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BRAZIL & CHINAThe New Trade RoutesFINANCIAL TIMES SPECIAL REPORT | Monday May 23 2011
Drawn into an ever closer embrace
This month thevessel that willcome to define early21st century trade
between Latin America andAsia arrived in GuanabaraBay, the picturesque har-bour of Rio de Janeiro.
The Vale Brasil, commis-sioned by Vale, the Brazil-ian miner and the world’slargest exporter of iron ore,is the first of a new breed ofbulk carrier, known as theChinamax. With a capacityof 400,000 tonnes and meas-uring 362m in length and65m in width, this goliathcan carry twice as muchiron ore as most vesselsnow plying the routebetween Brazil and China.
Just as the caravel sym-bolised the age of discoveryand early colonial tradebetween Portugal and Bra-zil, the Chinamax encapsu-lates China’s growing hun-ger for the naturalresources of Latin Amer-ica’s largest economy.
As these two leadingemerging economies draweach other into an evercloser embrace – one of thefirst overseas trips by Bra-zil’s new president, DilmaRousseff, was to China –few doubt that the world iswitnessing the birth of oneof the great commercialrelationships of the future.
“Brazil will export a lot ofthe strategic commoditiesthat China needs and Chinawill export manufacturedgoods and invest in assem-bly plans in Brazil,” saysCharles Tang, head of theBrazil-China chamber oftrade and industry.
But far from being asmooth passage, it is a rela-tionship that will befraught with challenges andmisunderstandings alongthe way. It would be diffi-cult to find two large coun-tries in the modern worldthat are less familiar witheach other than China andBrazil or that are more dif-ferent socially, politicallyand culturally. Alreadythere are growing tensions,with most of them originat-ing from the Brazilian side.
While Brazil welcomesChinese demand for itscommodities, it is angry atan influx of cheap Chinesemanufactured imports thatit says undermine Brazilianindustry. Brazilia alsoaccuses Beijing of closingits market to imports fromBrazil and of maintainingan artificially cheap cur-rency to make its exportsmore competitive.
“China has a clear posi-tion on what it wants fromBrazil,” says Geert Albers,general manager for Brazilof Control Risks, a consul-tancy. “But Brazil needs toclarify somehow what itwants from China.”
The speed with whichthis relationship has devel-oped has meant that mostpotential flashpoints areonly emerging now.
Between 2000 and 2009,Brazil’s exports to Chinarose 18-fold, driven by com-modities such as iron oreand soya beans. In 2009,China surpassed the US asBrazil’s biggest tradingpartner, accounting for 12.5per cent of the Latin Ameri-can country’s exports.
Bilateral trade rose a fur-ther 53 per cent last year to$56bn, while Brazil’s tradewith the US increased 30per cent to $45bn.
When it comes to com-modities, Beijing has dis-covered that Brazil offerssomething of a one-stopshop. Latin America’s big-gest economy is the world’slargest exporter of iron oreand of a host of agriculturalproducts, including coffee,sugar and – of special inter-est to China – the “soyacomplex” of beans, oil andmeal.
Brazil’s discovery of vastoffshore oilfields, which areset to catapult it into thetop ranks of the world’s oilproducers, are also ofincreasing interest toChina.
“The economic benefits ofBrazil’s and China’s traderelationship remain high,”
wrote Standard & Poor’s,the credit rating agency, ina paper late last year.
The trading relationshipis rapidly being duplicatedin investment. Last year,China became Brazil’s larg-est foreign direct investorfor the first time.
China accounted forabout $17bn of Brazil’s totalforeign direct investmentinflows of $48.46bn in 2010,up from less than $300m in2009, according to Sobeet, aBrazilian think-tank ontransnational companies.
This FDI, much of which
was channelled through taxhavens such as Luxem-bourg, was related to com-modities and energy. Thebiggest transaction wasChinese oil major Sinopec’s$7.1bn purchase of a 40 percent stake in Repsol Brazil.
The growing commercialrelationship with China wasfostered by Brazil’s previ-ous president, Luiz InácioLula da Silva, a proponentof the rise of the so-calledBric nations, which asidefrom Brazil and China com-
prise India and Russia.For Mr Lula, the rise of
trade with China providedthe economic tailwind thathelped him win re-electionin 2006 after this first four-year term and then to pro-pel his protégée, Ms Rouss-eff, to office last year.
With billions of dollarsrolling in from commoditiesexports and Chinese invest-ments, Mr Lula was able tostart a credit-fuelled eco-nomic boom in 2009 and2010 without having toworry about the currentaccount deficit.
For the first time, thelower middle classes hadmoney to spend. At thesame time, they could sud-denly afford to buy house-hold goods thanks to a floodof cheap imports fromChina. For Mr Lula’s Work-ers Party, trade with Chinaprovided a seductive for-mula for staying in power.
“The long Chinese boomhas affected virtually everypart of the world. But Brazilis arguably the countrywhere it has made thegreatest difference,” wrotePerry Anderson in an essay,“Lula’s Brazil”, in the Lon-don Review of Books.
Today, there are growingsigns that the honeymoonis over. While Brazilreported a trade surpluswith China of $5.2bn lastyear, this was because ofcommodity exports, accord-ing to industry lobby Fiesp.
On the industrial front,imports of manufacturedgoods from China rose bywhat Fiesp called a “devas-tating” 60 per cent lastyear. The deficit in manu-factured goods was a record$23.5bn, up from only $600mseven years ago.
Today, it can be hard tofind something made inBrazil. About 80 per cent ofcostumes used at Brazil’scarnival festival this yearwere imported, nearly all ofthem from China: from themore traditional creationsflaunted by competingsamba schools to the lesstraditional Osama binLaden masks. And it is notonly textiles that are beingmade in China. Braziliansteel producers suffered asharp fall in prices lastyear, which they blamed ona sharp rise in cheapimports, mainly fromChina.
Brazilian manufacturerswarn the country faces“deindustrialisation” if itdoes not introduce moreprotection measures in theface of what they call thedumping of artificiallycheap Chinese products inLatin America. Of 144 anti-dumping investigationsstarted by Brazil in thefourth quarter of last year,50 were against China.
During her recent trip toChina, president Rousseffurged Beijing to acceptmore Brazilian industrialgoods. Beijing agreed to buymore regional jets fromBrazil’s Embraer, while aTaiwanese company withextensive operations inChina, Foxconn, said itwould invest $12bn in amanufacturing complex inBrazil to make iPods.
Like the US before it,which became addicted toChinese credit and cheapmanufactured goods, someare arguing that Brazil ison course for a full-blowneconomic crisis if it doesnot rein in an excessivespending spree drivenby its new-found commod-
ity wealth. The IMF calcu-lates that if commodityprices were to moderate to2005 levels, Brazil’s currentaccount deficit could doublefrom a comfortable 2.3 percent today to a worrying 5per cent.
China also representsother challenges for Brazil.
To a large extent, itis a relationship ofopposites, fraughtwith challenges andmisunderstandings,writes Joe Leahy
More on FT.comChina’s yuan is kept artificially lowwhile Brazil’s realsoars. Whatare theimplications?SamanthaPearson
FT.com/brazilchinatrade2011
www.ft.com/brazilchinatrade2011 | twitter.com/ftreports
Brazil’s discoveryof vast offshoreoilfields is alsoof increasinginterest to China
InsideMartin WolfBrazilfaceschallengesas thecentre ofthe globaleconomyshiftstowards Asia Page 3
InfrastructurePrivate companies aretrying to improve thesystem Page 2
Profile Vale’s new chiefwill have to steer adifficult course Page 2
Financial flowsThe extent to whichBrazil will allow Chinato invest in strategicresources is still to bedecided Page 2
ProfileCDB isthedrivingforcebehindChinese
investment overseasPage 3
Profile Hong Kongbased ZTE saysmanufacturing locallymakes sense Page 4
Olympics Lessons tobe learnt from Beijing’shosting of the games in2008 Page 4
Richard Lapper Rise ofChina has enabledBrazil to rise Page 4
Beyond Brics Aselectionof relatedstoriesfrom theFT’semergingmarketshub Page 5
Online Embraer hasfaced difficulties gettingapproval for its aircraftin China
The people of both coun-tries are painfully ignorantof each others’ customs.Unlike most cities inEurope and North America,it is difficult to find oneChinese restaurant on thestreets of São Paulo.
