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Treasury & Capital Markets
China eyes Latin America amid supply chain shift
Regional heavyweights like Mexico, Brazil offer diversification, new markets, US access
Yuki Li 23 May 2024

With shifts in the global supply chain and global trade in general due to fallouts from Covid and geopolitics, China is boosting its foreign direct investment (FDI), trade and cooperation with Latin American economies like Mexico and Brazil in a bid to diversify its supply chains and expand into new markets.

The global supply chain has been reshaped in recent years. Covid disrupted the original supply chain, shifting it from a China-dominated one to a more diversified network, a process accelerated by reshoring and localization moves around the world.

This desire for diversification, along with shifting cost structures and rising domestic market growth, has benefited the economies of some emerging countries, among them India and various Southeast Asian ones, which are projected to experience higher trade growth compared with the global average. And some Latin American countries are also benefiting from the shift.

Bridge Mexico

Mexico is well-positioned to capture a significant share of the expected investment related to nearshoring given its proximity to and trade agreements with the US, coupled with its long-standing industrial infrastructure being intertwined with that of its northern neighbour.

While the US is still Mexico’s top foreign investor by far, the level of investment, which can fluctuate, generally has changed little over recent years. FDI from China into Mexico, although of a generally lower magnitude, has risen significantly since 2020.

Overall, between January 1999 and December 2023, China invested in Mexico a total of US$2.55 billion, according to DataMexico. This was distributed in equity capital of US$1.75 billion, inter-company debts of US$584 million and reinvestment of earnings of US$219 million.

Mexico’s FDI from China peaked in 2022, reaching around US$600 million, DataMexico shows, with 2023’s drop to US$153.39 million. This can be attributed to the fact that the FDI figures are mostly driven by large deals, and some large EV-related projects were postponed to this year or 2025. However, a rebound of investment is expected in 2024, given that there are a few significant deals in the pipeline.

Chinese companies that invest in Mexico largely target industrial sectors like automobile manufacturing, mining and energy, seeing the country as both an indirect way of accessing the US market as well as an opportunity to expand into its domestic market.

For example, Chinese firm Lingong Machinery Group, a major player in the Chinese construction machinery industry, announced last year an investment of US$5 billion to develop an industrial park in the Mexican state of Nuevo León. The project will be executed in stages, with the completion of the first phase in July 2024.

The company had previously signed a US$140 million investment agreement in 2022 to establish an electric elevator production plant in Nuevo León, cementing the existing relationship between the company and the local government.

Additionally, State Power Investment Corporation (SPIC), one of the major electricity generation companies in China, acquired three solar power plants in northern Mexico in 2020 through its Mexican subsidiary Zuma Energía de México. This acquisition makes SPIC the second-largest private renewable energy producer in Mexico.

While Chinese state-owned companies have generally made the first expansionary moves into Mexico, more and different types of companies, states a banker at one of the big four Chinese banks, are expected to start entering the market going forward.

Brics buddy Brazil

China, of course, sees Brazil, which has the largest population in the region and is a fellow founding member of the Brics economic alliance of emerging markets, as an important trade partner. China is currently Brazil’s largest import and export partner. It accounted for 31.3% of Brazil’s exports in 2021, followed by the United States (11.2%), Argentina (4.2%), and the Netherlands (3.3%). In terms of imports, China, according to data aggregated by Santander, was also a significant partner, representing 23.2% of Brazil’s total imports in the same year.

And the export volume from Brazil to China continues to grow annually, reaching a historical high of over US$100 billion in 2023. The main export products include agricultural and animal husbandry products, as well as iron ore and crude petroleum. In terms of imports from China, semiconductor devices account for the most at 7%, followed by broadcasting equipment, electrical transformers and integrated circuits.

The two countries’ connection is not restricted to trade. There is also deep cooperation as seen in investment by Chinese companies in Brazilian infrastructure projects. For example, a consortium between Brazilian firm Comporte and a subsidiary of Beijing-based CRRC in March 2024 won an auction for a 30-year concession to build a railway that would link the cities of Sao Paulo and Campinas.

And times are changing in the use of currencies for international trading. While Brazil and other Latin American countries continue to rely heavily on the US dollar not only for its trade settlement with the US, but also with other countries, more companies could begin accepting payments in RMB, as China’s footprint in the Latin American region continues to expand under the Belt and Road Initiative or other platforms. There have been an increasing number of Brazilian trade settlement cases using RMB, states the Chinese banker, not only with China, but also with Russia and Argentina.

As well, the Latin American region, apart from the development of its traditional industries, is set to get a massive boost from the developments in the new energy industry, given that among the top five producers of lithium – a metal essential to the production of electric batteries – three of the countries are in Latin America. These are Chile with 44,000 million tonnes (mt), Argentina 9,600mt and Brazil 4,900mt. The others are Australia with 86,000mt and China with 33,000mt.

Due to the large advantage in battery raw materials sources, these countries also attract significant investment from electrical vehicle (EV) companies. BYD, the largest EV maker in China after Tesla, has made significant strides in Chile, where it has established an assembly plant and is reportedly planning to build a battery materials factory. Additionally, BYD is set to manufacture EVs, chassis and battery materials in Brazil starting this year.

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