Permanent Secretariat of the Forum for Economic and Trade Co-operation between China and Portuguese-speaking Countries (Macao)
ABSTRACT: This article reviews the transformation and upgrading process of China-Brazil bilateral economic and trade relations on trade, investment, finance and services, from the Chinese perspective.
The volume of trade between China and Brazil reached a record high in 2013. It then dropped afterwards due to economic recession in Brazil, but data from 2017 shows an encouraging recovery. Trade relations have strong support from the highest political authorities, including the Chinese President, Xi Jinping.
Chinese investment in Brazil increased and has been highly diversified since 2010. Despite the aforementioned economic recession after 2013 and losses suffered by many companies, their persistence, a step by step approach and diversified development approach assured their success in Brazil. This success was helped by Brazil’s investment partnership program (infrastructure-based privatization investment plan) launched in 2016.
On the financial realm, at first, Chinese financial institutions chose to issue commercial loans to support the implementation of relevant projects. Afterwards, in order to support mergers and acquisitions investment of Chinese enterprises in Brazil, they began to apply syndicated loans and financial investments. On services, China and Brazil have effectively cooperated on important areas, but this should be a good time to expand and strengthen such cooperation to more areas.
KEYWORDS: Economic and Trade Relations; Investment; Cooperation between China and Brazil
The economic and trade relations between China and Brazil were extraordinary from 2013 to 2017. In 2013, their bilateral economic and trade relations reached a historical height. At that time, China had been the largest trading partner of Brazil for five consecutive years. Brazil was the largest trading partner and an important investment destination of China in Latin America for a long time. The pragmatic cooperation between the two countries has achieved fruitful results.[* Translation by Zehua Tian, PhD student at the University of Macau.
The Central People’s Government of the People’s Republic of China, 2013, online: http://www.gov.cn/ldhd/2013-11/06/content_2522771.htm. ] At that time, Wang Yang, the Vice Premier of the Chinese State Council, attended the third session of China-Brazil High-level Coordination and Cooperation Committee which was held in Guangzhou, and evaluated that the relations between China and Brazil were in the most active and productive period. However, because of the ‘double dip’ in international economy, the end of a cycle of rising commodity prices, the new normal of Chinese economy, and the deterioration of domestic political and economic situation in Brazil, their bilateral trade and economic relations also underwent a baptism and test in a complex and volatile environment.
Over the past five years, the governments and enterprises of the two countries maintained a highly consistent willingness to cooperate, as well as a strong strategic force. At the same time, they actively explored the road of development. On the one hand, the Chinese leaders put forward several constructive proposals, such as the ‘One Belt and One Road’ international cooperation initiative, the new ‘1+3+6’ framework for pragmatic cooperation[ On 17 July 2014, Chinese President Xi Jinping attended the China-Latin America and Caribbean Summit in Brasilia and delivered keynote speech. China proposed to jointly build a new ‘1+3+6’cooperation framework, referring to the establishment of the China-Latin American Countries and Caribbean States Cooperation Plan (2015-2019) with the aim of achieving inclusive growth and sustainable development. China strives to promote China-Latin America trade to scale up to 500 billion USD and the investment stock to Latin America up to 250 billion USD within ten years and promote the expansion of local currency settlement and currency swap in bilateral trade. And we should boost China-Latin America industry connection with energy and resources, infrastructure construction, agriculture, manufacturing, scientific and technological innovation, and information technologies as cooperation priorities.] and the new ‘3x3’ model for capacity cooperation[ On May19 local time, Premier Li Keqiang attended the China-Brazil Business Summit in Brasilia together with President Dilma Rousseff of Brazil and delivered a speech. Li Keqiang stressed that China is willing to discuss with Latin-America a new ‘3×3’ model of China-Latin America production capacity cooperation. First, we should conform to the needs of the Latin American countries and jointly build three major channels of logistics, electricity and information to achieve connectivity on the South American continent. Second, we should observe the rules of market economy and achieve a cooperation pattern with sound interaction among enterprise, society and government. Third, we should focus on China-Latin America cooperation projects and expand three financing channels of fund, credit and insurance.] between China and Latin America. Moreover, China also actively implemented the trade policy of import expansion; on the other hand, the Brazilian government actively dealt with economic recession, effectively curbed inflation, tightened fiscal spending, and further opened a lot of investment areas. All these favorable conditions laid the foundation for the transformation and upgrading of the economic and trade relations between China and Brazil. And the China-Brazil economic and trade cooperation will usher in a new era. From the perspective of China, with the focuses on trade, investment, finance and service, this article reviews the transformation and upgrading process of China-Brazil bilateral economic and trade relations and look forward to their future development.