While Brazil and Chinaoften see eye-to-eye in inter-
national forums on issuessuch as the unrest in theMiddle East, it is unclearhow long this will last. Bra-zil is a liberal democracythat increasingly wants touphold human rights, whileChina is authoritarian andbrutally repressive of dis-sent. Brazil wants to be the
dominant power in LatinAmerica, while China’sincreasing trade with theregion is turning it into acompetitor. But others sayit may be too soon for Bra-zil to press the panic buttonon its relationship withChina. While trade betweenthe two has grown fast, it
has been from a minimalbase. Today, it comprises 15per cent of Brazil’s interna-tional trade.
“Brazil has diversified itsexports – it is also a bigsupplier to Europe. It isn’tas if it’s only dependent onChina,” says Pamela Cox,vice-president for LatinAmerica and the Caribbeanat the World Bank.
That may be so, but withevery new shipload ofresources that leaves Brazilfor China, this dependenceis set to increase.
Vale says that, while itsfirst seven Chinamaxes willcome from South Korea, ithas ordered the next 12from China. The vessel ofearly 21st century trade willcarry Brazilian naturalresources, but the shipitself will be made in China.
For Brazil, the messagefrom the metaphor is clear.China is at the helm of theglobal economic super-tanker of the future. It is upto Brazil to decide what roleit will play in the voyageand how it wants to pay forthe ride.
Shoulder to shoulder:Dilma Rousseff andHu Jintao meet in Beijing
Reuters
2 ★ FINANCIAL TIMES MONDAY MAY 23 2011
The New Trade Routes | Brazil & China
Mining giantmust keepgovernmentonside
With its own 10,000kmrailway network, nineprivate port terminals andrevenue last year that wasbigger than the grossdomestic product ofBulgaria, Vale appearsmore like an empire thana company.
The Rio de Janeiro-basedminer is the world’sbiggest producer of iron
ore and one of Brazil’slargest companies. If itwere not for Vale’s exports,the Latin Americancountry would have run atrade deficit last yearrather than its $20.3bnsurplus.
However, the sheer sizeof Vale has proved to bethe company’s biggestchallenge. The miner’sAmerican depositaryreceipts are trading at upto a 30 per cent discount toits peers, partly because ofconcerns that Brazil’sgovernment will not sit byand let such a strategicallyimportant company followits own path.
Murilo Ferreira took overthis month as Vale’s chiefexecutive, replacing RogerAgnelli, who was in effectforced out by thegovernment. Investors arewaiting to see if thecompany’s loyalty remainswith its shareholders or isshifting to the state.
“It’s too early to tell forsure, but I don’t thinkmuch will change. Theyhave so many biginvestment projects on thego that will double the sizeof Vale. I’ll think they’lljust get on with it,” saysPedro Galdi, a mininganalyst at SLW Corretora.
The government retaineda majority stake in Valeafter it was privatised in1997, but grew increasinglyfrustrated at how thecompany was run underMr Agnelli and earlier thisyear put enough pressureon the remainingshareholders that hiscontract was not renewed.
One of the government’smain complaints has beenthat Vale is turning itsback on Brazil byexporting ever more ironore to China rather thandeveloping a domestic steelindustry.
In the first quarter ofthis year, Asia accountedfor about half of Vale’s
revenues, with 29.7 percent coming from China.
The company’s insistenceon building many of itscargo ships in Asia ratherthan Brazil also made MrAgnelli few friends in thegovernment.
This month, Valeannounced that it hadreceived delivery of theworld’s largest iron orecarrier. Despite its tactfullynationalist name, ValeBrasil, the ship was madein South Korea and willhelp shift even morechunks of Brazil to China.
However, analysts havetaken a relatively relaxedapproach to the
management shake-up,partly because the sharesare cheap and thefundamentals of the ironore market remain veryattractive.
The choice of MrFerreira, a discreet andtechnically minded formerexecutive of Vale, alsocame as a relief to mostinvestors, who had fearedsomeone directly linked tothe government might beput up for the job.
In fact, Vale’s realproblem with politics liesacross the Atlantic Oceanin Africa, where thecompany competes withChinese groups to tapsome of the world’s
highest-quality iron oreand copper reserves.
“The problem, like withall projects in Africa, is thepolitical risk they face –not only with the localgovernment, but also withthe tribes,” says BernardoLobão, an analyst at StudioInvestimentos.
In April last year, Valebought a miningconcession in Guinea for$2.5bn, giving it access toSimandou, which isconsidered the world’srichest undeveloped depositof iron ore.
However, the project wasthrown into uncertaintyafter Guinea’s transition tocivil rule late last year.
Vale also faces thechallenge of building theports and railways toaccess the reserves, as ithas done in Brazil.
Geographically, it wouldmake more sense to builda railway through Liberiato the coast but that couldprove difficult because ofpolitical instability.
For this reason, analystsbelieve the mining giantwill focus on exploitingBrazil’s reserves first, suchas the south side of theCarajás mine in theAmazon region.
But Vale’s empire islikely to keep expanding,says Mr Galdi at SLW.“Vale has huge cashreserves, so it could lookfor acquisitions toreinforce its position in theworld, perhaps in the areaof fertilisers,” he says.
“It depends what comesup, but with the crisis inthe eurozone, there aresome interestingopportunities around,”Mr Galdi says.
ProfileValeThe new chief willhave to steer adifficult course, saysSamantha Pearson
One of thegovernment’s maincomplaints hasbeen that Vale isturning its backon Brazil
Poor logisticspresent aproblem forpartnership
With its towering redtorii gate and graf-fiti of girls in kimo-nos, the neighbour-
hood of Liberdade in São Paulolooks like most Japanese out-posts around the world.
But over the past few years,packets of seaweed have beenpushed aside to make room forChinese noodles on supermarketshelves, and Mandarin voicesnow fill the crowded streets.
“It was mostly just the Japa-nese here before, but then theChinese came and starting buy-ing everything,” says JessicaChen, a Taiwanese shopkeeperin the district who moved toBrazil in 1982. “It won’t be longbefore China dominates theworld,” she says, laughing.
It is not uncommon to hearpeople in Brazil talking aboutthe growing Chinese presence inthe country as an invasion.Looking at the government’sforeign trade data, it is easy tounderstand why.
Brazil sent $30.79bn of exportsto China in 2010, almost 30times as much as a decade ear-lier, when it exported only$1.09bn worth of goods. Overthat 10-year period, importsfrom China also surged morethan 20-fold to $25.60bn.
Once a relatively obscureforce in Brazil, China is now itsbiggest trading partner afterknocking the US off the top spotin 2009.
The speed at which tradebetween Brazil and China hasgrown is even more remarkable,considering the long journeythose Chinese noodles had toundertake to reach São Paulo’ssupermarkets.
More than 10,000 miles apart,China and Brazil are separatedby the Pacific Ocean and theAndes, one of the longest moun-tain ranges in the world.
Brazil’s infrastructure is alsocreaking under the strain ofthe country’s rapid economicgrowth, presenting furtherdifficulties for importers andexporters.
