China and Peru relations

Conference given at the University of International Relations

and Peking University

May 16, 2014

Carlos Aquino Rodríguez Director of the Institute of Economics Research and Professor at San Marcos National University, Peru Specialist in Asian Economies Peru’s Official Translator of the Japanese language Master and Doctor Course at Kobe University, Japan Visiting Professor at Universities in Asia

E-mail : carloskobe2005@yahoo.comWeb site, Blog, Facebook

Index

I. Introduction II. Peru and China old relationship III. State of economic relations: Trade, Investment,

Economic Cooperation IV. FTA agreement between Peru and China V. Chinese culture influence VI. Conclusions

I. Introduction

On November 2nd, 1971 Peru and the People Republic of China established diplomatic relations. On March 1st, 2014 was the fourth anniversary since the Free Trade Area, FTA, agreement between the two countries entered into effect.

China became in 2011 the biggest export destination and trade partner of Peru, over the United States, which was the traditional top partner, and given present perspectives that position will continue in the future

Peru has an old history of relations with China.

II. Peru and China old relationship

The first contact between these countries began in 1849, when Chinese immigrants began coming to Peru. From that year up to 1872 around 100,000 Chinese came to Peru, mostly from the southern part, in present day Guangdong province.

Peru became the first country in Latin America to receive Chinese immigration in a large scale

Peru became in 1874 the first Latin American country to establish diplomatic relations with China

(But in fact relations seems to be older than that. From the second half of the sixteen century the Acapulco-Manila Galleon trade made possible the exchange of goods between China and Mexico –and Peru-, through Philippines)

http://commons.wikimedia.org/wiki/File:Andres_Urdaneta_Tornaviaje.jpg

III. State of economic relations: Trade, Investment, Economic Cooperation

After Peru suffered a period of economic stagnation and political instability, in 1990 the new government introduced economic reforms that opened the economy to foreign trade and investment, and at the same time political stability was attained. So the economy began to grow again.

Peru is a middle income country, with a Gross Domestic Product, GDP, per capita of 7,000 dollars (year 2013) and a population of 30 million people.

It has achieved sustained growth of its economy in the last decade and has an increasing participation in the global economy

Has a strategic location in South Pacific with vast natural resources and variety of climates, in a territory of 1.28 million km2

Graphic 1: Overview of Peru economySource: http://www.proinversion.gob.pe/RepositorioAPS/1/0/JER/PRESENTACION_PAIS/PPT_Por%20que%20invertir%20en%20Peru%20en%20ingles%202014_pptx.pdf

Graphic 2: Overview of Peru economy

Peru has the fastest growing economy in Latin America It has a sound macroeconomic environment, low

inflation rate (2-3% per year), low public external debt (less than 20% of GDP), and high Foreign Exchange Reserves (around 65 billion dollars or 33% of GDP)

Since 1990 Peru embarked on the task of getting more involved with Asia. Peru is present now in the Asia-Pacific Economic Cooperation forum, APEC, the Forum for East Asia and Latin American Cooperation, FEALAC, the Pacific Economic Cooperation Council, PECC, and the Pacific Basin Economic Council, PBEC.

Trade

One of the engines of Peru economic growth has been external trade, and specially demand for China.

In 1993 the amount of Peruvian exports to China was only of 140 million dollars, but in 2003 they reached 676 million dollars. In the same period imports from China increased from 90 million dollars to 646 million dollars.

But from the last decade exports to China leaped to reach 7.8 billion dollars in 2012, though it decreased to 7.3 billions dollars last year 2013. See table 2. Imports from China was 8.3 billion dollars in 2013.

