Emerging Actors in Development Finance: A Closer Look at Chinese and Brazilian Overseas Investments

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Introduction

South-South financial flows are changing the nature of development finance and assistance. Between 2009 and 2010, two Chinese state-owned banks lent more money to other developing countries than the World Bank.¹ During the recent financial crisis, Brazil invested $10 billion in International Monetary Fund bonds, a striking example of the country’s transformation from a debtor to creditor.²

Expanding South-South trade and investment provides welcome and needed sources of capital for countries in Africa, Asia, and Latin America. At the same time, these financial flows – coupled with the emergence of powerful financial actors from China, India, Brazil, and other economies – may pose new challenges for environmental and social sustainability.

A New Geography of Growth

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Relative shifts in economic power and political influence are reconfiguring the global context for sustainable development policy. We are currently witnessing what the Organisation for Economic Co-operation and Development (OECD) terms “the new geography of growth” – “a 20-year structural transformation of the global economy in which the world’s economic centre of gravity has moved towards the East and South.”

Trends indicate that developing economies will “account for 57% of world GDP [Gross Domestic Product] by 2030.”³ Despite sharp differences among members, the G-20 is supplanting the G-8 as the primary vehicle for global economic policy coordination.⁴ Large emerging market economies are defining their own approaches to development cooperation, governance issues, and environmental and social sustainability outside of many existing normative frameworks.

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Expanding South-South Trade

South-South trade is clearly a dynamic force in the global economy. While world trade expanded four-fold between 1990-2008, South-South trade grew more than ten times. Developing countries now account for around 37% of global trade, with South-South flows making up about half of that total (19% of global trade).⁵ In 2009, for example, China surpassed the U.S. as Africa’s largest trading partner. Sino-Africa trade volumes exceeded $91 billion in 2009.⁶

China Goes Global

China’s decades-long rapid growth has made it the second largest economy in the world, surpassing Japan in mid-2010.⁷ A major factor contributing to China’s growth has been its integration into the global economy. China’s transformation from “isolated” to “globalized” is a direct result of the government’s desire to spur and maintain lasting growth of its economy.⁸

In 2001, China’s tenth Five-Year Plan (2001-2005) formalized the directive for Chinese companies to “Go Global,” a strategy to gain access to needed resources, stimulate the export of goods, and grow China’s multinational businesses and brands. Beijing has provided diplomatic support, favorable tax exemptions, insurance, and, critically, access to low-cost finance.

The “Go Global” strategy delivered quick results – China’s outward foreign direct investment (OFDI) flows increased from under $1 billion in 2000 to $57.9 billion in 2010, while its stock of OFDI grew from nearly $27 billion in 2000 to over $296 billion in 2010.⁹

As reported by the Chinese Ministry of Commerce (MOFCOM), China’s OFDI stock is largely concentrated in Asia, although investment has increased significantly in Latin America and Africa over the past five years. However, this figure assigns flows through the offshore centers solely to the corresponding region, leading to an overestimation of OFDI in Asia and Latin America. An assessment by the U.S.-based Heritage Foundation investigates these discrepancies. Whereas MOFCOM reports $7.8 billion in African OFDI, Heritage records $37.9 billion. Whereas MOFCOM designates Latin America as the second leading OFDI destination in 2008, Heritage ranks it behind all other regions, with significant investments in Europe, Oceania, the Middle East, and North America.¹⁰

Chinese Overseas Investment Banks

Chinese authorities have simplified regulations to facilitate investment abroad. Three governmental bodies – MOFCOM, SAFE, and the NDRC – have primary but not sole oversight of China’s overseas investment (separate from foreign assistance) regime. MOFCOM is responsible for developing regulations for outbound investment and for coordinating activities with commercial counselors posted at Chinese embassies. SAFE issued new regulations in 2009 that reduced qualification requirements for offshore foreign currency lending and expanded the sources of funds for lending (including access to government foreign exchange reserves).¹¹ The NDRC reviews large outbound investments to ensure they align with the country’s political interest and overall economic development policy.