“The cost of logistics is hugein Brazil,” says Richard Dubois,infrastructure partner at PwC inSão Paulo. For example, it ismore than three times as expen-sive to transport soyabeans,Brazil’s second-biggest export toChina, overland in Brazil than itis in the US, he says.
“It is the same for almostevery other commodity,” hesays, adding that the main prob-lem is the lack of rail networksand the poor quality of roads.
Brazil’s railways have seensome improvement since thenational system was privatisedin the late 1990s, but still onlyabout a quarter of the country’scargo transport went by rail lastyear, forcing exporters on to theroads.
“There is also the question ofthe bottlenecks at the ports,”says Otávio Nese of the ProjectManagement Institute’s Brazildivision. “There has been a lackof investment as well as a lackof long-term planning.”
However, there are someexceptions to the poor state ofBrazil’s transport infrastruc-ture. China’s insatiable demandfor commodities has led some of
the country’s more enterprisingcompanies, and even the Chi-nese themselves, to take mattersinto their own hands.
As a result, a handful of ambi-tious construction and infra-structure projects have sprungup across the country over theyears, increasing pressure onthe public sector to catch up.
“The exception to the hightransport costs is iron ore,because Vale created its ownrailway and port infrastruc-ture,” says PwC’s Mr Dubois.
Vale, the world’s largest ironore miner, has laid about10,000km of track across nine ofBrazil’s 26 states, and is nowresponsible for transportingabout 16 per cent of Brazil’stotal rail cargo.
The Rio de Janeiro-based com-pany has also built nine portterminals. Its Tubarão portcomplex in the south-east of
the country is capable of mov-ing 43,000 tons of iron ore anhour.
This month, Vale alsoannounced that it had receiveddelivery of the world’s largestiron ore carrier, a ship thelength of about four footballpitches, costing the company$748m and made in South Korea.
Eike Batista, Brazil’s richestman, together with China’sWuhan Iron & Steel and SouthKorea’s Hyundai Heavy Indus-tries, are also building Açusuperport, which is set to be thelargest in the Americas on com-pletion.
The project, off Rio deJaneiro, is expected to attractup to $40bn in total investmentand should serve both minersand oil companies.
Efforts are also being made toimprove road networks.
The inter-oceanic highway
traversing Latin America east towest is expected to be completedthis year, giving Brazil accessfor the first time to Pacific portsand helping to link the countrycloser to China and other Asianeconomies such as South Koreaand India.
Meanwhile, one of the favour-ite points of entry for Chinesegoods coming into Brazilremains Manaus, the Amazo-nian city whose duty-free statushelps keep costs low.
“The product arrives in piecesand then it’s assembled in thefree-trade zone in Manaus tomake the most of the tax exemp-tions,” says Raphael Martello,an economist at TendenciasConsultoria in São Paulo.
“Most of the goods from Chinacome in bits and then they’reassembled there.”
However, economists andenvironmentalists warn of the
dangers of making too manysacrifices, as Brazil opens thedoors to its new top tradingpartner.
The low cost of many Chineseimported goods has been blamedfor crushing some parts of Bra-zil’s domestic industry, whilethe new highway across Perurisks encouraging deforestationas it gives ranchers access tomore of the forest.
The challenge now for Brazil’spresident, Dilma Rousseff, is tofind ways of making the most ofChina’s demand for commodi-ties while leaving a positivelegacy for the country.
“Brazil has to watch carefullyhow this evolves,” says SérgioAmaral, former minister ofdevelopment, industry and for-eign commerce.
“It’s important we understandthe contribution China is mak-ing to Brazil.”
InfrastructurePrivate companies aretrying to improve thetransport system, saysSamantha Pearson
Insatiable demand: trucks carrying soyabeans line up on the highway to the port of Paranagua Reuters
‘There is alsothe question ofthe bottlenecksat the ports’
ContributorsJoe LeahyBrazil Correspondent
Jamil AnderliniBeijing Bureau Chief
Samantha PearsonBrazil Reporter
Kathrin HilleBeijing Correspondent
Martin WolfChief EconomicsCommentator
Richard LapperEditor, Brazil Confidential
Tom GriggsCommissioning Editor
Steven BirdDesigner
Andy MearsPicture Editor
For advertising, contact:John Moncure on:+1 212 641 6362;fax: +1 212 641 6544;email:[email protected] your usualrepresentative
Murila Ferreira: new man at the helm of Vale Bloomberg
Commodities are central todefining the relationship
When Repsol sold a 40 percent stake in its Brazilianarm to Chinese rivalSinopec last year, the Span-ish oil producer says thedeal would create one ofLatin America’s largestenergy companies. The dealwas a sign of things tocome, as Brazil began theexploitation of the recentlydiscovered oil and gasreserves in the basins off itssouth-eastern coast.
“Brazil’s offshore boastsone of the world’s fastest-growing oil and gasreserves,” Repsol said atthe time. “The deal high-lights the enormous inter-national interest in thishistoric moment for Brazil.”
Repsol could have just aseasily have swapped thewords “international inter-est” for Chinese interest.
While every country inthe world wants to invest inBrazil’s natural resourcesand agricultural industry,few are keener than energy-deficient and food-hungryChina.
This interest led China tobecome Brazil’s biggest for-eign direct investor lastyear, a position that is onlyexpected to grow. But likeother aspects of the Brazil-China relationship, the twocountries will have to agreeon what form this new part-nership will take – in partic-ular, how far Brazil will bewilling to let China investin its strategic resourcesand agricultural land.
“There is a big interestamong Chinese executivesin investing more in Brazil.There has to be an environ-ment favourable for foreigninvestment. That way wecan create more jobs inBrazil,” said Chen Deming,China’s trade minister,during a visit to LatinAmerica’s biggest economyin May.
China accounted forabout $17bn of Brazil’s totalforeign direct investment of$48.46bn in 2010, up from
about $300m in 2009, accord-ing to analysis by Sobeet, aBrazilian think-tank onmultinational companies.
Mergers and acquisitionscontributed $12.53bn of thistotal, Dealogic, the datacompany said. Aside fromthe Repsol deal, theseincluded a $3.07bn invest-ment by Sinochem, a Chi-nese state-run group, in oiland gas assets in Brazil’sPeregrino Field.
Another Chinese group,East China Mineral Explo-ration and DevelopmentBureau, invested $1.22bn inItaminas Comercio de Mine-rais, a mining company,while State Grid Corp ofChina spent $1bn in an elec-tricity grid deal.
Investments by Chinesecompanies in previousyears include a $362manchor investment byWuhan Iron & Steel inMMX Mineracao e Metalicosa Brazilian miner.
For Brazil, these invest-ments were at first wel-come. But increasingly,they have become a sourceof concern for policymak-ers. When rumours sur-faced last year that Chinesegovernment-backed compa-nies were looking at buyingup tracts of Brazilian farm-land, the government drewthe line. Reinterpreting anexisting law, it introducedrestrictions on FDI invest-ment in farms.
These laws were ostensi-bly not directed at China.Brazil was also concernedthat sovereign wealth fundsor companies backed byother governments werebuying farmland. But themain target is believed tohave been China.
“I am not the minister of
external affairs. I do notwant to create an incident,”the minister of agriculture,Wagner Rossi, told the FTin an interview earlier thisyear. “Some of these coun-tries are great partners inother areas, but havingthem buying land in Brazilcreates some sort of sover-eign risk for us. This is notpart of our plan and we arenot going to allow that.”
In recent months, Chinahas indicated it is preparedto diversify its investmentsinto Brazil beyond theresources and agriculturesectors. During a visit toChina by President DilmaRousseff in April, Foxconn,
a Taiwanese company withextensive operations inmainland China, promisedto invest $12bn in Brazil ina facility to make Appleproducts.
