In light of the COVID-19 pandemic, some of our budgets have taken a hit. We have become more conscionable about where we spend our money and have begun to look for cheaper alternatives when possible. China has done the same thing over the past few years, but with global assets instead of household goods. With foreign investors pulling out of Latin America’s uncertain economy, China has swooped in to buy these low-cost companies as opposed to pricy European and U.S. American investments.
China’s most recent shopping list includes energy companies in Chile, Mexico, and Peru. As of December 2020, Chinese total investments in Latin America amounted to $7.7B. Compared to North American investments of $3.4B and European investments of $3.5B, Latin America has taken the largest amount. But why has China’s wallet sparked interest in Latin America? What do these massive investments mean for Latin residents and their economy? And should Latin governments consider defeat in internal economic growth because of China’s overbearing footprint in Latin America?
There are multiple incentives to invest in Latin America but one of the driving factors is the current low prices. Before the political uprisings and evident forms of corruption, Latin America’s lack of development attracted foreign investors. It was a project that had growth potential and the projected profits were high. However, political instability and rampant government corruption have sparked capital flight as wary investors seek to either cut or prevent losses. With the urgency to remove their money from Latin America’s uncertain economy, investors have been selling their assets at staggeringly low prices.
China has been taking advantage of foreign investors’ panic by taking up great assets at below-market prices. No risk no reward, right?
Last year, State Grid Corporation of China, an electric utility company, announced its plan to purchase Sempra Energy, including its 100% ownership of Chilquinta Energia. Chilquinta Energia is the third-largest energy provider in Chile, providing service to at least 2 million people. In the same year, State Grid Corporation agreed to acquire 96.04% of Compañía General de Electricidad (CGE), another Chilean energy provider serving over three million residents. As stated on the SGC website, its goal is to “leverage its strengths…to facilitate the future growth of CGE, and help it improve grid operation and services so as to provide stable power supply to the Chilean people.” With China’s expansive knowledge of technology, it hopes to implement these advances within the Chilean borders.
Zuma Energia, Mexico’s largest independent renewable energy company, was acquired in November 2020 by State Power Investment Corporation (SPIC). Zuma Energia is a successful company responsible for reducing 1.5 million tons of carbon dioxide from Mexico’s atmosphere per year through its use of clean energy at an accessible cost to residents. SPIC, a major energy company based in China, owns more than “$170 billion in assets across 41 countries, including wind, solar and hydropower projects in Brazil and Chile.” SPIC’s ownership is evident and expanding throughout Latin countries.
China Yangtze Power International (Hongkong) Corporation(CYPI), acquired 83.6% of Luz Del Sur, a Peruvian energy company that serves approximately 4.9 million residents in Lima, Peru. It is responsible for 33% of the country’s total electric sector. The shares sold to CYPI were previously owned by Sempra Energy, a corporation based in the United States. The remaining shares of the company are still owned by local and foreign shareholders.
Benefits for China
Investments in the renewable energy market are relatively new. For many years, countries have relied on fossil fuels; investors are just now shifting their attention from fossil fuels to renewables. China is ahead of the game and has started to invest in this attractive market. The rates of return on renewable energy have been defeating the sluggish returns of fossil fuels. In Germany and France, renewable returns amounted to 178.2% over five years compared to -20.7% from fossil fuels. The United States has also experienced a volatile shift as renewable returns yielded 200.3% while fossil fuels only resulted in a 97.2% return.
The prospective profits of the energy market are high and China has made sure to get in early before the prices soar. With more countries shifting to renewable energy, the value of these assets is also on the rise. By investing, China has increased its economic security even through unexpected times. Energy is a necessity for households and firms. Therefore, even during unanticipated events like COVID-19, its demand does not experience a great impact. It is a safe investment that is projected to grow slowly but steadily.
Impact on Latin American Locals
With an experienced global power taking over energy corporations, implementing new technologies in developing countries becomes easier. China has more experience in managing electrical companies around the world when compared to local corporations in Latin America, therefore, can better expand and improve the service quality. Locally-owned electrical companies have limited access to technological developments and financial resources, so China’s presence might improve the quality and stability of electrical power within these countries.
Because some countries have implemented quality and price controls on energy providers, Latin residents should not fear China’s integration into their markets will lead to an overpriced service bill. In Chile, distributors are subject to strict quality standards and must oblige to the prices determined by the National Energy Commission. Peru’s electrical rates are set by the GART Commission for Energy Rates. GART ensures rates imposed are the lowest of the continent to not burden residents with costly basic necessities. Locals will likely experience an improvement in their renewable energy quality without having to overpay.
Impact on Latin American Economies
China is profiting and locals are experiencing improved service quality, but how will this impact Latin economies in the long-term? Various Latin American economies can be classified as unstable due to their lack of technological development, corrupt governments, and a grand amount of national debt when compared to their low GDP. Investing in renewable energy is a good move but Latin America has had to pass up on this great opportunity because they do not have the financial resources nor good credit history with foreign investors. By constantly defaulting on their debt, their economy’s health has been dwindling, allowing foreigners to swoop in and take the profits for themselves.
If Latin America were to invest in itself, it could greatly improve its economy. Each government has to reassess whether deepening their pockets in the short-run at the cost of ensuring the country’s economic growth in the long-run is the best move. With more internal stability, Latin economies have the potential to help their citizens more than what foreigners have to offer. Instead of being passed around from foreign hand to foreign hand, Latin governments can regain control of their resources and establish themselves as a region of self-growth and development.
Chile’s adoption of a new constitution and Peru’s inability to keep a president for longer than a week in 2020 is definitely hindering their economies. However, there is still hope for Latin countries that want to ensure prosperity in the long-run. China’s overpowering presence in Latin profits should not discourage governments from seeking ways to stabilize their economy. Latin Americans deserve more than merely an improvement in their electricity, they deserve to live in countries they can count on for prosperity.