In addition, CBRC and SASAC also play an oversight role. Risk management guidelines issued by the CBRC in 2008 opened the door for Chinese banks to provide loans for merger and acquisition purposes (previously forbidden under a 1996 regulation.) They require “banks to perform due diligence regarding compliance, operational, and commercial risks relating to the parties and the transaction.”¹² There is no mention of social and environmental risks.

Rather than seeking financing primarily through the capital markets, Chinese companies obtain 80-90% of their funding from Chinese banks.¹³ As part of the Go Global strategy, China’s state-owned policy banks, largely the Export-Import Bank of China (China Exim) and the China Development Bank (CDB), were mobilized to facilitate international capital flows and support mergers and acquisitions of foreign companies. Although not the largest in terms of total assets and domestic investment, China Exim Bank and CDB play the leading role in overseas investment. Other state-owned banks, such as the export and credit insurance company (Sinosure), have also contributed on a lesser scale.

China Export Import Bank

The Export-Import Bank of China (China Exim) was formed in 1994 along with two other “policy banks,” the China Development Bank and the Agricultural Development Bank of China, “as tools of the government, allowing Beijing to allocate preferential or targeted finance through a hybrid of planning and market means.”¹⁴ As a policy bank, China Exim finances and implements the government’s trade and overseas investment policies.¹⁵ The Bank is under the direct leadership of the State Council.

China Exim has exhibited phenomenal growth over the past decade. It has increased lending volumes by 30% to 40% year-on-year – an indicator of the accelerating nature of the “Go Global” strategy. China Exim is by far the largest export credit agency in the world. It approved over $70 billion in new lending in 2009, more than U.S. Exim, JBIC, and BNDES Exim combined.

Why is China Going Global?

Increasing demand for energy and natural resources is a major driver behind China’s foreign direct investments. In 2010, China was the world’s leading consumer of several major commodities including copper, steel, coal, lead and iron ore. As China’s economy experiences unprecedented growth, there is a growing need for new markets, technology, and brands.

Growing Investment in Africa

China’s investment position in Africa is accelerating rapidly, rising from an OFDI stock of less than $500 million in 2003 to $9.3 billion in 2009.¹⁶ Reportedly more than 7,900 Chinese enterprises are now established in Africa, with businesses ranging from home appliances, textiles, clothing, infrastructure, power generation, and natural resource extraction.¹⁷ Returns on investment by Chinese companies in Africa are reportedly higher than in other developing countries: from 24%-30% compared to between 16%-18%, according to the Ministry of Foreign Affairs.¹⁸

Africa as a region has increased its rather minor share of China’s total trade from 2% in 2001 to 4% in 2009.¹⁹ While China’s volume of trade with other regions is far more significant, the opposite is true for many African countries: China has become Africa’s largest export destination and the second largest source of imported goods. South Africa recently announced that it would prioritize China and India as these countries are now its biggest export markets.²⁰

Imports from Africa

The bulk of China’s imports from Africa originate from relatively few countries. While investments are spread across 48 African countries, over 70% of Chinese OFDI stock in 2008 was concentrated in five resource rich countries: South Africa, Nigeria, Zambia, Sudan, and Algeria.

However, by international comparison, China’s investments in Africa’s natural resources match well-established patterns. 50%-80% percent of all FDI to Africa goes to natural resource exploitation.²¹ Despite the rapid scale-up in Chinese investment in Africa, most foreign direct investment (FDI) in Africa originates from OECD countries – 91.6% of total inward FDI stock in Africa in 2008.²² Similarly, the bulk of U.S. imports from Africa are sourced from relatively few resource rich countries; 77% of total imports in 2009 came from five countries: Nigeria (30.5%), Algeria (17.3%), Angola (15%,) South Africa (9.2%), and Congo-B. (4.9%).²³ The top three African oil exporters – Nigeria, Angola, Algeria for the U.S. and Angola, Sudan, Libya for China – provided a quarter of each country’s total imports (27.6% or the U.S., 25.1% for China).

Resources-for-Infrastructure Deals

China has executed a number of resources-for-infrastructure deals in Africa in recent years, backed not just by oil but also bauxite, chromium, iron ore, and even cocoa. In these deals, China provides loans for infrastructure development, which are repaid by delivery or sales of the borrowing country’s natural resources. This structure is used most commonly when a country does not have the financial capacity to guarantee and/or service a loan commitment but has a natural resource (such as oil) to offer as repayment. This approach follows a long history of natural resource-based transactions and is far from unique to China.

