Jurisdiction - China
Reports and Analysis
China – Beijing The Matchmaker.

25 September, 2013



China’s courtship of Latin America has gathered pace. And the best is yet to come.


The global financial crisis has significantly affected the traditional flow of capital within the major world economies, creating more investment opportunities between emerging market economies. China is now the world’s second largest economy, largest consumer of energy, and fifth largest overseas investor.

Latin America’s economic growth has outpaced many other developed regions making it an attractive growth market for investors. China’s need for vast amounts of energy resources and commodities, and its desire to acquire overseas companies as a source of growth coupled with Latin America’s abundance of natural resources and commodities, strategic market position, and need to build its infrastructure to boost its emerging economy has led to a surge in Chinese outbound investment into Latin America. 

Beijing is serving as matchmaker between China and Latin America. With this in mind, it’s timely to examine the latest trends in Chinese outbound investment into Latin America and discuss why, despite a slowdown in China’s economy, outbound investments hit a record high in 2012.


Broken records


Despite a relative slowdown of GDP growth, Chinese global outbound investment, based on China’s GDP and as measured by the A Capital Dragon Index, surged to a record high for the full year 2012. The main drivers behind this increase were: 

• the government’s so-called Going Out Policy that encourages outbound investments and abundant financing by China’s state policy banks, such as the China Development Bank and China Export-Import Bank;
• opportunities created by the European debt crisis to acquire distressed assets at large discounts to market prices; and,
• opportunities to diversify by investing in non-US dollar assets.

In 2013, Beijing is continuing to push these favourable policies and, in essence, is serving as a matchmaker between China and Latin America.


Evolving relationship


In recent history, China and Latin America’s relationship was based on needs; China’s need for Latin America’s abundant natural resources and commodities, and Latin America’s need for China’s abundant capital. The majority of the early outbound investments were in the form of oil for money loans with Chinese investors extending loans to mining and petroleum companies, and entering into long-term procurement contracts for those resources in Latin America. 

These were followed by Chinese stateowned enterprises (SOEs) acquiring stakes in natural resources companies in Brazil, with Sinopec, China’s second largest oil and gas producer and biggest refiner, being one of the most active investors of overseas assets in the industry. In 2010, Sinopec made the largest Chinese investment into Latin America by acquiring 40% of the Brazilian operations of Repsol-YFP for $7.1 billion. Since then, however, Sinopec has acquired additional oil and gas assets in Brazil, Argentina and Venezuela. In analysing recent trends in Chinese investment into Latin America, we can see how the country’s investment into the region has increased and how this relationship has matured.




The most important macro trend is that Chinese outbound investment into Latin America is increasing. In 2012, Chinese outbound investment in Latin America more than doubled compared to 2011. In 2011, investments into Latin America constituted six percent of China’s total outbound investment, compared to 17% in 2012. In fact, Latin America was Chinese investors’ number one destination in the first quarter of 2012, representing 43% of China’s overseas direct investment, and number two in the second quarter of 2012, just behind Europe. 

As China outbound investment increases, there is a clear trend towards a larger diversity of players, targets and investment types. Although SOEs still dominate China’s outbound investment, non-SOE corporates, including private equity (PE) firms, are becoming increasingly active. Outbound investment by non-SOE corporates is expected to increase in the next few years, particularly in energy resources, innovative technology, and advanced manufacturing abroad. There is also a new trend towards more Chinese financing of private infrastructure projects in Latin America. 

China’s list of targets is expanding beyond Brazil’s natural resources to other Latin American countries such as Mexico, Peru and Colombia. Further, there is a clear trend away from takeover deals towards more diverse forms of investment such as minority interests, partnership deals and coinvestments. Chinese investors are increasingly investing via minority stakes to reduce risk, gain familiarity with a given market and minimise political resistance associated with certain transactions. Chinese companies and global firms are also seeking ways to cooperate in partnership to create more value for their companies and increase the chances for successful business integration by giving both partners an incentive to make the deal work. An example of this is Repsol and China’s Sinopec partnership to jointly develop the projects of Repsol Brazil.


Policy changes


Chinese outbound investments are typically subject to the approval of the National Development and Reform Commission (NDRC), the Ministry of Commerce (MOFCOM), the State Administration of Foreign Exchange (SAFE) and the StateOwned Assets Supervision and Administration Commission (SASAC) (for SOEs only) or their authorised local agencies. This is on top of any industry-specific approvals. 

Regulatory approval often affects the timeline and success of a transaction. Therefore, investing in sectors that the PRC government has targeted and the host country government encourages are crucial elements in a successful transaction. Given this, one of the most important drivers of Chinese outbound investment into Latin America has been Beijing’s increased support and role in encouraging Chinese companies to invest abroad. Last year, Beijing passed a co-investment reform allowing SOEs to team up with global PE firms to co-invest overseas to collaborate on outbound investments. It also issued the PRC government’s first comprehensive policy document encouraging outbound investment and acquisition by Chinese companies. These policy changes have created a new class of PE-led transactions. Coupled with the above trends and developments (especially the economic turmoil in Europe, and the US seeing depressed prices and an increased number of buying opportunities for capital intensive Chinese companies), these changes have set the stage for a more mature and strategic wave of Chinese outbound investments into Latin America.