Mr Chen’s delegationsought to strengthen thisimpression with promisesthat Geely, a Chinese smallcar maker, might build aplant in Brazil. But hestressed that Brazil mustkeep its side of the bargainby reducing the cost ofdoing business in the coun-try, such as by streamliningits notoriously sluggishports and improving itslogistics.
While Brazil might be
suspicious of Chineseinvestment, it needs addi-tional inflows of longerterm financing to help fundits growing current accountdeficit.
At about 2.3 per cent ofgross domestic product, thisis not yet alarming. But ifcommodity prices were toease, the current accountdeficit could deterioraterapidly, leaving Brazil onthe verge of a debt crisis.
Many believe that for thisreason, financial relationsbetween Brazil and Chinaare only going tostrengthen.
A key part of this couldbe achieved throughincreasing the use ofChina’s currency, the ren-minbi, in trade with LatinAmerican economies. Thiscould be done by replacingthe dollar with a basket ofcurrencies that wouldinclude the renminbi.
Fernando Pimentel, Bra-zil’s trade minister, saidafter meeting Mr Chen: “Wementioned to the ministerthe importance of beginninga discussion in interna-tional forums about thenecessity to change theinternational monetarystandard.”
Many analysts believethat the sooner Brazil real-ises that its financial des-tiny is tied to China’s, thebetter. Once Brazil startsproducing oil from its off-shore “pre-salt” fields, itscurrency will become evenmore linked to commoditiesand energy prices.
China will be one of themain buyers of these prod-ucts, meaning that it willmake sense for Brazilianand Chinese companies totrade in renminbi and even-tually to save in renminbi.
Brazil will become part ofa “renminbi block” of coun-tries that use the Chinesecurrency to trade.
Tony Volpon, head ofLatin America research atNomura, says: “Pre-salt oilis one big thing that isgoing to happen in Brazil inthe next few years and it’sgoing to double down onthe China bet:
“If you think the Brazil-ian real is a commoditycurrency right now, wait acouple of years – it’s goingto be much worse.”
Financial flowsTies between thetwo are only goingto strengthen,says Joe Leahy
Deep well: China wants access to Brazil’s oil Getty
Having countriesbuying land inBrazil creates somesort of sovereignrisk for us
Wagner Rossi,Minister of agriculture
FINANCIAL TIMES MONDAY MAY 23 2011 ★ 3
The New Trade Routes | Brazil & China
Lender with aglobal reach
When the Chinesegovernment agreed in May2009 to lend $10bn toPetrobras in exchange fora guaranteed supply of oilover the next decade,China Development Bankwas in charge of handingover the cash.
In almost every largedeal involving preferentialChinese loans to foreigngovernments or companies,CDB is at the top of thelist of Chinese financialinstitutions distributingthe funds.
While CDB istheoretically supposed tolend money based oncommercial considerations,these often seem to comesecond when it extendsmega-loans to the likes ofRussia, Venezuela andBrazil in exchange forguaranteed supplies of oil.
Other favoured recipientsof CDB funding are such
state-owned groups asPetroChina and Chinalco,which are attempting to“go global” by acquiringoverseas companies andassets.
China’s outbound foreigndirect investment reached$220bn in the five yearsbetween 2006 and 2010,according to governmentfigures.
That is close to 10 timesthe total cumulative $26bnthat Chinese companieshad invested in 150countries at any time upuntil the end of 2005.
Most of the newinvestment was funded bypreferential loans fromstate-owned Chinese bankswith CDB leading the way.
Under the charismaticleadership of Chen Yuan,the CDB’s chairman – the“princeling” son of aCommunist Party foundingfather – the bank hasmorphed from a piggybank for state constructionprojects such as the ThreeGorges dam into one of theworld’s most powerfulfinancial institutions.
Together with the muchsmaller China Export-Import Bank, CDB has lentmore to developingcountries over the past twoyears than the WorldBank, according toFinancial Times research.
The two “policy banks” –as they are called in China– signed loans of at least$110bn to other developinggovernments andcompanies in 2009 and2010, compared with$100.3bn lent by theequivalent arms of theWorld Bank from mid-2008to mid-2010.
Unlike most of its state-owned financial institutionpeers, CDB does notanswer to the country’sbanking regulator, butreports directly to the statecouncil, or cabinet.
This special status,combined with thepersonal political powerwielded by Mr Chen hasallowed the bank to dothings that other Chineselenders can only dream of.
In mid-2007, CDB took a3.1 per cent stake inBarclays Bank as part ofan even more ambitiousplan to fund Barclays’unsuccessful takeover bidfor much of ABN Amroand take a nearly 10 percent stake in the combinedentity.
Even as the globalfinancial crisis gatheredpace in mid-2008, CDBmade another aggressiveattempt to buy Germany’sDresdner Bank, althoughthat plan fell throughwhen China’s top leadersbecame worried aboutspreading financialcontagion.
Similar concerns stoppedCDB from taking a hugestake in Citigroup, as theUS financial groupdesperately sought freshsources of funds.
While it did notachieve its goal of globaldomination throughoffshore acquisition, thebank has become anintegral part of China’sincreasingly influentialforeign policy strategy,particularly indeveloping countries inAfrica, Asia and LatinAmerica.
The CDB is notpublicly listed and rarelyreleases any figures, butsome analysts believe ithas also served as aconduit for some of thecountry’s $3,000bn inforeign exchangereserves to be lent out tostate companies that areexpanding abroad.
Under ChenYuan, CDB isone of theworld’s mostpowerfulbanks
Manufacturing at risk from global shift to Asia
The centre of the globaleconomy is shiftingtowards Asia. Thispresents both newopportunities and newchallenges for establishedhigh-income countries andfor emerging economies,such as Brazil.
In Brazil’s case, theopportunities are evident,because China’scomparative advantage inmanufacturing iscomplementary to Brazil’srelative advantage incommodities.
But the challenges toBrazil are quite as big asthe opportunities. Thedynamic source of demandfor Brazilian commoditiesis a good thing, butdeindustrialisation is not.
The speed and scale ofChina’s rise isbreathtaking. In 1990, itsshare in worldmerchandise trade (thesum of exports andimports) was just 2 percent. In 2000, it was below4 per cent. By 2010, it hadreached 10 per cent.
Its share of worldexports had risen evenfaster than this, frombelow 2 per cent of worldmerchandise exports in1990 to close to 11 per centin 2010.
Amazingly, China isalready a far moreimportant market forBrazil than the US. Theshare of the Chinesemarket in Brazil’smerchandise exportsjumped from 2 per cent in1990, to 5 per cent in the
middle of the last decadeand 15 per cent in 2010.
In 2002, the US marketabsorbed as much as 26per cent of Brazil’s exports.By 2010, the US marketshare was down to a mere10 per cent. The share ofthe Chinese market inBrazil’s exports is not sofar below that of the entireEuropean Union, whichabsorbed 21 per cent ofBrazil’s exports in 2010,down from close to 25 percent in 2007.
The US and theEuropean Union havedominated global tradenegotiations for decadesbecause their markets werefar bigger than those ofother economic powers.This is true no longer.
Yet the impact of Chinaon Brazil is not just amatter of scale, importantthough that is, but also ofcomposition.
China has an open, largeand fast-growing economy.But it is also a middle-income country with ahuge supply of cheaplabour. Its arrival as aglobal economic power hasbeen shifting the pattern ofglobal trade andproduction: in particular, itlowers the prices ofrelatively labour-intensivemanufactures and raisesthose of commodities.
These twin effects ofChina’s entry into theworld economy are also ofhuge importance for Brazil.