I.Trade Development: A Huge Potential
In 2013, China-Brazil bilateral trade volume reached a historic peak of $90 billion USD. [ According to statistics recorded by China Customs, the bilateral trade volume between China and Brazil in 2013 was $ 90.279 billion USD at first, then changed to $ 89.856 billion USD.] However, while we looked forward to another record high in 2014, Brazil faced an economic slowdown of a nearly zero annual growth. In 2015 and 2016, Brazil economy declined by 3.8% and 3.6%. With sharp devaluation of Real and decline in purchasing power, the Brazilian imports from China shrunk dramatically. Although the volume of Brazilian commodities exported to China has increased, it is hard to curb the trend of decline in the export volume under the effect of lower prices. Nevertheless, in 2017, Brazil's economy started to come out of the bottom. It is generally expected that its economic growth rate will be around 1%, the currency of Real will stabilize and the inflation will be effectively controlled. The recovery effect influenced the bilateral trade quickly and causes a gratified restorative growth. China's import volume from Brazil even reached a historic height of $58.6 billion USD. From this data, we can see that the expansion of China's import from Brazil is undoubtedly a stabilizer for the bilateral trade in a harsh environment, as well as a major driving force for the resumption of growth.
As one of the world trading powers, China attaches great importance to imports when strengthening its exports. In 2014, the Chinese government began to implement the trade policy of expanding imports,[ The Central People’s Government of the People’s Republic of China, 2014, online: http://www.gov.cn/zhengce/content/2014-11/06/content_9183.htm.] in order to meet the needs of the economy-driven restructuring. China continues to open its markets, and its import scale is expanding constantly, which not only boosts the domestic economic development, but also makes an important contribution to the global economy. Statistics show that in the past 10 years, China's annual average import volume reached $750 billion USD, equivalent to creating 14 million jobs for its trading partners. China contributed more than 20% of the world economic growth.
The statistics of China-Brazil bilateral trade also proved that this policy was effective. In past five years, China has made tremendous efforts to overcome not a few problems, such as demand reduction in the new normal economy, and the declining demand for raw materials due to the compression of steel production capacity. At the same time, China also had to take into account the diversified demands of other countries to export to China. In 2014, when China’s President Xi Jinping visited Brazil, Tianjin Airlines signed an agreement with Embraer to order forty E190 regional jets.[The Ministry of Foreign Affairs of the People’s Republic of China, 2014, online: http://www.fmprc.gov.cn/web/ziliao_674904/1179_674909/t1175756.shtml. ] In 2015, when China's Premier Li Keqiang visited Brazil, the quality inspection departments of both countries signed the protocol for quarantine and veterinary hygiene of Brazil beef to China, to restore the exportation of Brazilian beef to China.[ The Central People’s Government of the People’s Republic of China, 2015, online: http://www.gov.cn/xinwen/2015-05/20/content_2864973.htm. ] These measures showed the sincerity of China in expanding its imports from Brazil.
In the meantime, Brazil also made its efforts. Although there were some problems in its economic development, and the purchasing power was declining, Brazil still purchased a lot of Chinese commodities for the 2014 World Cup Brazil and the 2016 Rio Olympic Games, such as construction machineries, various kinds of equipment (including electricity, communication, security, photovoltaic, city bus, rail transit and water transport), garments, electronic products and small commodities. Hence, Brazil did help to improve the development of Chinese exports.
