China’s Ambitious Latin American Railway

The Egyptians had the pyramids; the Incas had Cuzco; the French dug Suez, and the Americans the Panama Canal. Every society marks its greatness with a physical act of wonder. Now it’s China’s turn

We’ve written before about the Nicaraguan Canal – a vanity inter-oceanic waterway being built by the Chinese – now there is talk of Latin America’s first cross-continent railway. Li Keqiang, China’s Premier, has just made his first visit to Latin America since coming to power in 2013. He visited Brazil, Colombia, Chile and Peru in a whistle-stop tour of the continent. He also made an incredible announcement: China is going to build a railway from Brazil to Peru, one that links the grain-rich Atlantic pampas with Latin America’s Pacific coast. An express train to take commodities from the world’s breadbasket to its biggest population.

The ideal hunting ground for Chinese firms

The more patriotic of you may have been annoyed that Britain didn’t get a mention in the first paragraph. To be fair, you’re probably on to something. In the height of its pomp, Britain built railways across Latin America and the world, using its excess capital and engineering capacity to improve trade routes that its bustling economy so badly needed. Nowadays China is playing that role. As a result, it is desperate for its excess steelmaking, train-building, employee-rich economy to be able to keep itself busy. Put another way, China is desperate to win infrastructure contracts around the world.

“China has become a major player in Latin America, overtaking the US as the major trade partner in many countries in the region”

Latin America is the ideal hunting ground for Chinese firms. According to the International Monetary Fund (IMF), Latin America’s infrastructure deficit stands at around 6% of regional GDP per year. The one country ready to help is China. Since the year 2000, China has become a major player in Latin America, overtaking the US as the major trade partner in many countries in the region –  including Brazil. In 2014, it lent $22bn to Latin America, more than the World Bank and the IMF combined. In his recent visit, President Li promised that China would spend $250bn in the region over the next decade, up from $110bn between 2007 and 2012.

Negotiating a fair deal for Latin America

Right now commodities are performing badly. But, with a population of 1.2 billion people, China realises it will need plenty of cereals, oil and minerals in the years to come. So at the moment, while everyone in the West is worrying about the commodity slump, China is building the bridges, roads and railways needed to ensure that it’s got a fast-lane to Latin America’s natural resource riches.Of course, China isn’t the only one with strategic interest in the trade. Latin America also needs to make sure its priorities are being looked after. This is a bit less certain as at the moment, China dominates the trade and investment relationship between the two parties.

China has far-reaching Latin American infrastructure plans…

China has a $10billion trade surplus with Latin America. Moreover, because China sells a diverse basket of manufactured goods to Latin America (while receiving just a few basic commodities in reverse) that surplus is entrenched and has far-reaching consequences (such as skills, employment, etc). It’s hard to boil the whole ‘China Rise’ argument down to a few paragraphs, but it’s a long debate facing many a Latin American policymaker. For example, LatAm INVESTOR spoke to Carlos Herrera, executive director of ProInversion (Peru’s investment agency), during his China tour last month, and he is convinced that the region will benefit. He admitted that there are many concerns, but said that it’s up to each country to ensure it gets a fair deal from China.

Ultimately, it’s better that Latin America is able to choose between China and the US than just rely on its northern neighbour.

These changes are in our favour

You could easily debate the pros and cons of this Chinese involvement all day. Irene Mia, The former head of Latin America at the Economist Intelligence Unit, notes the difference between Chinese promises and reality. Analysts estimate that only one third of pledged Chinese investments between 2007 and 202 actually came to fruition. You could also debate the actual impact. For example, some Latin Americans joke about the Nicaragua Canal that the Chinese will “bring their own earth and water”. Sounds extreme, but it’s well accepted that China brings as many workers and as much equipment to foreign projects as possible.

China’s rise is good for Latin America. Or to be more precise, those Latin America countries that have the nous to play China against America will benefit from having two superpowers bidding for influence. And from an investment perspective, China shares this magazine’s view of Latin America’s potential. And that is great news for the region.