Thus the most strikingfeature of Brazilian tradeis the shift in itscomposition towards apattern one wouldnormally associate with arather less advancedeconomy. The share ofprimary commodities inthe country’s exports hassoared from 22 per cent atthe beginning of the last
decade to 46 per cent inthe 12 months up to andincluding April 2011. If oneadds in semi-manufacturedproducts, the share reached60 per cent. Meanwhile, theshare of manufactures hastumbled from 58 per centof exports at the beginningof the 2000s to just 38 percent in the 12 months toApril 2011.
The shift in thecomposition of Brazil’s
exports went hand in handwith a big improvement inthe country’s terms oftrade – the price of itsexports relative to itsimports.
Thus, in March 2011, itsterms of trade were 30 percent about their averagelevel since the beginning ofthe 1990s, and 34 per centhigher than in early 2003.
The final impact ofChina on Brazil’s trade
comes via its role in whatGuido Mantega, Brazil’sfinance minister, describedlast year as an“international currencywar”. With advancedeconomies experiencinglow interest rates andfinancial worries, money ispouring into emergingeconomies that have brightprospects. China’s massivecurrency interventionsdeflect the impact of thatflow towards othercountries, including Brazil.
The swings in the realvalue of Brazil’s currencyhave certainly been large.
Between May 2004 andApril 2011, Brazil’s trade-weighted real exchangerate calculated byJPMorgan rose by 119 percent, while China’s realexchange rate appreciatedby just 20 per cent overthe same period.
Brazil has been losingexternal competitiveness toa startling and disturbingdegree.
In short, China’s rise hasalready had a big impacton Brazil and is likely tohave an even bigger one inthe years ahead: it hasshifted the direction andcomposition of Brazil’s
trade; it has played a rolein improving the country’sterms of trade; and it hasprobably played asignificant role in theappreciation of theBrazilian real exchangerate, as well.
For Brazilianpolicymakers the challengeahead is to position theircountry to benefit from themuch improved tradingopportunities, whilepreventing excessiveshrinkage of the country’smanufacturing industry.
Brazil is never going tobe competitive in exportsof labour-intensivemanufactures. But, being alarge middle incomecountry, it must manage toexpand its presence insophisticatedmanufacturing.
The pressure from arising China is bound tobecome more ferocious.
Nor is China the end ofthe story. India is alsolikely to become a growingsource of competition forBrazilian companies.
But this is a challengeBrazil has to meet if it isto generate the sustainedrise in incomes itspopulation needs.
China’s rise hasalready had a bigimpact on Braziland is likely to havean even bigger one
Eastern approaches: China is a far more important market for Brazil than the US Reuters
Martin Wolf
ProfileCDBJamil Anderlini onthe bank’s role inthe drive overseas
4 ★ FINANCIAL TIMES MONDAY MAY 23 2011
The New Trade Routes | Brazil & China
Telecoms manufacturer makes move to Latin America
When Dilma Rousseff, Brazil’spresident, visited China lastmonth, she signed 20 bilateraltrade and investment deals.
Among the big-ticket itemswas a commitment by ZTE,China’s second-largest telecomequipment maker, to build anindustrial park in Hortolândia,close to São Paulo.
Although ZTE, a state-controlled company listed inHong Kong, refuses to put afigure on its planned total
investment, sources familiarwith the situation put it atseveral hundred million USdollars.
“Our plant will serve asZTE’s base for Latin Americaand will employ more than2,000 people,” says EliandroAvila, chief executive of ZTEBrazil.
That is a big expansion fromthe company’s current presencein South America. So far, ZTEhas only got a sales force onthe ground, and has some localcontract manufacturing doneby Evadin, a Braziliancompany.
However, “Brazil represents50 per cent of the SouthAmerican market,” says MrAvila.
ZTE is one of the world’sleading makers of telecominfrastructure gear and devices
such as handsets and datacards. Last year, its turnoverwas Rmb70.3bn.
Analysts emphasise thatdespite the distances involved,manufacturing in China for theSouth American market wouldstill be more cost-effective formost technology products.However, Brazil’s high importtariffs are starting to forceChinese companies to expandin the country.
“Basically, our products costan average 70 per cent morewhen imported,” says Mr Avila.He adds that the mainadvantages of setting up shoplocally include incentivesprovided by the governmentwhich allow the company toavoid high import taxes.
Construction of ZTE’s facilityis well under way, and thecompany plans to have the
first part of the factory, whichwill focus on handsets, readyto start production within sixmonths.
A second phase is planned tobecome operational in late 2012or early 2013. That part willproduce network infrastructuregear such as routers.
Apart from production, ZTE’sindustrial park will alsoinclude research anddevelopment. Some 200 of theBrazil-based employees are towork in a new R&D centre, oneof 15 worldwide, with a totalheadcount of 30,000.
For the time being, ZTE’sBrazilian operations are likelyto rely heavily on Chinesestaff. Twenty per cent of the2,000 are expected to comefrom Shenzhen, the company’sheadquarters in southernChina.
ZTE also intends to continueits co-operation with Evadin,its contract manufacturingpartner, for certain deviceseven as its own factory beginsoperations.
Strong demand is driving theexpansion in Brazil. This year,the company said its standingin the country had been raisedconsiderably, following a“significant sales boost” drivenby large-scale contracts forwave-length-divisionmultiplexing, a technology thatcombines different carriersignals on to one optical fibre.
Last year, the companylaunched a low-cost cell phonewith digital television throughVivo, the Brazilian operator, inthe Latin-American market.
Therefore, ZTE has bigambitions. “Our goal is to beamong the top three companies
in terms of networks andterminals,” says Mr Avila.
Worldwide, ZTE ranks fifthamong network infrastructurevendors behind Ericsson ofSweden, its Chinese peerHuawei, Nokia-SiemensNetworks, and Cisco. It is alsoone of the world’s top fivehandset vendors.
Like Huawei before, it hasbeen outgrowing some of itswestern rivals such as Norteland Alcatel-Lucent and steadilyrising through the globalindustry’s ranks.
If ZTE’s ambitious Brazilianplans work out, there might bespace for other manufacturersto follow.
Although the Chinesecompany says its own factorywill be the only one in itsfacility for now, it is setting upan entire industrial park.
ProfileZTEThe HKlisted groupfinds it makes sense tohave a local factory,writes Kathrin Hille
Our plant will serveas ZTE’s base forLatin America and willemploy more than2,000 people
Eliandro Avila,ZTE Brazil
Material demandshaped economyof regional giant
Brazil’s growing consumer marketsand resource-rich economy make itimpossible to ignore at the hightables of international business. Yetthe country’s dynamic image hidesan uncomfortable truth. None of itseconomic transformation of the pastdecade or so would have beenpossible without the rise of China.
Brazil’s democratic consolidation,social progress, and consensualcommitment to economic stabilitymay be deep-rooted and home-grown,but, without the turbo-chargedeconomic expansion of China, itseconomic fortunes could not haveimproved as quickly. China mattersto Brazil for two reasons.
First, its demand for iron ore andsoya is fuelling the development ofBrazil’s two biggest export sectors.The same could happen also with oil,as Brazil organises the exploitationof its giant offshore reserves.
Second, Chinese – and Asiandemand more generally – is thefundamental reason for the sharpupward movement in commodityprices in recent years.
Octavio de Barros, the researchdirector of Bradesco, Brazil’ssecond largest bank, says that theshift in the terms of trade has beenthe foundation stone of thetransformation. It provided a $100bnwindfall that has “saved thecountry” from the debt crisis at thebeginning of the century and madepossible the social spending – on thebolsa familia social plan and theminimum-wage legislation that haveunderpinned social improvement.
Brazil’s dependency has – in Mr DeBarros’ words – been “chemical”. Yetthe danger is that it could alsobecome corrosive. Of late,policymakers have begun to worryabout the impact of Chinese importsand manufacturing investment onlocal industry.