China and Brazil have a high degree of confidence and recognition in further expanding the scale of bilateral trade. This is because of the economic development and the goodwill of the two countries. The market size of both countries accounts for 23% of the entire world, and the total economy accounts for 17%. At the same time, the bilateral trade volume accounts for only 2% of China’s total foreign trade volume, 18% of China-US trade volume and 16% of China-EU trade volume. Hence the development of bilateral trade between the two countries has enormous potential. The first China International Import Expo will be held in China in November 2018.[ In May 2017, Chinese President Xi Jinping announced at the opening ceremony of the Belt and Road Forum for International Cooperation that China will host the China International Import Expo starting from 2018, and the first China International Import Expo will be held from 5 to 10 November 2018.] And Brazil will also expand imports after its economic recovery. Therefore, both countries should seize the opportunity, then improve their bilateral trade, in order to make it compatible with the economic strength and market size of the two countries.
II.Investment Cooperation and Enduring Development
Enterprises such as Huawei, ZTE, Gree and Bank of China were the forerunners in entering the Brazilian market in the 1990s. By 2009, a small number of enterprises of manufacturing, energy and agribusiness had invested in Brazil by establishing foreign affiliates in Brazil. Those enterprises mainly aimed at meeting the international demands, seeking new markets, or purchasing bulk commodities and providing energy-related services. Since 2010, large numbers of Chinese enterprises have entered Brazil and set off the first wave of investment in in the country, including automobile, home appliances, heavy machinery, banks, as well as telecommunication, electricity and agriculture enterprises. According to the reports of the China-Brazil Business Council,[ Chinese Investments in Brazil, Projects and Research, China-Brazil Business Council, 2014-2015, online: http://www.cebc.org.br/en/projects-and-research/chinese-investiments-in-brazil. ] the total amount of announced Chinese investment projects in Brazil reached $ 56.5 billion USD in 2007-2013, of which $ 28.3 billion USD were confirmed. At the same time, manufacturing enterprises were mainly through greenfield investment or creating joint ventures to enter Brazilian market, while energy and agriculture enterprises were mainly through acquisitions of good assets. Chinese enterprises have already diversified their investment of industries and entry modes in Brazil.
With the slowdown of Brazil's economy in 2014 and the economic recession in 2015 and 2016, Chinese manufacturing enterprises (home appliances, automobile, motorcycle, construction machinery, etc.) in Brazil were very difficult to develop. The deterioration of the economic environment caused market weakness, and sales were almost stagnant. Due to the devaluation of Real, corporates suffered substantial losses, and many enterprises had to stop production to go through the economic winter. In the meantime, the devaluation of Real also created opportunities for Chinese companies to invest in electricity and agriculture (through mergers and acquisitions). The acquisitions by China Three Gorges Corporation and China Oil & Foodstuffs Corporation in Brazil are typical examples. Brazil launched its investment partnership program (infrastructure-based privatization investment plan) in 2016, to open large scale franchises such as railways, highways, airports and even oil and gas, to private and foreign investors. The acquisitions made by Hainan Airlines, State Grid Corporation of China and China Communications Construction Company set off the second wave of investment in Brazil and built the confidence of economic recovery of Brazil. Several statistical reports made by China-Brazil Business Council are attached after this article, which can help us to better understand the situation during this period. In addition, according to the latest communique issued by Ministry of Planning, Development and Management of Brazil in January 2018, from 2007 to 2017, China confirmed to have invested $533 billion USD in Brazil for a total of 93 projects. The total amount of investment announced and confirmed in 2017 was $20.9 billion USD. It is the year of second highest volume of investment since 2010 ($38.5 billion USD), and more investment from China is expected in the future. Several features of this process are summarized as follows:
The first one is persistence and great efforts. The earliest enterprises like Huawei, Gree which entered the Brazilian market, have already firmly occupied the Brazilian market through the hard work for nearly two decades. They underwent a lot of changes in different situations and experienced various difficulties in carrying out their projects. However, they always believed in the prospect of the Brazilian market, and constantly strived to adapt to different situations. It is the persistence that makes them familiar with the Brazilian market, laws and partners, and provides valuable reference for other Chinese enterprises. Then other greenfield investment developed, such as TCL, Midea, Chery, JAC, BYD, XCMG, Sany Heavy Industry, LiuGong machinery.