Beyond Brazil


We believe that Chinese M&A activity into Latin America will continue to increase with a focus beyond Brazil into target countries with high growth emerging markets such as Mexico, Peru and Colombia.



Mexico is the second largest economy in Latin America, the region’s third largest trading partner of China, and has a Presidential administration focused on increasing foreign investment and trade. Mexico’s stable political environment, strong macroeconomic fundamentals, strategic position as a port of entry into the US and Latin American markets, and President Peña Nieto’s promotion of inbound investment provide an attractive investment environment for Chinese companies. Optimism is high in Mexico and cooperation between it and China continues to strengthen. In May of this year, Chinese President Xi Jinping and Mexico’s President Peña Nieto pledged to further strengthen trade and investment cooperation between the two countries. In particular, we believe the two sectors to watch out for are the automotive sector and the oil and gas sector.
We saw first-hand when visiting Monterrey, the industrial heartland of Mexico, and meeting with Nuevo Leon’s Minister of Economic Development that Mexico’s automotive manufacturing sector, in particular in Monterrey, is highly receptive to Chinese foreign direct investment. This same sector has also found ways to invest in China with many large and small companies from Monterrey, such as Nemak and Katcon, manufacturing in China. Monterrey’s state government is keen on continuing to attract Chinese investment and on finding ways to further invest into the country. President Peña Nieto’s administration has also proposed a number of important legal reforms in the areas of tax, labour and corporate law. The most important of these, the energy reform, remains pending. But we believe that, when passed, it will liberalise oil exploration and services sector driving future foreign direct investment and M&A activity in the oil and gas sector.




Peru is another Latin American country rich in opportunity for Chinese companies and investors. In the last few years, China has become an increasingly important investor in Peru, as well as a central destination for Peruvian exports such as textiles, fish minerals and agricultural products. Three years ago, China and Peru signed a free trade agreement to promote increased trade and investment between the two countries. Since the free trade agreement was signed, China has replaced the US as Peru’s largest trade partner. 

Chinese investors are also very visible in Peru’s mining sector. This includes Aluminum Corporation of China (Chinalco), Minmetals, Zijin Mining Group, and Shougang Hierro Peru SAA. Chinalco has invested more than $50 million in Peru to build a sewage water treatment plant. Chinese financing is also present in Peru. In December 2011, China Development Bank entered into a $50 million loan agreement that will be used for electrical infrastructure projects in Peru; the agreement also forms a part of a broader memorandum of understanding between China and Peru. Increased relations between the two countries, Peru’s attractive and fast growing economy (with only minimal coverage from global institutions), and a relatively open environment for foreign investment provide an excellent platform for increased investment and cooperation. In fact, according to Peru’s Minister of Finance, total investment in Peru is expected to rise from $2 billion to $20 billion by 2019. We expect the principal focus of future M&A activity will be in the mining, technology, energy and health industries.




In the last few years, Colombia has emerged as one of the most attractive investment markets in Latin America. The country’s financial institutions have been broadening their presence through pan-Latin America deals, such as Grupo Sura’s acquisition of the Latin American pension and wealth management assets of ING. Transactions like this are establishing Colombia’s financial institutions as pan-Latin American players. We believe Colombia’s financial sector presents an opportunity for Chinese financial investors.


Colombia’s energy sector is also receptive to collaboration with international investors. For example, last year the China National Petroleum Corporation executed a cooperation agreement with Colombia’s state oil company Ecopetrol. The development of this arrangement will influence future collaboration between Colombia’s energy players and international investors. Colombia’s auto manufacturing industry has also been of high interest to Chinese companies and investors. In 2011, Chinese car makers exported 1 million cars worldwide. This figure is expected to accelerate to as many as 2 million by 2015, with Colombia targeted to be one of the fastest growing destinations for those exports in Latin America. Today in Colombia there are over 15 Chinese car brands including Chery, Foton, Great Wall, Geely and Yangtze. 

Further, like Brazil and many other Latin American economies, Colombia is experiencing an infrastructure bottleneck. This is driving a heavy government focus on public and private partnerships. A prime example of this focus is China Development Bank’s financing of Bogota’s El Dorado International Airport, as well as the active bidding by international and Chinese players around the Ituango hydroelectric complex. This bottleneck has created demand for infrastructure financing, which includes lending from abroad. This presents opportunities for large Chinese lenders like China Development Bank and China Exim Bank, as well as for private Chinese lending institutions.


A new wave

China and Latin America is on the crest of a new wave of strategic investment and development. This is due to Beijing’s continuing role as matchmaker – driving outbound investment through its Going Out Policy and encouragement of international financing by China’s state policy banks – the natural maturing of cross-border transactions between the two regions, and the strategic demand for resources and technology. Together, these factors should drive yet another record year of Chinese investment into Latin America.





For further information, please contact:


Michael J. McGuinness, Partner, Shearman & Sterling
[email protected]   


Vanina de Vernueil, Shearman & Sterling
[email protected]


Comments are closed.