They fear it could be contributingto a hollowing out of the industrialinfrastructure and accelerating areorientation of the economy backtowards raw materials.
Chinese imports are stillsignificantly less than Brazil’sexports to China. Last year, Brazilrecorded a positive trade balance ofabout $5bn after registering asurplus of about $4bn in 2009. But itsexports are heavily biased towardscommodity products.
The installations at giant open-pitmines in the Amazon state of Pará,railway lines to Atlantic ports andthe ore carriers that ship the metalconstitute nothing less than a giantconveyor belt between Brazil andChina. So do the clogged roads thatlink the soya fields of the centre-west with Paranagua port: two-thirdsof all Brazilian soya went to Chinain 2010.
By contrast, Chinese exports toBrazil tend to be manufactureditems. Low value-added items suchas footwear and clothing all figureprominently. Overall, Chineseexports grew from a few hundredmillion dollars in 2000 to $20bn in2008. Between 2006 and 2008, thenumber of pairs of Chinese shoesimported into Brazil more thandoubled to 34m pairs, for example.
But Chinese companies are alsoexporting more complex productssuch as machine tools andequipment, often competing directlywith local manufacturers. Forexample, China supplied 12.9 percent of THE machines andequipment imported in 2010, a risefrom only 2.1 per cent in 2004,according to Brazil’s capital goodsindustry association.
The strength of the real in the pasttwo years has added to concerns,because it has made Chinese productsmuch cheaper relatively than theirBrazilian counterparts. The numberof Brazilian companies importingfrom China rose by 24 per cent from9,267 in January-February 2010 to11,469 in the same period of 2011.
This has prompted alarm. Tariffshave been imposed on items rangingfrom shoes and textiles to
loudspeakers. But the results havebeen mixed. For example, tariffswere imposed on shoe imports in2009. But although the importnumbers have subsequently fallen,the Brazilian Footwear Associationsays that the rise in imports fromother Asian countries reflects thefact that Chinese exporters aresimply rerouting sales through thirdcountries.
There are concerns, too, thatconsiderable quantities of cheaperChinese products are being smuggledin through neighbouring Paraguay.Giant semi-formalised markets inBrazilian cities are stuffed full ofcounterfeit telephones, fashion items,DVDs and watches, the vast majorityof which are made in China.
In a recent survey of 300 mobiletelephone users, Brazil Confidential,the Financial Times’s premium newsand analysis service, found that onein 10 Brazilians had bought so-calledching lings – pirate phones that canbe fitted with up to four SIM cards(a facility that allows consumers tobenefit from discounts offered bymultiple operators and thereforereduces overall costs).
Brazilian manufacturers faceadditional challenges on anotherfront, as China channels growingquantities of direct investment into
the country. A good deal of thiscapital is earmarked to guaranteesupplies of raw materials and isfrequently in partnership with localoperators.
Wuhan Iron and Steel plans towork with Eike Batista, theentrepreneur, on plans to producesteel. China’s development bank hasloaned $10bn to Petrobras, the stateoil concern, while two Chinesegroups – Sinochem and Sinopec –have agreed joint ventures to exploitoffshore fields.
However, in other areas, Chinesebusinesses are potentially competingwith local companies.
For example, machinerymanufacturers, such as Sany HeavyIndustries, car companies andmotorbike makers have all set upoperations in Brazil.
Not surprisingly, perhaps,industrialists want tougher action.Paulo Skaf, the head of the SãoPaulo Federation of Industries, goesas far as to argue that China“benefits much more” than Brazilfrom the relationship and that forBrazil the “risks are much greaterthan the opportunities”.
And even within the governmentthere is a recognition that despite itsbroader benefits, Brazil’s engagementwith China has an unpalatabledimension.
Fernando Pimentel, the minister ofdevelopment, industry andcommerce, is heading a workinggroup looking at the issue. But hehas been quick to recognise thatChina inflicts “harm on Brazilianmanufacturing”.
The writer is editor ofBrazil Confidential.
Guest ColumnRICHARD LAPPER
There are concerns thatquantities of cheaperChinese products arebeing smuggled in throughneighbouring Paraguay
‘Ching lings’ can take many sim cards
Olympics and World Cuprequire a robust approach
In the centre of Beijing’s spectac-ular “bird’s nest” Olympic sta-dium four or five Chinese tour-ists beetle slowly along the run-
ning track on rented imitation Seg-way scooters or negotiate smallobstacle courses set up next to thelong-jump pit.
The forlorn scene on a recent Mon-day afternoon is a far cry from theimages of the 2008 Olympic Gamesplaying out on giant screens 100mabove the tourists’ heads.
The footage of Usain Bolt smashingthe world 100m record is proof to thetrickle of people willing to pay Rmb50to step inside the stadium that theplace really has been filled to its91,000 capacity at least once since itwas completed early in 2008.
Today, the stadium is home to aprocession of increasingly eccentricattempts to recoup some of the $423mit cost to build – most recently anequestrian riding display that drewlittle interest from the public.
As Brazil gears up to hold the 2014football World Cup and the 2016 Olym-pic Games, officials are no doubt stud-ying the experience of Beijing’s Olym-pics and trying to work out how torecreate the successes and avoid thepitfalls of the 2008 extravaganza.
The Brazilian committees willalmost certainly conclude that onlyan authoritarian undemocratic coun-
try such as China could pull off thekind of spectacle it did, while manag-ing to ignore the colossal waste andupheaval that went with it.
Tens of thousands of people wererelocated just to make way for theOlympic green and stadium complexand countless more were shifted fromtheir homes in the complete makeoverof Beijing that preceded the Games.
While many were content to moveto modern apartments and acceptedthe compensation given by the gov-ernment, many others were unhappyat being evicted but were given littlechoice and in some cases were evenremoved by force.
The city went into overdrive in theyears leading up to the Games, whichwere viewed by the Communist Partyas the ultimate international coming-out party and an unparalleled propa-ganda opportunity to convince its sub-jects of the benefits of one-party rule.
Beijing budgeted more thanRmb280bn ($43bn) for the building ofOlympic venues, as well as upgradesfor urban transport, energy and waterinfrastructure and widespread treeand flower planting to turn the dustycapital green.
Without a free press or any kind ofelectoral oversight, the governmentfaced little outside scrutiny over theenormous expenditure and the demoli-tion of most of the ancient neighbour-hoods that gave the city its uniquecharacter.
But the greening of the city and theimprovement in public transport andother infrastructure were clearlyappreciated by many of the city’s resi-dents.
“This type of infrastructure con-struction is what Beijing wanted toprovide to benefit the residents andthe citizens of the whole nation and
the whole world,” says Wang Haiping,deputy director of Beijing’s city plan-ning department, who was speakingat a press conference just before theGames kicked off.
“Even if we did not host the Olym-pic Games, we would still do this. Wecan only say that the preparations forthe Olympic Games have sped up ourpace of city planning, developmentand construction.”
The pace of construction in therun-up to the August 8 2008 openingceremony was indeed frenetic andwith the full might of the state behindit, the programme was completed wellahead of schedule.
But many of the auxiliary facilities– such as apartment blocks, shoppingmalls, subway lines and hotels – thatwere supposed to be finished intime for the Games were notcompleted until well after the openingceremony.
Some are still not ready even now.The iconic China Central Television
building, designed by Rem Koolhaas,a Dutch architect, was supposed to beoperational in time for the Games, butit was still under construction inFebruary 2009, when a fire gutted anadjacent structure, built to house theMandarin Oriental hotel.
Reconstruction on the blackenedshell has only just begun and theCCTV building next door remainslargely empty to this day.
The lesson for Brazil will be not toget too ambitious with the “optionalextras” when it comes to preparingfor the World Cup and Olympics.
