By Sunny Park, BloombergNEF
China has in recent years emerged as a key trading partner for Latin America. As both sides strive to achieve climate goals, this burgeoning relationship is set to expand into more areas relating to the energy transition, with the promise of mutual benefit.
Latin America’s growing appeal
The shared ambitions of Latin American nations to foster higher-value economic activities and expedite their transition toward a net-zero energy future have enhanced the growing appeal of the region to businesses.
Latin America has become an attractive market for global and Chinese companies, achieving a milestone in global foreign direct investment (FDI) with a record-breaking $225 billion in 2022, 55% higher than 2021, according to the United Nations’ economic agency for the region, the Economic Commission for Latin America and the Caribbean (ECLAC). Additionally, the Inter-American Development Bank (IDB) notes that the region’s export value surpassed the global average, experiencing a 2.9% year-on-year increase as of the first quarter of 2023. This significant influx of FDI and heightened trading values underscore the mounting interest of foreign investors in the region’s business landscape.
China-Latin America trade relationships deepen
China has ascended to become one of Latin America’s major trading partners, trailing only behind the US and Europe, according to Inter-American Development Bank. Further, bilateral trade between the China and the Latin American region has grown 26-fold over the past two decades, swelling to $310 billion in 2020 from $12 billion in 2000, based on a European Parliament report. Conversely, Latin America is China’s fourth-largest trading partner, with a substantial trade volume of around $450 billion in 2022.
In addition to its role as a key trading partner, China’s leadership in clean energy has also bolstered its influence in Latin America as well other emerging markets. However, the strength of their current ties wasn’t always assured.
China’s Belt and Road Initiative (BRI), a global infrastructure development strategy, was introduced in 2013 with the goal of developing new trading relationships and boosting China’s global profile and influence. The initiative encompasses a wide array of both new and pre-existing infrastructure projects, spanning many regions and industry sectors. By 2023, the BRI had extended its reach to 149 countries, with financial investments amounting to $67.8 billion. Latin America wasn’t initially included in the BRI. However, at the second meeting of the China-Community of Latin American and Caribbean States in 2018, China made a special announcement anticipating increased cooperation between the two regions under the BRI.
Chinese companies direct their investments in Latin America for three main reasons: 1) the region’s abundant natural resources and raw materials, especially key materials for the green transition and supply chain; 2) food security; and 3) rising geopolitical tensions. Consequently, many Chinese companies have expanded their presence, particularly in the energy, transportation, and infrastructure sectors.
Since then, Latin America and the Caribbean has witnessed robust growth in BRI investments, with a remarkable increase of 227% since 2018, according to a report by Fudan University’s Green Finance & Development Center.
A total of 21 Latin American countries have joined the BRI as of 2023, anticipating a substantial inflow of Chinese infrastructure investment. For example, in 2022, Chinese firms invested in 32 new projects in areas such as electricity (50%), Information of Technology (IT) (25%), manufacturing of EVs (6%) in Brazil, an all-time high in value recorded, according to the Brazil China Chamber of Commerce.
Nevertheless, the rapid growth of Chinese influence in the Latin American region prompts questions about the potential implications of such dominance, whether it fosters mutual benefit or simply intensifies the region’s dependence on China. Notably, Chinese companies have acquired a substantial share of regulated national energy distributors in Chile (buying stakes in Compañía General de Electricidad and Chilquinta Energía SA) and Peru (by acquiring Enel SA).
A similar pattern is observed in trade relationships between China and Latin America. China has become a significant importer of the region’s commodities, including metals, beef and soy. China has also increased its share of the region’s manufacturing imports such as electronics, electric vehicles, and nuclear components.
EVs and clean energy gain momentum
Another driver of increasing investor interest in Latin America is the world’s push to decarbonize. Surging global demand for EVs is expected to boost the need for lithium, a resource abundant in South America. The region is gearing up for battery cathode manufacturing and the export of critical minerals with significant Chinese investment. The EV market is expected to accelerate in the coming years, with companies planning to start producing EVs in Mexico, Brazil, and Argentina beginning in late 2024.
Chinese automakers such as BYD, Chery, and Great Wall Motors aim to start EV and electric bus (e-bus) production in Brazil by 2024, potentially narrowing the price difference between internal combustion engines and EVs. In Brazil, BYD has already initiated e-bus chassis production in Campinas, and operates a lithium-ion battery module plant in Manaus, as part of its ongoing expansion efforts.
BYD alone targets an annual production of more than 150,000 EVs in Brazil and plans to introduce its first flex-fuel plug-in hybrid EV (PHEV), capable of running on both gasoline and ethanol. In Mexico, where EV manufacturing capacity already exists, global automakers are shifting focus to tap into the growing US market, driven by recent incentives provided in the US’s Inflation Reduction Act.
China’s dominance of global clean energy equipment manufacturing and supply chains is evident in the region. For instance, eight of the top 10 solar module providers to projects in Latin America are Chinese, led by Longi, Jinko, Trina and JA, based on BloombergNEF data. In April 2023, Brazilian President Luiz Ignacio Lula da Silva and Chinese President Xi Jinping signed some 20 agreements to further strengthen their already close ties, particularly in the areas of trade, climate change, and the energy transition.
What to expect
Chinese investment is anticipated to maintain its upward trajectory, with a strong emphasis on supply chains associated with renewable energy and EVs. This aligns with the ambitions of various Latin American countries such as Argentina, Brazil and Chile to develop higher value activities and accelerate their energy transition. Although the increasing Chinese presence and influence in the region raise concerns about potential economic and political imbalances, BNEF expects Chinese investments and interest to continue to expand in Latin America. The growing connections and capital flows between China and Latin America have the potential to benefit both sides, contributing to their shared goal of achieving net zero.
Learn more about more opportunities in Latin America
The investment opportunities and challenges in Latin America will be discussed in BNEF Summit Shanghai on November 27-28, 2023. For more analysis of developments and the market outlook for Latin American region, BNEF clients can read: