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China invests heavily in Brazil, elsewhere in pursuit of political heft

By John Pomfret
Washington Post Staff Writer
Monday, July 26, 2010; A01

PORTO DO ACU, BRAZIL -- Here along the golden sands that grace the Atlantic coastline 175 miles north of Rio de Janeiro, China is forging a new economic reality.

Just past a port where workers are building a two-mile-long pier to accommodate huge vessels known as Chinamaxes that will transport iron ore for China's ravenous steel industry, past berths for tankers to lug oil to Beijing, a city of factories is sprouting on an island almost twice the size of Manhattan. Many of the structures will be built with Chinese investment: a steel mill, a shipyard, an automobile plant, a factory to manufacture oil and gas equipment.

The port project recalls the China of the past decade: a worldwide effort to extract resources for use in the country's vast manufacturing sector. But the factory city represents something new: an aggressive push to invest in industries overseas to bolster the country's image and political influence.

Call it "dollar diplomacy," Chinese-style.

The investments in Brazil reflect China's "going out" strategy, which seeks to guarantee natural resources for development purposes and to shield the country's state-owned enterprises from slower growth at home. Flush with more than $2 trillion in foreign exchange reserves, China has directed its state firms to scour the globe for opportunities.

As it does so, China is playing by its own rules, giving its firms an edge over U.S. and other multinational companies bound by internationally mandated restrictions intended to promote fair competition. In addition, Brazil and other developing countries, which once saw China as an ally, are now realizing that Chinese companies are competing on their own turf for resources and market share. And some analysts say the United States has been slow to perceive that China is using investment to build political heft.

In the first half of this year, China's investment in Brazil topped $20 billion, more than 10 times all of China's previous investment in the country. That puts China on track to be Brazil's No. 1 investor for 2010, compared with 29th in 2009. China's investments are also booming elsewhere -- from Peru, where one-third of the minerals sector is in Chinese hands, to Japan, where Chinese mergers and acquisitions quadrupled from 2008 to 2009.

"They do not want to be perceived as just natural-resource eaters," said Eike Batista, the Brazilian billionaire behind the port project and one of the world's richest men. "To them, it's common sense."

Li Jianqiang, who runs China Shipping's operations in South America, sees big opportunities. "Brazil used to look to the U.S. and Europe, but then one day they discovered us and they realized how far behind they were. Money talks, and we understand that. If you have money, people respect you, and then you will have political power."

Chinese firms have bought stakes in Brazil's electrical grid; they are building steel mills, car plants and a telecommunications infrastructure in that country. Chinese grain companies are negotiating to buy huge tracts -- some larger than 600,000 acres -- of Brazilian outback to plant soybeans. Chinese firms have the inside track on landing a huge high-speed-rail contract. They want to help realize Brazil's gargantuan plans -- estimated at more than $250 billion -- to tap its offshore oil reserves.

The China Development Bank has given Petrobras, Brazil's main oil producer, $10 billion as a down payment on future business. Starting last year, China became Brazil's biggest trading partner, replacing the United States.

China has even begun to adopt a gringo swagger that stands in contrast to its old role as the cheerleader for the Third World. For the past several months, it has refused to buy a drop of soy oil from Argentina after that country slapped tariffs on Chinese shoes -- although that tiff didn't stop Beijing from committing $8.5 billion this month to refurbish Argentina's creaky rail system as long as Argentina buys Chinese trains.

In March, Ecuadoran President Rafael Correa compared China to the worst imperialist corporation after Beijing refused to bend on terms for financing a $1 billion hydroelectric dam. Then he caved in to China's demands.

" 'New colonialists' is how we refer to China now," said Roberto Giannetti da Fonseca, who represents manufacturers in Latin America's industrial heartland of Sao Paulo.

China's 'special tools'

Roberto Abdeneur was one of the Brazilians who built his country's relations with China. He was an ambassador to Beijing in the 1980s. But as the relationship deepened, Abdeneur began to see China as more of a challenge to Brazil than an opportunity. As Brazil's ambassador to the United States four years ago, Abdeneur noticed that the United States, too, was beginning to worry about China, but in a different way.