COUNTRY 2010 2010 2011 2011 2012 2012 2013 2013

Exports Imports Exports Imports Exports Imports Exports Imports

1. U.S.A 6,087 5,811 5,903 7,350 6,175 7,916 7,306 8,783

1. China 5,436 5,140 6,963 6,325 7,848 7,802 7,331 8,379

1. Japan 1,790 1,336 2,174 1,314 2,575 1,499 2,226 1,433

1. Canada 3,329 539 4,232 583 3,445 588 2,692 615

1. Switzerland

3,845 118 5,937 150 5,074 154 2,967 158

Source: Aduanas del Peru:http://www.aduanet.gob.pe/aduanas/informae/BalContiZonaPais_01122013.htm

TABLE 1: MAJOR TRADE PARTNERS OF PERU, 2010-2013, IN MILLION OF DOLLARS

Country/Economy 1993 1997 2003 2010 2011 2012 2013World Total 3,344.40 6,741.75 8,939.82 35,073.25 46,386.03 45,846.18 41,511.7

Australia 14.99 16.31 53.12 117.5 115.35 99.50 130.37

South Korea 59.36 91.50 176.34 894.9 1,696.09 1,545.35 1,536.38

China 140.84 490.06 676.96 5,425.9 6,972.64 7,848.97 7,331.44Philippines 31.99* 47.96 11.06 123.41 109.75 55.23 128.11

Hong-Kong 28.60 68.82 30.31 78.5 93.24 96.54 84.22Indonesia 32.62* 36.33 22.67 36.61 61.49 101.18 105.31

Japan 299.04 473.57 391.16 1,790.4 2,174.76 2,575.33 2,226.72Malaysia 57.33* 59.77 5.51 8.43 6.75 27.68 56.29

New Zealand 1.50 - 3.72 13.5 18.63. 25.82 22.55

Russia 9.90 9.48 14.18 57.9 78.80 88.43 149.76

Singapore 1.68* 11.96* 16.15 6.66 7.94 21.46 20.18

Thailand 11.71* 36.23 26.71 98.10 264.76 234.06 138.25

Taiwan (Chinese Taipei)

118.78 159.11 147.28 293.0 365.28 261.10 211.29

Vietnam 1.62* 2.56 10.64 63.89 77.72 90.43 44.80

*Year1994Source: Aduanas del Perú: http://www.aduanet.gob.pe/aduanas/informae/2012/generales/ExpoImpoPorContiZonaPais.htmlhttp://www.aduanet.gob.pe/aduanas/informae/BalContiZonaPais_01122013.htm

TABLE 2: PERU'S EXPORTS TO ASIAN MEMBERS OF APEC (IN MILLION OF DOLLARS)

Trade China became from 2011 the top export destination and

the top trade partner of Peru Peru’s Minister of Economy Mr. Luis Castilla said on

October 2011 that he “prays every day” for China economy to continue growing at high rates because that way Peru will benefit from that. If China economy reduces its pace of growth there will be less demand for Peru raw materials, prices, of specially minerals, will decrease, exports revenue will decrease and the country will be affected. In fact this happened from 2012.

See the following two figures where it is seen that price of raw materials have decreased a little and there is strong correlations with China economic growth rates.

Peru exports mainly raw materials while buys from China mostly manufactured goods.

Source: World Economic Outlook, april 2014, Figure 1.5 page 6

Source: IMF, World Economic Outlook, April 2014, page 36

TABLE 3: TOP 11 PRODUCTS EXPORTED TO CHINA, 2013

PRODUCT Millions of DollarsFOB value

Total 7,331Copper ores and concentrates 3,338Copper cathodes 1,020Fishmeal 856Iron ore 855Zinc ore 203Lead ore 195Silver ore 182Zinc, not alloyed 100Cuttle fish and squid 91Other gasoline without lead tetraethyl

58

Fresh grapes 45

Ores and Fishmeal (8 products): 92% of total Source: ADUANAS DEL PERU http://www.aduanet.gob.pe/aduanas/informae/XPaisPartMensual_01122013.htm

TABLE 4: IMPORTS OF PERU FROM MAJOR ASIAN MEMBERS OF APEC (IN MILLION OF DOLLARS, CIF) Source: Aduanas del Peru

Country/Economy 1993 1997 2003 2010 2011 2012 2013

World Total 4,024.55 7,716.79 8,428.51 27,910.70 37,891.00 42,150.68 43,273.7

Australia 17.35 33.09 28.12 75.07 111.1 133.0 132

South Korea 99.42 230.25 277.72 1,044.25 1,497.2 1,647.6 1,588

China 90.43 195.92 646.54 5,115.3 6,364.7 7,802.9 8,379Philippines 11.06 12.04 22.9 27.4 29.8

Hong Kong 12.29 17.04 15.19 22.80 15.8 20.5 18.8

Indonesia 40.00 120.96 221.1 245.1 206

Japan 303.62 417.99 367.40 1,336.96 1,314.4 1,499.9 1,433

Malaysia 57.77 160.44 207.0 206.9 199

New Zealand 45.95 - 16.20 56.47 68.1 119.0 80.9

Russia 15.28 21.92 56.36 183.42 513.0 334.2 339

Singapore 22.23 38.45 50.83 60.00 57.4

Thailand 32.10 372.28 443.7 452.1 651

Taiwan 60.16 112.05 133.58 327.80 442.1 461.7 442

Vietnam 4.69 52.50 102.4 113.1 131

Trade

Actually China is the biggest market for Peruvian exports. China buys most of the copper, iron ore, zinc, fishmeal, that Peru sells abroad. And China is the second source of imports, after the U.S.

In the other hand, most of the textiles and garments imported by Peru came from China as are also toys, footwear, electrical appliances and most of the consumer goods, and increasingly cars.

Cheap manufactured goods from China have helped improve the living standards of many Peruvians, especially of poor people.

But also cheap Chinese goods has represented a strong competition to some manufacture sectors in Peru.

TABLE 5: TOP 10 PRODUCTS IMPORTED FROM CHINA, 2013

PRODUCT Millions of dollars CIF Value

Total 7,921Mobile Phones 730Data processing machine 459Motorcycles 136Vehicles 111Telecommunications devices 98Other polyethylene terephthalate with titanium dioxide

84

Other footwear with top of textile and rubber sole or plastic

84

Other footwear 80Other wind power generators 69Other TV sets 76

Source: ADUANAS DEL PERU: http://www.aduanet.gob.pe/aduanas/informae/MPaisPartMensual_01122013.htm

Investment

Foreign Direct Investment (FDI) in Peru has increased a lot in the last years

China investment in Peru was nil up to 1992. That year, Shougang Corporation ( 首钢集团 ) bought the state company Hierro Peru that exploits iron. It was the first big sale of a Peruvian state company after the government began in 1990 a process of economic reforms and opening of the economy to foreign investment. 

China interest in securing sources of raw material was the reason behind its decision to buy the Peruvian company. It was one of the first biggest investments by a Chinese state company of a foreign asset outside Asia. Shougang paid around 120 million dollars for that. The mine that Shougang bought is the only one that produces iron ore in Peru

China investment is mainly in mining, but lately also in oil and fishmeal sectors.

Table 6: Direct Foreign Investment flows in Peru (in millions of US$)Source: Proinversion

YEARSBCRP DIRECT

FOREIGN INVESTMENTS

VARIATION

1995 2,557.0 1996 3,471.1 35.8%1997 2,139.3 -38.4%1998 1,643.9 -23.2%1999 1,940.0 18.0%2000 809.7 -58.3%2001 1,144.3 41.3%2002 2,155.8 88.4%2003 1,335.0 -38.1%2004 1,599.0 19.8%2005 2,578.7 61.3%2006 3,466.5 34.4%2007 5,491.0 58.4%2008 6,923.7 26.1%2009 6,430.7 -7.1%2010 8,454.6 31.5%2011 8,232.6 -2.6%2012 12,239.7 48.7%

2013 2/ 11,108.0 -9.2%2014 2/ 9,400.0 -15.4%2015 2/ 9,435.0 0.4%

 STOCK DE APORTES AL

CAPITAL POR PAÍS DE ORIGEN

(Millones US$) 