Just ensuring that the core venuesare ready on time and within budgetwill be a hard enough task and, in ademocratic country with a relativelyfree media, any extravagant andexpensive plans that fail to meetexpectations will prove far morepolitically costly than they did inChina.
Another lesson from Beijing is theproblem of rampant corruption.
Right next to the Olympic greenand the bird’s nest stadium is a row oftall white towers culminating in onetaller building, shaped at the top likean Olympic torch with a gravity-defying lick of flame protruding intospace.
This row of buildings was alsoempty when the Games kicked off andtoday houses a “seven-star hotel” thatappears not to have any occupants.
The contract to develop this projecton the choicest bit of real estate avail-able in the run-up to the Olympicswas originally granted by Liu Zhihua,the vice-mayor of Beijing in charge ofOlympic construction, who wasdetained in 2006 in a corruption scan-dal.
Mr Liu was found guilty of takingbribes and handing huge constructionprojects to his numerous mistressesand was given a suspended death sen-tence in 2008, later commuted to lifein prison.
Given the scale of investment andthe opportunities for corruptionpresented by Brazil’s big comingevents, the government of DilmaRousseff would do well to heed thelesson of the corrupt Mr Liu and hisconstruction concubines.
SportThere are lessons to belearnt from Beijing’shosting of the 2008Games, reportsJamil Anderlini
Just ensuring that thecore venues are readyon time and within budgetwill be a hard enough task
Generation game: Joao Havelange, Fifa honorary president, is shown a model of the Olympic Village for Rio 2016 Getty
FINANCIAL TIMES MONDAY MAY 23 2011 ★ 5
The New Trade Routes | Brazil & China
A strong currency is government’s best friend PossibleUturnover pricecontrols
Renminbirevaluationcannot solvenation’s woes
Scramblefor oil inits oldbackyard
Knockoff ringsand posh frocksfill the shelves
Appetite for meat grows in Asia
Carnival: celebrated inBrazil but made in China
Another day, another macro-prudential measure from Brazil. Inearly April, Guido Mantega, financeminister, announced a doubling in thetax due on personal loans, from 1.5 to3 per cent a year. Measures like thishave let Brazil reduce its reliance onhigh interest rates, formerly its onlyweapon against inflation.
The trouble with high rates is theydrive the currency higher and thathurts competitiveness – hence thewhole currency war. But you cannothave everything and, with inflationpushing higher, Brazil appears tohave decided that the strong real isits friend, after all.
With consumers paying 238.3 percent a year for credit card debt, it ishard to see how an extra 1.5 pointswill make much difference. But asTony Volpon at Nomura points out,the measure may curb supply ofcredit (rather than demand) becausewider spreads provoke more defaults,so banks may lend less.
In any event, it does not look likethis will slam the brakes on consumer
credit, currently expanding at a rateof 22 per cent a year – thegovernment reckons 12 to 15 per centwould be “adequate”.
And what about inflation? Thecentral bank’s weekly survey of about100 market economists has it abovesix per cent by year-end. The survey’sfive top-rated economists say it willbe 6.4 per cent. Not only is inflationway above the government’s 4.5 percent target. It is threatening to breachthe upper limit of its two percentagepoint tolerance.
The government has been right tolook beyond interest rates for ways tofight inflation. Now, it seems, itsreach has embraced the currencyitself. The day after the surprisingly
weak “currency measures” – the realburst through the R$1.60 barrieragainst the US dollar and kept righton going. It now looks likely to settleinto a new band of R$1.55 to R$1.60 –not far from where it was in pre-crisisdays. So far, the government has notreacted.
What is the pay-off? Thegovernment has three macropriorities: low inflation, investment,and competitiveness. All of those canbe addressed by micro-prudentialmeasures: overhauling the tax systemand the labour code, improving publiceducation, and so on. Fat chance.
If you limit yourself to monetarypolicy and macro-prudential measures,you cannot have all three. Give up
the fight against inflation, and youhave a popular revolt. Give up oninvestment, and the World Cup andthe Olympics will be disasters for astart – and never mind all the otherinfrastructure needed irrespectively.
Give up on competitiveness –well . . . Who will be hurt? Whatcommodities exporters lose on thecurrency, they regain in part fromrising prices. What manufacturers losein competitiveness, they regain inpart on the components they import.
A stronger real will hurt, no doubtabout that. But perhaps not thatmuch. In the fight against inflation, itis the government’s friend. And rightnow, the government needs all thefriends it can get.
Interest ratesJonathan Wheatley askswhether a muscular realmay not be beneficial to thecountry’s economy after all
So why did President BarackObama make a beeline forBrazil within the first 100 daysin office of the country’s newpresident, Dilma Rousseff?
The obvious answer isbecause he wanted to get inearly to build a moreconstructive relationshipbetween the US and Brazilthan existed under MsRousseff’s predecessor, LuizInácio Lula da Silva.
But why the rush? Theanswer might lie in thispassage from Mr Obama’sremarks during a joint pressstatement with Ms Rousseffafter their mid-March meeting.
“We’re creating a newstrategic energy dialogue tomake sure that the highestlevels of our governments areworking together to seize newopportunities. In particular,with the new oil finds offBrazil, President Rousseff hassaid that Brazil wants to be amajor supplier of new stablesources of energy, and I’ve toldher that the United Stateswants to be a major customer,which would be a win-win forboth our countries.”
So it was about oil – Brazil’s“pre-salt” finds, which are juststarting to come on stream.And not just any oil but onethe biggest offshore discoveriesin history and all of it locatedin a stable democracy in thewestern hemisphere, not theMiddle East.
Fast forward to April and MsRousseff is visiting China.Among the corporate deals onthe sidelines of the trip, aproposal by Foxconn, theTaiwanese-owned electronicsgroup with large operations inChina, to invest $12bn in Brazilcaught the headlines.
But perhaps more importantin the long run was thecourting during the visit ofPetrobras, the Brazilian oilmajor, by Chinese peerSinopec. Petrobras already hasa deal to supply oil to Sinopecfrom the pre-salt fields. ButSinopec has gone further byfinalising a joint venture withPetrobras to explore off thecoast of northern Brazil.
The US is realising thatstrategic competition withChina for scarce resources isno longer something it does farfrom home. Latin America,once the backyard of the US, isshaping up to become the stagefor the next tussle betweenthese two giants.
US relationsJoe Leahy says Brazil’sreserves are likely tomake it the setting fora tussle over resources
If the old marketing cliché“the customer is alwaysright” was true in allsituations, then Brazil’s
latest moves regarding Chinawould look like madness.
When a country is yourbiggest trading partner, is itreally a good idea to complain?
That is what Brazil is doing.Even though China’s purchasesof its iron ore, soy meal andother commodities helpedBrazil weather the globaleconomic crisis, LatinAmerica’s biggest economy isnow crying foul as cheapChinese imports flood itsmarkets, undercutting domesticproducers.
If Brazil makes public itsconcerns at an internationalforum, it will mark a shift inthe world order. Until now, fewcountries other than the UShave had the confidence tocomplain about China for fearthat Beijing might simply pullup stumps and leave if it getsupset.
Only a country such asBrazil, which has enough
agricultural and mineral wealthto satisfy China’s thirst forresources for decades, is soindispensable to Beijing that itcan dare to have a voice.
“I think in the past therehasn’t been a unified globalvoice on these issues,” saysEric Farnsworth, vice-presidentof the Council of the Americas.“Nobody wants to upset theChinese.”
But even if Brazil does jointhe US in taking a stand onChina’s allegedly undervaluedcurrency, what is next?
