drought and, consequently, from hunger, due to the control of Chinese dams over rivers for energy generation.

The environmental cost must be considered crucial for the country in several aspects and, in this case, there is no foreign investment to repair the potential damage to the Brazilian image.

Source: InfoMoney