China and Inter-American Development Bank Announce US$1 Bln Investment Fund

March 22, 2012 Posted by China Briefing Reading Time: 3 minutes

By Gregor Hastings

Mar. 22 – China and the Inter-American Development Bank (IADB) have recently announced plans for a US$1 billion investment fund to help develop Latin American and Caribbean markets.

The IADB and China’s state-owned Export-Import Bank of China will each make investments of $150 million and the remaining funds will be raised from the market. The purpose of the fund is to finance public and private sector projects in addition to making equity investments in the region.

“This new platform will promote stronger investment ties between China and Latin America and the Caribbean and will help our region overcome some of the most important development challenges,” said IADB President Luis Alberto Moreno.

The announcement comes at a time when China is seeking to maintain its lead among countries rushing to invest in fast-growing South American economies. A report by the UN Economic Commission for Latin America and the Caribbean (ECLAC) shows FDI inflows were up by 40 percent with respect to 2009 and stood at a total of US$113 billion. Outflows increased almost fourfold to reach an all-time high of US$43 billion, reflecting the strong growth of trans-Latin firms.

China is currently the fastest growing foreign investor in the region and accounts for about 9 percent of its total FDI. A report by the Inter-American Dialogue last month showed that Chinese state-owned banks lent US$75 billion to Latin America between 2005 and in 2010.The main attraction for China lies in the abundance of natural resources, such as iron ore and oil, which it desperately needs to maintain robust economic growth.

Another opportunity for China is presented by the developing status of these economies. They are in need of modern infrastructure, often on a large scale; an area where China has considerable experience and expertise. Some analysts have also indicated that China seeks to tie its exports in services such as telecommunications and construction with its investments in the region.

“Chinese banks almost always tie their loans to the purchase of Chinese goods,” said a separate report by the Inter-American Dialogue.

However, commentators have highlighted criticisms previously directed at China for its ventures in Africa, citing exploitation of cheap labor imported from China as opposed to providing the local population with jobs.

Fellow BRIC member Brazil has already called for caution regarding the expansion of Chinese investment in the region.

“We need to look at these kinds of proposals cautiously because the Chinese presence in some places has meant that they bring over their own workers and practices,” Brazil’s Planning Minister Miriam Belchior told Reuters at the IADB meeting.

China is Brazil’s largest trading partner, but also its largest competitor in both Latin American and African markets. Both countries are racing to protect domestic industries from foreign competition and some analysts fear a recent rise in import duties in Brazil could lead to protectionism in emerging markets.

Despite concerns about dealing with China, Latin America has been forced to look to the East for investment, while the United States and Europe are mired in debt crises, economic stagnation and foreign wars.

In addition to the fund with China, the IADB said it would make more than US$300 million available to combat crime in a region with only 8 percent of the global population, but over 30 percent of the world’s murders.

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