Brazil has already takennumerous trade-relatedactions in line with WorldTrade Organisation rulesagainst Chinese goods, suchas increasing tariffs onfootwear and launching anti-dumping actions. Brazilwould be unlikely to takemore radical action againstsuch an important businesspartner, and is particularlylikely to avoid any moves thatmight violate global tradingrules.
Empty bluster is unlikely tobother China. But even ifChina did allow someappreciation of the renminbi,would this really help softenBrazil’s currency, the real,against the dollar and result inlower levels of cheap importsflooding into Brazil?
The answer is probably no.Brazil has homegrownproblems that have contributedto the currency’s strength.
While China’s purchase ofcommodities has strengthenedthe real, Brazil’s real interestrates (nominal rates adjustedfor inflation) are the highest ofany large economy.
This, together withbreakneck economic growthfuelled last year by governmentspending, has drawn inoverseas investors, addingfurther pressure on the real toappreciate.
Whichever way you look atit, the solution to Brazil’s
CommoditiesJoe Leahy asks ifa spat over importsand exports couldderail the relationshipwith China
Britain’s royal wedding hasdone its part, however small, toincrease Brazil’s trade deficitwith China. Cheap Chineseversions of Kate Middleton’sengagement ring were sold bythe dozen in the week beforethe marriage ceremony.
It is another sign of theability of Chinesemanufacturers to respondrapidly even to individualevents and turn their factoriesto mass production of the mostvaried items. It makes youwonder what cheap Chineseimports will flood shoppingstreets around Brazil duringthe World Cup in 2014.
On Rua 25 de Março, one ofthe busiest mass-marketshopping streets in São Paulo,you can buy an imitation ofthe sapphire and diamond ringfor about R$10 ($6.30) andimagine yourself for a while asthe new Duchess of Cambridge.
But the Royal wedding hasalso turned the world’s eyes toanother end of the Brazilian
business spectrum: itsincreasingly haute couturefashion industry. With the SãoPaulo Fashion Week becominga bigger and more internationalevent each year, the newDuchess of Cornwall’s blueengagement dress came in goodtime. It was created byDaniella Helayel, a Braziliandesigner who owns the brandIssa London.
The dress has been sold outsince last year. So for now,Brazilian girls will have toindulge their romanticism withcheap imitation rings.
Royal weddingIona Stevens saysSão Paulo’s streetshave been floodedwith imitationproducts
When Dilma Rousseff, Brazil’spresident, visited China recentlyshe said she would be pressuringBrazil’s largest trading partner toimport more than just iron ore andsoya.
In response, China seems to havesaid: “Sure, we’ll have more chicken,and a little more beef. Oh, and we’ll trythe pork.” Apart from aircraft producerEmbraer, which scored a deal for up to$1.4bn, the big Brazilian winners so farseem to have been the country’s meatproducers, which are growing quickly
along with the world’s appetite.Agriculture minister Wagner Rossi
announced China had approved 25 newchicken processing plants and five newbeef refrigerators for export, more thandoubling the total number of each to49 and eight, respectively.
FranciscoTurra,presidentof theBrazilianChicken
Producers andExportersAssociation, toldBeyondbrics this
could easily meanthat the totalamount of chicken
exported directlyto China from Brazil
will double in 2011, up
from 134,000 tonnes in 2010.Behind iron ore, soya, and oil, chicken
meat competes with coffee to be Brazil’sfourth-largest commodity export.
Beef trails a bit behind, while pork doesnot play a large role at the moment.
Scoring deals for meat producers in away achieves some of the diversification ofthe China-Brazil trade connection that MsDilma was aiming for.
It does not, however, provide the lifelinefor her country’s manufacturing sector,battered by the overvalued real, that theEmbraer deal does.
Brazil’s agricultural sector is enjoyingthe benefits of the current high food pricesthat are also contributing to inflationworries, but animals have to eat too: theprice of corn and soy used to raisechickens is cutting into margins.
At the very least, Brazil is increasing itsshare in the huge Chinese meat market,which is not likely to go away soon.
Food exportsDiet changes are giving a boostto Brazil’s food producers,writes Vincent Bevins
Ask anyone what comes tomind when they think of Braziland they will probably tell youit’s Pelé, the footballer, orcarnival.
So it may come as some
surprise to learn that up to 80per cent of costumes wornduring Brazil’s festival haveactually been imported, almostexclusively from China.
Others may just be surprisedthat it is worth shipping theskimpy outfits they see ontelevision, some of which arebarely more than a string ofsequins, thousands of miles.
But for those familiar withBrazil’s textile industry, this isnot news. It has been sufferingfor years, both as a result ofinternal problems and external
pressures. The sector iscomprised of a small number ofcompanies, which have failedto keep up with boomingdemand from the country’sever-richer consumers. Thegovernment has made thingsmore difficult through a lack ofinvestment. And, to top it off,the rapid appreciation ofBrazil’s currency means that itmakes more sense for retailersor distributors to get what theyneed from abroad.
The government worriesabout trying to control the
exchange rate, but the biggerpicture is that Braziliancompanies need to concentrateon producing high-value goodsrather than cheap stuff.
But the party must go onand, for the next few carnivalsat least, it looks like China isgoing to steal the show.
TextilesSamantha Pearsonreveals that costumesfor Mardi Gras aremanufactured overseas
One of the few points ofsubstance to come out of theBrics summit was a statementcalling for regulation ofcommodities prices.
This is odd.Earlier this year, Guido
Mantega, Brazil’s financeminister, specifically ruled outthe idea of regulatingcommodities prices, saying todo so would stand in the wayof growth and production.What is going on?
Here is part of paragraph 17of the Sanya declaration:“Excessive volatility incommodity prices, particularlythose for food and energy,poses new risks for thecontinuing recovery of theworld economy.
“We support theinternational community instrengthening co-operation toensure stability and strongdevelopment of [the] physicalmarket by reducing distortionand further regulate financialmarkets.”
And here is what MrMantega said in the run-up toa G20 meeting in Paris inFebruary: “If there’s one thingthat has to be done, it’s toencourage growth andproduction and not hinder it.”
Amado Boudou, Argentina’sfinance minister, was in accord:“We agree to increase supplyin our countries or transfertechnology to othercountries . . . But the discussioncan in no way look atregulating commodities prices.”
What does this tell us?Mr Mantega was not in
Hainan, so it may just be thatthe right hand does not knowwhat the left hand is doing.
Or it may be that those inHainan did not really meanwhat they were saying.
But there was certainly noneed to talk about regulatingcommodities markets.
And if anyone would benefitfrom such a thing, it is notlikely to be the producers. Itlooks as if China has beenexercising its persuasivepowers.
As ever, its actions ratherthan words that count.
But the words seem tosuggest that Brazil has beenheavily leant on.
CommoditiesJonathan Wheatleylooks at the meaningbehind a statementfrom Brazil’s financeminister aboutcommodity regulation
Balancing act: China’s purchases of commodities helped Brazil weather the economic crisisUS PresidentBarak Obamawould like astrongrelationshipwith Brazil’sDilma Rousseff
Guido Mantega:excessivevolatility incommodityprices posesrisks for theworld economy
Latin America’sbiggest economy isnow crying foulas cheap importsflood its markets
China doll: Brazil’sdomestic textile industry
has failed to keep up withdemand from customers
Getty
Engaging: a rack of fake rings
beyondbricsThe FT’s emerging markets hubBringing together news and views from over 40correspondents all over the emerging markets world
problems always seems to bethe same.
Cut government spendingand reduce the role of the statein hogging national savingsand many of Brazil’s industrialills will cure themselves.
Blaming the customer maygo down well with the publicin the near term, but it willonly be a matter of time beforepeople realise that morefundamental reforms areneeded if Brazilian industry isto become more competitive.
6 ★ FINANCIAL TIMES MONDAY MAY 23 2011