The second one is step by step. The mergers and acquisitions can be taken for examples. China Three Gorges Corporation entered the Brazilian market by participating in a joint venture with Portuguese electricity companies first, then it acquired the assets of Portuguese electricity companies in Brazil. Afterwards, it won the bid for the franchise of two hydropower plants by itself and acquired the assets of Duke Energy in Brazil. At first, the State Grid Corporation of China acquired the equity of 14 power concession companies in Brazil and laid the foundation for its future development. Then together with Brazil's State Electricity Power Company, it won the bid for the first phase of the franchise project of Belo Monte UHV transmission. Afterwards, it won the bid for the second phase of the franchise project of Belo Monte by itself. At last, it acquired CPFL Company and controlled the whole industry chain of the power generation, transmission and distribution. Instead of completing the mergers and acquisitions of Brazilian companies overnight, Chinese companies learned from the original Brazilian management team and gradually adapted to the Brazilian market, then kept exploring new opportunities to develop.
The third one is diversified development. We can see that in the past five years, Chinese enterprises not only enjoyed rapid growth of investment in such traditional areas as energy, mining, electricity, agriculture, telecommunications and manufacturing, but also began to cooperate in emerging areas, like Internet (Baidu acquired Peixe Urbano, a Brazilian online shopping company), airlines (Hainan Airlines participated the investment of shares for Blue Panorama Airlines), service (DiDi acquired 99TAXI, China Communications Construction Company acquired CONCREMAT Engineering Consulting Company), and finance (Haitong Securities participated the investment of shares for Bank Espirito Santo, Fosun acquired RIO BRAVO). In addition, because of Brazil’s mature market, more and more Chinese enterprises paid attention on franchise projects. While even not long ago, Chinese companies seldom chose franchise projects, because they were unfamiliar with this business model and concerned about the long payback of investment.
The success in Chinese philosophy relies on three necessary factors: ‘good timing’, ‘tendency and potentiality’, and ‘catchable opportunities’. These factors can be applied here. In these five years, Chinese enterprises met an excellent opportunity to enter the Brazilian market. They were both in line with the needs of international cooperation under the ‘One Belt One Road Initiative’ and the general trend of enterprises investing overseas. At the same time, they also met the requirements of industrial upgrading and infrastructure improvement of Brazil. And the more important thing was that through a lot of growth and development, they already had the ability to seize opportunities.
I. Financial Cooperation and Service Development
Financial cooperation is very important to improve the development of bilateral economic and trade relations. And there is a wide variety of financial cooperation between China and Brazil. At first, financial institutions chose to issue commercial loans to support the implementation of relevant projects. According to the statistics provided by Inter-American Dialogue, from 2007 to 2016, China Development Bank and the Export-Import Bank of China issued loans for ten times of about $ 36.8 billion USD to support the projects of Sino-Brazilian enterprises in energy, infrastructure facilities, manufacturing and large-scale procurement. Afterwards, in order to support mergers and acquisitions investment from Chinese enterprises in Brazil, Chinese financial institutions began to apply syndicated loans and financial investments. The Special Fund for China-Latin America Production Capacity Cooperation was established in 2015, and the China-Brazil Cooperation Fund for the Expansion of Production Capacity was put into operation in May 2017. They both provided great support to the implementation of the projects of China-Brazil production capacity cooperation (such as the acquisitions made by China Three Gorges Corporation, State Grid Corporation of China and Sinopec Group, etc.). In March 2013, the People's Bank of China and the Central Bank of Brazil signed a bilateral currency swap agreement of $30 billion USD, aiming to reduce the risks to bilateral trade and investment caused by changes of the international market exchange. And there are different types of Chinese financial institutions set up in Brazil. In order to enter the Brazilian market, Bank of China and Industrial and Commercial Bank of China established subsidiary banks; China Construction Bank, Bank of Communications, Haitong Securities and Fosun Group acquired local banks and asset management companies of Brazil; some other financial institutions established representative offices and working groups.