País 2012 % % AcumuladoEspaña 4,818.57 21.25% 21.25%EE.UU. 3,012.47 13.29% 34.54%Sudáfrica 1,740.17 7.67% 42.21%Chile 1,643.90 7.25% 49.46%Brasil 1,334.91 5.89% 55.35%Reino Unido 1/ 1,314.93 5.80% 61.15%Canada 1,276.23 5.63% 66.78%Suiza 934.65 4.12% 70.90%México 897.90 3.96% 74.86%China 796.48 3.51% 78.37%Italia 733.51 3.23% 81.61%Colombia 569.32 2.51% 84.12%Países Bajos 2/ 486.39 2.15% 86.26%Japón 436.79 1.93% 88.19%Noruega 402.82 1.78% 89.97%Otros 2,275.31 10.03% 100.00%

TOTAL 22,674.35 100.00% *Stock actualizado a diciembre de 2012. 1/ Incluye Dependencias Británicas y Territorios Británicos de Ultramar. 2/ Incluye Territorios de Ultrama

Table 7: Stock of FDI in Peru by country of origin, million dollarsSource: http://www.proinversion.gob.pe/0/0/modulos/JER/PlantillaStandardsinHijos.aspx?ARE=0&PFL=0&JER=1537

Investment

In the last years Chinese companies have announced and are carrying out big investment. For example Chinalco Aluminiun Corp. invested 3.5 billion dollars in a copper mine called Toromocho, in the central part of Peru. Another big investment is the project Pampa de Pongo, of the Nanjinzhao Group Co. Ltd. for 3.28 billion dollars that will produce iron.  

According to statistics by the Ministry of Energy and Mines of Peru, by January 2014 there is an amount of 59.58 billion dollars of investment mostly being currently carried on the mining sector, of which investment from China accounts for 23.23% of the total, or 13.83 billion dollars, the biggest one.

GRAPH 3: ESTIMATED PORTFOLIO OF MINING PROJECTS BY MAIN INVESTOR Source: Ministerio de Energía y Minas: “Cartera estimada de proyectos mineros, January 2014”, page 3

Investment

In addition to that on April this year the company resulting from the merger of Glencore and Xstrata agreed to sell the copper project Las Bambas located in Apurimac, and sold it for $5.85 billion to a Chinese consortium led by MMG Ltd., which is owned by China Minmetals, and included Guoxin International Investment Corp. and Citic Metal Co. When the mine come into production it could increase by more than a third the amount of copper produced in Peru

On November 13 2013 it was announced that China National Petroleum Company through its listed company PetroChina bought Petrobras Peru unit for $2.6 billion. The Chinese firm bought all the shares of Petrobras Energia Peru S.A., which has three oil and gas fields in Peru.

Investment Also a Chinese company, China Fishery Group Limited

(CFGL), bought last year the fishmeal company Copeinca (for a total of nearly US$300 mlls), and seeks to control a larger part of the production of fishmeal, of which China is the largest buyer of Peruvian production. By March 2014 CFGL and a group of Chinese investors under the name Fosun are the bidders to buy the fishmeal company Diamante, with a price tag of $850 million. Peru share in world export of fishmeal is around 41% and China is the main world importer of that product with a share of 41% of the world total.

But some Chinese investment has run into trouble, especially and notoriously Shougang Corporation. Since it began operations, every year, they have had trouble with its labor union that had gone on strikes very often.

Investment

It seems that the new China investment is trying to avoid these problems (as been seen in the operation of Toromocho copper project).

The Industrial and Commercial Bank of China (ICBC) established an office in Lima in the year 2013 with a capital of 50 million dollars to lend companies in Peru who want to buy goods from China

Chinese investors have shown interest in others sectors, like agro industry and infrastructure

Also there is a need to attract more Chinese tourists, who travel in bigger number all over the world.

La caratula dice: A LA CONQUISTA: La compra de Las Bambas le dará a China un tercio de la producción de cobre del Perú. Lo que se viene puede ser aun mas sorprendente

(The title page says: TO THE CONQUEST: Buying of The Bambas will give China a third of Peru's copper production. What's come next may be even more surprising)

Magazine “Poder”, April 24 - 2014, Issue No 62 http://www.poder360.com/home.php?id_country=7

Economic Cooperation

In the last years China has given some money as economic cooperation to Peru and lately scholarships to Peruvian students to learn Chinese language. Also it has established four Confucius Institutes with Peruvian Universities to foment Chinese culture and language.