Brazil Takes Off

Once the largest debtor among developing countries, Brazil has transformed its economy over the past two decades into a regional and, increasingly, global powerhouse. With the largest economy in South America, Brazil ranks ninth in the world in terms of GDP. In 2006 it became a net foreign investor (while still attracting significant inward flows).²⁴ It is a world leader in biofuels technology and a major agricultural producer.²⁵

Role of Brazilian Financial Institutions

BNDES – originally Banco Nacional de Desenvolvimento Economico e Social (National Bank for Economic and Social Development) but rebranded as “El banco de desarrollo de Brasil,” (“The Brazilian Development Bank”) – is a wholly owned federal government company.²⁶ It is the largest provider of funding for capital investment in Brazil. As a key source for long-term financing and subsidized interest rates, the bank is normally responsible for almost 20% of total credit granted by Brazilian banks to the private sector.

In 2009, BNDES estimates that it provided nearly 40% of financing for all investments in Brazilian manufacturing and infrastructure.²⁷ BNDES provides direct credit, fund distribution through financial intermediaries, and equity investment. It also provides grants for social, cultural, and technological development. With total assets of $285 billion (as of September 2010), BNDES is Brazil’s fourth largest bank.

While Brazilian firms began to invest abroad in the 1980s, the “internationalization of Brazilian companies is a relatively recent phenomenon. From 2000 to 2003, OFDI averaged $0.7 billion a year. Over the four-year period 2004-2008, this average jumped to nearly $14 billion. In 2008, when global FDI inflows were estimated to have fallen by 15%, OFDI from Brazil almost tripled, increasing from just over $7 billion in 2007 to nearly $21 billion in 2008. An estimated 887 Brazilian companies have invested abroad in 78 countries.”²⁸

Not only did China displace the U.S. as Brazil’s biggest trade partner in 2009, but it was also Brazil’s largest foreign investor, investing in a wide range of areas, from iron ore mines to vast tracts of farmland and the electricity grid.

China and Brazil: A Strategic Partnership?

In April 2010 Brazil and China pledged to foster their “strategic partnership,” signing a range of agreements including a 2010-2014 Joint Action Plan to deepen bilateral relations.²⁹ President Lula stated that the agreements come on top of “spectacular” growth in bilateral trade of “780 percent since the beginning of my administration” in 2003, reaching $36 billion in 2009 in spite of the global economic crisis, making China Brazil’s largest trading partner.³⁰ However, this trade is highly asymmetric. “Whereas Brazilian exports are concentrated mostly on soy and iron ore, Chinese sales cover a wide range of industrial goods, from electronic equipment, machinery, shoes, textile and garments. Moreover, Brazil accounts for less than one percent of the total Chinese exports, whereas the Asian country is the destination of around 10 percent of Brazilian exports. The Chinese state company Sinopec is now the largest buyer of Brazilian oil, importing 200,000 barrels per day.”³¹

China and Brazil seek similar relationships with Africa, sharing a strong proclivity to oil and mining activities. China’s trade and investment relationship with Africa, however, is far more diverse than Brazil’s, encompassing energy, manufacturing, retail and agriculture in addition to oil and mining. This makes it less likely that the two countries will compete over investment opportunities. A key challenge is to ensure these trade flows result in clear benefits to the host government and local communities, and safeguard the environment.

WRI’s Work

With our record of independent research, our experience convening a wide range of stakeholders, and our close partnerships with organizations in China, Brazil, and several host countries in Africa and Asia, WRI’s International Financial Flows and the Environment (IFFE) initiative supports efforts by both investors and host countries to move towards environmentally and socially responsible development.

IFFE works to help these countries to apply the highest climate change, environmental and social standards to their investment overseas, report publicly on these standards, and respond to the concerns of NGOs and local communities.

For additional information on WRI’s Emerging Actors in Development Finance work, contact WRI Senior Associate Xiaomei Tan xtan@wri.org.