Service is very important in Brazil with a long-term share of 60-70% of Brazil's GDP, while in China, the share of service had just reached 51.6% of the total GDP in 2016. Until now, China and Brazil have effectively cooperated in services such as engineering contracting, finance, telecommunications, ocean shipping, tourism, electronic commerce, legal advice, etc. and it is a good time to expand the cooperation between the two countries. At present, Brazil is the second largest market of Chinese contracted projects in Latin America. Chinese enterprises have high market expectations for Brazilian infrastructure construction in the future. The huge development potential of bilateral trade in goods improves the development of shipping. For instance, influenced by development of mineral trade, the Cargo (400,000-ton VALEMAX) of Vale S. A. has already been operated between the ports of Brazil and China; there are more and more tourists coming from each country; and the electronic commerce, especially online shopping, also develops dramatically because of the cooperation between enterprises of each country (Alibaba set up AliExpress in Brazil, Baidu acquired Brazilian group-buying website, etc.). The governments of the two countries have also set up relevant systems to promote cooperation in this field. From 2016 to 2017, China's Ministry of Commerce and Brazil's Ministry of Industry, Trade and Services signed Memorandum of Understanding on E-commerce and Memorandum of Understanding on Cooperation of Trade in Services, to provide guidelines for relevant enterprises. It can be said that China-Brazil economic and trade relations will be improved through the development of service trade.
In these five years, the transformation and upgrading of economic and trade relations between China and Brazil were far more complicated then introduced above. Currently, the global industrial chain changes structurally, and the global value chain becomes a new basis for international division of labor. For the future, we need to think on how China and Brazil can develop their own comparative advantages (including core technologies, brand advantages and business models, etc.), participate in competition all over the world, and move up in the global value chain. China and Brazil can be said to be the models of ‘South-South cooperation’ of developing countries because of their healthy and sustained development of economic and trade relations. The relationships between China and Brazil are not bilateral anymore but have global influence. At the same time, they are both members of WTO, BRICs and the G20, and they have the similar concepts of development. Besides improving the development of their own countries, China and Brazil should advocate for more developing countries to actively participate in global governance, and strive for greater institutional power and more voice for developing countries, in order to establish a more balanced and equitable global partnership for development. Finally, we wish a good economic and trade relations between China and Brazil forever!
The Major Chinese Enterprises Invested in Brazil by June 2012
* Translation by Zehua Tian, PhD student at the University of Macau.
1 The Central People’s Government of the People’s Republic of China, 2013, online: http://www.gov.cn/ldhd/2013-11/06/content_2522771.htm.
2 On 17 July 2014, Chinese President Xi Jinping attended the China-Latin America and Caribbean Summit in Brasilia and delivered keynote speech. China proposed to jointly build a new ‘1+3+6’cooperation framework, referring to the establishment of the China-Latin American Countries and Caribbean States Cooperation Plan (2015-2019) with the aim of achieving inclusive growth and sustainable development. China strives to promote China-Latin America trade to scale up to 500 billion USD and the investment stock to Latin America up to 250 billion USD within ten years and promote the expansion of local currency settlement and currency swap in bilateral trade. And we should boost China-Latin America industry connection with energy and resources, infrastructure construction, agriculture, manufacturing, scientific and technological innovation, and information technologies as cooperation priorities.