China is a member of the Inter American Development Bank

IV. FTA agreement between Peru and China

Peru has a FTA in effect with China from 2010. Peru expects to sell products with more value added to China.

The FTA agreement was initially opposed by some companies in Peru that were afraid of competing with China. In the agreement sensible sectors to China competition in Peru like textiles, garments, footwear were to a large extent exempted from the lowering or elimination of tariffs

But Chinese imports are, for some Peruvians companies, unfair competition because of dumping and subsidies.

A representative case is of Chinese shoes, which even if they have antidumping duties imposed on them from the year 2000, have came to dominate the market for imported shoes.

Graphic 4: Number of imported Chinese shoes (with uppers of rubber or plastics) and share in the market of imported shoes (in thousands –right hand-, and in %) Source: Quarterly Dumping and Subsidies Bulletin of Indecopi, december 2011, pag 5: http://www.indecopi.gob.pe/repositorioaps/0/5/bol/boletin_dumping_y_subsidios/Dic11CFD.pdf

By March 31, 2011, the following products from China have antidumping duties: several kinds of footwear (up to the year 2016), a kind of stainless steel flatware (up to the year 2016), several kinds of zippers (up to the year 2015), several kinds of poplin fabric type (up to the year 2015), several kinds of cotton fabric and mixtures with polyester (up to june 2014), a kind of cotton denim fabrics (up to the year 2015), several kinds of plain weave fabrics (up to year 2015), several kinds of sandals (up to november 2014).

Additionally on December 2013 anti-dumping duties were imposed on five types of clothing—polos, shirts, pants and shorts, innerwear and socks—imported from China. The duties imposed on polos, shirts, innerwear and socks are between US$ 0.14 and US$ 1.00 per garment, while the duties on imports of pants and shorts are equivalent to US $ 3.73 per garment.

By March 2013, 8 antidumping duties were imposed to China, one to United States, one to Pakistan, one to Vietnam, and one to India.

Peru expects from the FTA also more investment from China, not only to exploit raw materials, but also to produce manufactured goods for the internal market that is growing, and also to produce in Peru and from it export to countries whom Peru has FTA agreements. Peru has achieved FTA agreements with major markets like the U.S., European Community, Canada, most of Latin American countries, Japan and South Korea.

Peru is in negotiations in the Trans Pacific Partnership agreement, TPP, that will form a large free trade area in the Pacific region.

Peru has formed with Chile, Colombia and Mexico the “Alianza del Pacifico” or the Pacific Alliance, of 4 Latin American countries with borders in the Pacific Ocean and they will have a free trade area among them.

V. Chinese culture influence

It is said that perhaps 10% of Peruvians has some Chinese origin.

Chinese immigrants influence in Peru is well known in several subjects and for example one strong is in food.

Interest in China is increasing. China has established 4 Confucius Institutes in four Peruvian Universities

Peruvian government has begun giving scholarship for studying in China. CONCYTEC, the official institution for science and technology is offering financing for studies of Master, Doctor Course, special training and Chinese language in Chinese Universities

VI. Conclusions

China is an important economic partner of Peru. It is the biggest market for its exports, and an important source of investment. These two roles will increase in the future. China’s need for raw materials will increase and its companies are looking to control the source of these raw materials.

China economic growth at high rates is also important for Peru. In the last two years prices of minerals decreased because of a slowdown in China economy and this has affected Peru.

Also, Peru has big expectations on increasing exports to the Chinese market thanks to the FTA, but this will depend on creating goods suitable for their consumers. 

Peru and China are nations experiencing robust economic growth.

They are middle-income countries with a growing middle class, where internal demand is playing a bigger role in fueling economic growth.

Peru and China can strengthen their trade, investment and other economic ties, and expand their people-to-people exchanges.

It is important knowing better each other to avoid misunderstandings.’

There is a need to know the Chinese market to sell more value added goods and also to industrialize more the country (and need to learn form China development experience).