Why China’s 3,000-mile Latin American railway is great news for investors
China is investing heavily in Latin American infrastructure. That's great news for investors, says James McKeigue.
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
I've talked before about the Nicaraguan Canal a vanity inter-oceanic waterway being built by the Chinese now I want to talk about 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
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.
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
Take China's Latin American infrastructure boom. 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. Of this I am a bit less certain. At the moment, China dominates the trade and investment relationship between the two parties.
As I've noted before,China has a $10bn 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).
I've tried to boil the whole China Rise' argument down to a few paragraphs, but it's a long debate that I've had with many a Latin American policymaker. For example, I 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, I'd prefer 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 also debate the actual impact. For example, when I asked the Latin American representative of a well-known British infrastructure firm about the Nicaragua Canal he joked that the Chinese would "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.
For what it's worth, I think 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.
That said, I'm sure there will be a fair few nations where incompetence or corruption sees poorly executed Chinese projects cause more problems than they're worth.
Yet as interesting as all of that parlour room chatter is it's ultimately irrelevant for investors like us. So often we small fry individual investors that have to play Latin America through the few traded stocks available to us get buffeted by macroeconomic and geopolitical currents.
But, for once the tide is in our favour. China's increasing involvement (see stats above) is going to boost asset prices in the region.
I write this article from the shores of Guatemala's beautiful Lake Atitlan. The majestic beauty of the place is a reminder that China, which has had its fair share of environmental problems as it has developed, needs to respect the region.
Yet, from an investment perspective, China shares my view of Latin America's potential. And that is great news for the Latin America stocks that I've spent the last few years highlighting.