3 On May19 local time, Premier Li Keqiang attended the China-Brazil Business Summit in Brasilia together with President Dilma Rousseff of Brazil and delivered a speech. Li Keqiang stressed that China is willing to discuss with Latin-America a new ‘3×3’ model of China-Latin America production capacity cooperation. First, we should conform to the needs of the Latin American countries and jointly build three major channels of logistics, electricity and information to achieve connectivity on the South American continent. Second, we should observe the rules of market economy and achieve a cooperation pattern with sound interaction among enterprise, society and government. Third, we should focus on China-Latin America cooperation projects and expand three financing channels of fund, credit and insurance.
4 According to statistics recorded by China Customs, the bilateral trade volume between China and Brazil in 2013 was $ 90.279 billion USD at first, then changed to $ 89.856 billion USD.
5 The Central People’s Government of the People’s Republic of China, 2014, online: http://www.gov.cn/zhengce/content/2014-11/06/content_9183.htm.
6 The Ministry of Foreign Affairs of the People’s Republic of China,2014,online:http://www.fmprc.gov.cn/web/ziliao_674904/1179_674909/t1175756.shtml.
7 The Central People’s Government of the People’s Republic of China, 2015, online: http://www.gov.cn/xinwen/2015-05/20/content_2864973.htm
8 In May 2017, Chinese President Xi Jinping announced at the opening ceremony of the Belt and Road Forum for International Cooperation that China will host the China International Import Expo starting from 2018, and the first China International Import Expo will be held from 5 to 10 November 2018.
9 Chinese Investments in Brazil, Projects and Research, China-Brazil Business Council, 2014-2015, online: http://www.cebc.org.br/en/projects-and-research/chinese-investiments-in-brazil.
10 See online: http://www.cebc.org.br/pt-br/projetos-e-pesquisas/investimentos-chineses-no-brasil.
11 The Bulletin of Chinese Investment in Brazil, 2018, online: http://www.planejamento.gov.br/noticias/planejamento-divulga-boletim-de-investimentos-chineses-no-brasil.
12 See online: https://www.thedialogue.org/map_list/.
13 In May 2015, Chinese premier Li Keqiang proposed at China-Brazil business summit in Brasilia to set up a Special Fund for China-Latin America Production Capacity Cooperation, so as to support the implementation of the projects of China-Brazil production capacity cooperation. On 16 June 2015, the Special Fund for China-Latin America Production Capacity Cooperation was incorporated in Beijing, the total scale of which was $30 billion USD, and the capital of the first phase was 10 billion USD.
14 In May 2015, during the visit of Chinese Premier Li Keqiang to Brazil, China and Brazil reached a consensus on establishing a fund of bilateral production capacity cooperation. In June 2015, at the 4th session of the China-Brazil High-
level Coordination and Cooperation Committee, both sides agreed to set up a bilateral mutual fund of $20 billion USD. China contributed $15 billion USD and Brazil contributed $5 billion USD, to support the production capacity cooperation projects. On 30 May 2017, the fund was running officially.
15 The Central People’s Government of the People’s Republic of China, 2015, online: http://www.gov.cn/xinwen/2015-05/20/content_2864973.htm.
16 On 11 October, the 5th Ministerial Conference of China-Portuguese-speaking Countries Trade and Economic Cooperation Forum (Macao) concluded successfully in Macao. Minister Gao Hucheng and Marcos Pereira, Brazil’s minister of industry, trade and service signed the Memorandum of Understanding on Cooperation of Trade in Services between the Ministry of Commerce of the People's Republic of China and the Ministry of Industry, Trade and Services of the Federative Republic of Brazil. On 1 September, under the witness of President Xi Jinping and Brazilian President Michel Temer, Minister Zhong Shan and Brazil’s Minister of Industry, Trade and Services Marcos Pereira signed the Memorandum of Understanding on E-commerce Cooperation between the Ministry of Commerce of the People's Republic of China and the Ministry of Industry, Trade and Services of the Federative Republic of Brazil.