“China is the largest trading partner of Brazil, Chile, Peru and Uruguay, and has free trade agreements with several other Latin American countries.”
Mention to our partner and leader of the Asian Investment Desk, Civil Litigation, and Arbitration, José Tam.
Published in Latin Lawyer
Written by: Elliott Hodgkin, News Reporter, Latin Lawyer.
Latin America is awash with new business opportunities as China warms back up to the international market following a shutdown during the covid-19 pandemic. Excitement at many law firms across the region is palpable, with China’s pioneering advances in technology, penchant for long-term investments and unique way of negotiating deals forcing lawyers to innovate like never before.
Geopolitical tensions are certainly generating a great deal of controversy as both China and Latin America grow closer, while transactional work is often weighed down by mutually wide gaps in legal and cultural knowledge. But according to Hallam Chow, a Beijing-based Mayer Brown LLP projects partner with extensive Latin American experience, there are “no insurmountable obstacles” preventing more, diversified dealmaking between the two regions.
Despite fluctuations in China’s economy, trade and infrastructure projects remain robust. China is the largest trading partner of Brazil, Chile, Peru and Uruguay, and has free trade agreements with several other Latin American countries. It also regularly places winning bids for big-ticket concessions across the region. Digital infrastructure is prominent too, with at least 11 jurisdictions having implemented – or planning to implement – Huawei’s 5G technology.
The country’s foreign direct investment (FDI) into Latin America is also predicted to stay strong in the coming years. In 2022, the East Asian country forked out at least US$7 billion on assets, largely in the energy and mining sectors, a comparable figure to its investments in Europe and the US during the same period.
Marval O’Farrell Mairal partner Leonardo Rodríguez notes that a “huge jump in the sophistication of Chinese companies in recent years, from economic knowledge to English language skills,” is making such transactions increasingly easier to structure.
In one investment, Chinese car manufacturer BYD injected US$620 million into a former industrial park owned by counterpart Ford in the northeastern Brazilian state of Bahia. Brazil’s government and BYD hope that the construction of three new factories will, among other things, bring hybrid and electric vehicles to a wider market. The project, which President Luiz Inácio Lula da Silva tabled during a visit to Beijing earlier this year, is emblematic of the role China can play in facilitating Latin America’s energy transition.
Counsel for the deal is currently confidential.
China favours acquisitions among its various investment strategies due to the direct control it obtains in local businesses in return. Between 2017 and 2021, Chinese companies made over 130 acquisitions in Latin America for some US$44.4 billion. The majority of these were in Brazil. As Latin America’s largest economy, Brazil appeals to China as the most reliable entry point and ultimately a springboard into the region.
The focus of these acquisitions was, and continues to be, on the electricity sector, where 71% of those investments were made. A recent deal in that industry took place in April, when China Southern Power Grid International (CSGI) inked an agreement to buy Enel’s Peruvian assets for US$2.9 billion.
International firms Allen & Overy LLP and Hogan Lovells LLP, Chile’s Barros & Errázuriz Abogados and Miranda & Amado and Rebaza, Alcázar & De Las Casas in Lima worked on that transaction.
The deal represents a huge opportunity for Enel to eliminate its debt pile, while Peru can gain valuable input from China’s power supply expertise. But risks of creating a monopoly are high and the deal, if approved by local antitrust regulator Indecopi, would give state-owned CSGI an 83.15% stake in one of Peru’s largest power companies. But it’s not the first time the Andean country has divested such a substantial portion of its energy assets to China. Back in 2020, China Yangtze Power International nabbed US energy group Sempra’s Peruvian assets for US$3.6 billion.
The frequency of loans has plummeted in comparison now that China has reaped numerous successes through its FDI strategy. State-owned policy banks, such as China Development Bank and the Export-Import Bank of China, have pumped out credit lines across the region totalling more than US$140 billion since 2005, but that figure dropped from US$34.5 billion in 2010 to US$1 billion in 2021. The lack of direct market influence is largely driving that downturn. Lending also doesn’t allow China to target specific assets and sectors in the same way.
High-value loans do continue to crop up, however. Earlier this year, China Development Bank lent US$1.3 billion to Brazilian counterpart BNDES. The funds are targeting Brazil’s mining, energy, infrastructure, renewables and agriculture sectors, in addition to backing bilateral trade initiatives between the two countries.
Machado Meyer Advogados advised on the transaction.
China and Latin America are relatively inexperienced when it comes to doing business with each other, with substantial trade and investments only picking up steam since the early 2000s. This means that Chinese companies are often unfamiliar with environmental, labour and tax regulations in Latin America; their judgements of these are also often influenced by local Chinese standards.
But in Latin America, where environmental, social and governance (ESG) matters have become as important to compliance as anticorruption, a lingering feeling of hesitancy has settled over many companies mulling Chinese investment.
“Strong ESG practices are not a priority to Chinese investors,” says partner Guilherme Amaral from Brazil’s Souto Correa Advogados. This makes the process of obtaining the necessary permits and approvals from public bodies to develop projects a very taxing process for Chinese companies, who are used to less rigid environmental and labour regulations.
“This sometimes causes Chinese investors to invest through the acquisition of a project or a company directly, instead of developing a greenfield project,” explains Luis Schmidt, head of Philippi Prietocarrizosa Ferrero DU & Uría (Chile)’s Asia desk and the country’s former ambassador to China.
On the other hand, it can also lead to important regulations getting overlooked.
ESG compliance concerns are particularly evident in the mining industry, where projects can have controversial impact on local communities and the environment. In Ecuador last year, Chinese mining company Junefield Gold filed a US$480 million claim under the countries’ bilateral investment treaty after one of its mines was raided by opponents of the project. Junefield is claiming compensation for significant damages caused by those protestors, who in turn have accused the miner of polluting natural resources and undermining the rights of local indigenous people.
Mayer Brown and ROBALINO in Quito have been advising Junefield.
The two regions will need to put in the time to align expectations in order for these kinds of risks to die down. Disputes departments, however, will be kept busy in the meantime.
Increased Chinese involvement in Latin America has also sown concerns of further geopolitical tension and economic disruption, and where this will leave the US as the region’s main trading partner. The European Union has expressed similar concerns, recently welcoming Latin American heads of state to Brussels in an effort to shift their focus away from China with an EUMercosur trade deal.
José Tam, partner at Rodrigo, Elías & Medrano Abogados in Lima explains how another aspect of these issues is playing out in Peru. “China’s continued investment in Peru could have an effect on Peru’s relations with other countries, especially because China can offer more competitive economic tenders than companies from Peru and other countries.”
Tam, who is also president of the Chinese-Peruvian Chamber of Commerce, says that firms must prioritise neutrality when navigating these tensions, providing “legal advice that takes into account the interests of all stakeholders”.
But many international outfits maintain a positive outlook and are confident that a more diversified network of commerce will ultimately generate more work.
“Chinese companies develop and finance projects with European and international counterparties in Latin America and the firms working on those projects are US firms or staffed with US-based teams,” explains José Luis Vittor, partner and head of Womble Bond Dickinson’s Latin America practice in Houston.
“Those teams [with] cross-border experience between China and Latin America . . . will thrive,” he adds.
Latin Lawyer explores how firms can work more effectively with Chinese clients in an upcoming article.
