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China's Brazilian shopping spree

Chinese investment in Brazil has ballooned to more than $25 billion this year.

Chinese manufacturers are hard to compete with because they operate with advantages — low-interest loans, low taxes, new infrastructure, a devalued currency — which simply don’t exist in Brazil. Brazil’s roads are crumbling, its interest rates soaring and its real ranks among the most overvalued currencies in the world. And so it’s little surprise Chinese imports often out-compete locally manufactured goods.

It’s a dynamic repeated across Latin America, but “in the case of Brazil it’s even worse,” said economist Alexandre Barbosa, a professor at the University of Sao Paulo.

“Brazil is the country that has the most developed industry on the continent,” Barbosa said. “So China is displacing some of our exports in other countries of the region.”

This is bad for some manufacturers, and could be bad for the country as a whole if the manufacturing industry starts to shrink. Barbosa says Brazil can protect itself by directing investment to the right places, particularly high-technology industries.

“The Chinese are sitting on a tremendous amount of foreign reserves,” he said. “So why don’t they use their banks to establish a semi-conductor company here in Brazil. We don’t produce semiconductors here, so that would be amazing.”

But making this happen will require an aggressive effort by the Brazilian government to negotiate favorable trade and investment.

Brazil’s foreign trade secretary at the Ministry of Development, Industry and Foreign Trade, Welber Barral, said efforts to do so are underway.

“We have an investment policy that is very focused on bringing innovation and adding value to the Brazilian companies,” Barral said.

He cited the highest profile example — a multi-billion-dollar steel mill under construction in the state of Rio de Janeiro — along with other, smaller investments. The Chinese company H-Buster announced this year a $225 million expansion in Brazilian factories to make LCD screens. At least two companies are spending tens of millions to increase production of motorcycles, Barral said, and others are building auto factories.

Nevertheless, most of China’s biggest Brazil deals announced this year have been for commodities — the $1.2 billion purchase of an iron mine in the state of Minas Gerais; $7.1 billion to buy the Brazilian oil operations of the Spanish company Repsol, another $3.1 million for shares in an offshore oil field owned by the Norwegian company Statoil.

The most contentious investments appear to be in farmland. Several reports in the press regarding Chinese plans to buy hundreds of thousands of acres of farmland have sparked worries that China’s investment amounts to a land grab.

The newspaper O Estado de Sao Paulo ran an editorial in August that raised the specter of neocolonialism. It said that foreign investment is generally welcome, “but ‘business’ takes on another meaning when investments are subject to the strategic rationale of a foreign power.”

And the government seems to have responded. Secretary Barral pointed to a recent reinterpretation of Brazilian law, declaring that government approval will be required for large purchases of land by foreigners.

The Chinese government has shown a willingness to try other options. This month the governor of Goias announced a deal for up to $7.5 billion in Chinese investment for agriculture in the state of Goias. Early reports indicated the money will be used to turn 6 million acres of pasture into soy farms, and everything they produce will go directly to China.

When the deal was announced, the Goias secretary of planning and development, Oton Nascimento Junior, made a point of saying that China won’t own the land. The money will instead go to local producers to build roads, buy equipment, improve the soil and finance production.

“There is nothing here involving land purchases,” the secretary emphasized. “This is purely a partnership.”