It is well documented that China´s economic development model has been experiencing a substantial transformation since the mid-2010s1 — from an economic model driven by internal investment and external demand, to a model focused on internal consumption and external investment.2
China´s economic transformation is changing its economic relationship with Latin America, from competition in the international trade arena, to investment partnership in the Latin American region.
The new economic relationship between Latin America and China has great potential for mutual benefit. To make the best out of it, Latin America will need to understand China´s new economic development model (in particular the role of Chinese state owned enterprises), and China will need to understand the infrastructure development plans of Latin American countries as well as how Chinese companies can engage in join ventures with Latin American companies, including Latin American state owned enterprises.
China’s economic rebalancing
From 1987 to 2007 China accomplished an economic miracle. With annual GDP growth rates in excess of 10%, China created 120 million new jobs and pulled 400 million people out of poverty.3
However, in 2007 at the China National People´s Congress, Premier Wen Jiabao stated that "the biggest problem with China's economy is that the growth is unstable, unbalanced, uncoordinated, and unsustainable."4 At that time it was clear to the Chinese Government that China’s economic growth could not keep relying on massive internal infrastructure investments and exports, without a corresponding growth in internal consumption.
In the first decade of the new century, China´s consumption as percentage of its GDP decreased from 63 to 48%, the lowest of any major economy at that time (see graphs below).
Source: own, with World Bank data.
Conversely, as opposed to other major economies, at that time China´s GDP growth relied on its internal investment.
Source: own, with World Bank data.
The imbalance between consumption and investment produced an internal overcapacity problem in several Chinese sectors — including solar panels and power generation equipment, among others.5
It should be noted that despite the fact that the overinvestment produced some undesirable economic effects, at the same time it accelerated China´s development of comparative advantage in several industries, including the renewable energy industry. By the mid-2010s, China was already the world’s largest producer of wind and solar energy, and the largest foreign investor in renewable energy.6
In order to rebalance its economy, China switched gears in its economic development model, from an economy driven by internal investment and exports, to an economy focused on increasing internal consumption and investment abroad.
Since the mid-2010s, as China has increased its outward direct investment, it has changed the composition of its investment. As Ding, Di Vittorio, Lariau, and Zhou (2021) have shown, once concentrated in secure natural resources like oil or minerals, Chinese foreign investment has increasingly been concentrated in industries in which China has developed international comparative advantage, especially in the electricity industry. This has been particularly the case in Latin America. 7
Over recent years China´s M&A investment in Latin America has been focused on the electricity sector. In the last five years alone, 71 percent of China’s Latin American M&A investment has gone into the electricity industry.8
The role of China´s State Own Enterprises
China´s economic development model depends heavily on its state owned enterprises (SOEs). World Bank research conducted by Chunlin Zhang (2019) concluded that the share of SOEs in China’s GDP is between 23% and 28%.9 When it comes to outward foreign direct investment (OFDI), the contribution of the SOEs is considerable larger — 49.6% on average for the last five years.10 And if we zero in on ODFI in the electricity sector, the share of SOEs is 80%.11
China´s power sector investments cover the globe but are largely found in developing countries, particularly in Asia and Latin America (Li, Gallagher and Mauzerall, 2020).11
Source: Li, Gallagher and Mauzerall, 2020
Given the importance of China´s SOEs in the electricity industry in Latin America, it is worth understanding their corporate structure. As explained by Wendy Leutert (2022), Chinese SOEs are enterprise groups with member entities layered under a state-owned company.12
Source: Diagram adapted from Wendy Leutert “The Reform and Global Expansion of Chinese State-Owned Enterprises”.12
It is particularly important to note the dual objective of the Chinese SOE Model. On the one hand, the Government of China is able to keep control of all group companies through the Holding Company, which is a fully state-owned entity. And on the other hand, through its subsidiaries, the Government can take advantage of joint ventures with private companies, and can access capital resources from capital markets.
Compared to private Chinese companies, SOEs report lower economic returns on investment. But SOEs offer two other important benefits for the Chinese Government:
SOEs open new markets for all Chinese companies (state or private companies); and
SOEs are effective instruments with which to implement government economic policies.
Ample room for growth in the relationship between Latin America and China
There is considerable room for growth in this new form of investment partnership between Latin America and China:
the Latin American electricity industry is still in great need of investment, particularly in renewable generation plants and in the upgrade of transmission and distribution networks;
Mexico offers an exporting platform to Mexican-Chinese manufactures. By investing in manufacturing infrastructure in Mexico, China can access the North American market; and
Latin American SOEs can learn from the experience of Chinese SOEs, and begin to undertake their own development joint ventures in the electricity industry.