"In Washington, you are fixated on China's potential ideological penetration of Latin America or focus on whether China is training this army or that," Abdeneur said.

Indeed, U.S. analysts have written extensively on China's support of Venezuela's military, noted its bolstering of Cuba's air defense systems and speculated about whether Chinese analysts have replaced Russians at three signals intelligence sites in Cuba. U.S. officials have also expressed concern about Chinese-Brazilian cooperation in satellite and rocket technology.

"But that's a smoke screen," Abdeneur said. "The Chinese are playing on a different chessboard. The competition is commercial. You simply cannot compete because of the very special tools China has."

Among those tools is the way China cuts deals -- in Latin America and elsewhere. China is a master at low-ball financing, fashioning loans of billions of dollars at tiny interest rates that can stretch beyond 20 years. Financing, a seemingly arcane matter, can often account for 40 percent of the cost of a project.

This has become a headache for Western competitors, especially members of the 32-nation Organization for Economic Cooperation and Development (OECD), which long ago agreed not to use financing as a competitive tool.

China's Wuhan Iron and Steel bought a 21 percent stake in one of Batista's companies for $400 million, using below-market-rate loans provided by China's state banks. The steel company is also planning a $5 billion investment to build a mill at the Acu port, with Chinese state financing at attractive rates. China's oil and gas companies are talking with Batista about selling oil rigs and platforms to service Batista's offshore drilling operation -- again with low-interest loans.

"Given the size of the Chinese banks, they have the muscles to support a major expansion of Chinese companies abroad," said Otávio Lazcano, chief executive of LLX, the firm running the $25 billion port project.

Although U.S. oil and gas technology may be more advanced, the financing terms that China can offer Brazil are almost unbeatable. In some cases, China has handed out billions of dollars at less than 1 percent interest; under OECD rules, the United States must lend at market rates.

"We believe in a level playing field, the marketplace and transparency," said Fred P. Hochberg, chairman of the Export-Import Bank of the United States. "With China, there's an absence of the market and an absence of transparency."

A shift in Brazil

In the early years of this century, Brazilian President Luiz Inácio Lula da Silva embraced China as a brother developing country. China cultivated Brazil, hinting that it might support that country's dream of becoming a permanent member of the U.N. Security Council and offering what Brazil took to be a counterweight to the United States.

There was talk that Brazil would train Chinese pilots on its aircraft carrier. Pundits proclaimed a new Brasilia-Beijing axis. The pair formed half of the BRICs -- the four nations, including Russia and India, that were considered the new leaders of the global economy.

Lula's government even moved to silence critics of the newfound strategic union, yanking Abdeneur from his post as ambassador to the United States in late 2006 after he criticized what he called Brazil's "China fantasy" at a meeting of businessmen in Sao Paulo.

But these days, Abdeneur's warning -- that China is more competitor than partner -- is gaining traction.

On a recent trip to Africa, where Chinese companies have beaten out Brazilian firms across the continent, Lula tweaked China at almost every stop.

"I have nothing against my Chinese friends," Lula said in a speech July 8 in the Tanzanian seaport of Dar es Salaam, "but the truth is that sometimes they win a mine contract and they bring all these Chinese to work in a mine, and this doesn't generate opportunity for work in that country."

Responding to the challenge posed by China, Brazil has turned to the United States for help in starting its own export-import bank. It has launched dozens of anti-dumping investigations against Chinese firms. Its government is approving mergers faster than any time in the past to compete with Chinese companies. It has invested billions of dollars in government funds to resuscitate its shipbuilding industry, which hadn't built a big ship in 20 years. In the run-up to a Group of 20 meeting in Toronto in June, Brazil joined with the United States and India to call on China to allow the value of its currency, the yuan, to rise.

"The Chinese were furious," said Marcel Fortuna Biato, Lula's foreign policy adviser.

"China is the microcosm for the future of Brazil, all the good and bad. And like the rest of the world, we are trying to fashion a response," Biato said.

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