When two elephants fight, it’s the grass that suffers. So says an African proverb. But in Latin America the grass seems to be doing well out of the jostling between the US and China. In August El Salvador became the latest in a string of central American countries to switch diplomatic relations from Taiwan to China. In Panama, US protests managed to thwart the opening of a new Chinese embassy on the mouth of the canal.
But with 26 co-operation agreements between the two countries signed in the last year, this merely delays the inevitable spread of Chinese influence over Panama. China’s growing clout is evident not just in central America, but in South America too. In south Argentina it has built a controversial space station to be operated by the military. It will serve as a strategic monitoring post. For lovers of geopolitics it’s fascinating to see two superpowers vying for influence in a region – a tussle reminiscent of the Great Game between Britain and Russia in the 19th century. But for investors the underlying economic story is more interesting. China is gaining political influence because during the last decade it has surpassed the US as the most important trading partner for the major Latin American economies.
It’s also become a major investor, with Chinese firms making the most corporate acquisitions in the region. Finally, its state-to-state lending has also rocketed, and is now a bigger source of financing to Latin American governments than the World Bank and regional equivalents. China’s emergence as a major player in Latin America is great news for the region’s economies. It reduces dependence on the US, diversifies its sources of finance and investment and opens up new export markets. That’s positive for investors in Latin America as it will boost economic growth and asset prices over the coming decades.
Why China is so interested in Latin America
In densely populated east Asia, China is hemmed in by nuclear Russia to its north, fellow rising power India to its west and US-backed Japan to its east. For the world’s most populous country and soon-to-be largest economy, a key long-term goal is to ensure adequate supplies of energy, food and industrial metals. It has done an excellent job of gaining access to commodities in southeast Asia, but Latin America is uniquely abundant in all three.
In energy it has around 20% of the world’s oil and gas reserves but less than 10% of its population, making it a natural exporter. In agriculture it already has a dominant share in key global export markets: 60% of world soybean exports, 44% of beef, 42% of poultry, and 33% of corn. Moreover, with 33% of the world’s freshwater supplies and the most potential arable land on the planet, there is ample scope for these figures to grow.
The continent is also rich in base metals, with the world’s largest reserves of copper, and around a quarter of zinc reserves. It also looks well placed in metals with more cutting-edge applications. For example, 54% of the world’s reserves of lithium – essential for the batteries that will power the boom in electric vehicles – can be found in the “lithium triangle” of Bolivia, Chile and Argentina.