Analysis: China's risks in investing in Argentina

By SHIHOKO GOTO, UPI Senior Business Correspondent  |  Nov. 17, 2004 at 3:15 PM
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WASHINGTON, Nov. 17 (UPI) -- China could be Argentina's next best friend, especially at a time when the country is facing more enemies than allies as it is now. But Argentina may well have to work hard to keep China's attention and financial commitment, given the East Asian powerhouse's greater ambitions for all of Latin America.

Argentina continues to be plagued by at least $100 billion in private debt that the government has chosen to default on, much to the chagrin of international bankers as well as financial institutions including the International Monetary Fund. Meanwhile, the amount of overall external debt it continues to carry is estimated at around $131 billion. So the drastic decision to default on its debts would have led most economists to expect a drastic decline in investment into the country, given the potential risks of yet another government-backed default.

Yet the Chinese are so confident about Argentina's future prospects that they will actually be investing nearly $20 billion in the country. For China, it's a clear sign that it is no longer just a manufacturing base for multinational companies that are seeking to produce goods at an ever-cheaper price. Instead, China is clearly growing into an economic power in its own right and becoming a provider of jobs and resources outside its own borders.

China's President Hu Jintao arrived in Buenos Aires Tuesday and announced the government's decision to invest the money over a 10-year period on his first day in the capital. Official documents to seal the deal, including an $8 billion plan to expand Argentina's railway system and $5 billion for oil exploration, among other investments, were signed by Hu and Argentine President Nestor Kirchner at the presidential palace.

While China has traditionally had limited relations with the region, Hu has made clear in recent weeks ahead of the visit to the region that China would increase its commitment to Latin America over the next decade and invest at least $100 billion during the next 10 years.

"Our aim is to strengthen this relationship despite the distances" between China and Argentina, Kirchner said.

But Argentina will certainly be facing stiff competition from its neighbors for China's attention and money, especially Brazil, where Hu came from before heading to Santiago, Chile, to take part in the Asia-Pacific Economic Cooperation group's summit meeting over the weekend. Following the APEC meeting, Hu is expected to visit Cuba and meet with Fidel Castro.

So it is clear that China's commitment to Latin America goes far beyond Argentina, and indeed, China's offering to Brazil was generous enough as well, as the country was granted greater access to China's market for chicken and beef products in return for Brazilian President Luiz Inacio Lula da Silva recognizing China as a market economy, instead of a Communist state, which will make it easier for the two countries to do business. Brazilians government officials said that the beef deal alone could be worth about $600 million. China also offered between $5 billion and $7 billion in investments to improve the Brazilian transportation network.

Meanwhile, Brazil could be the safer bet for investments, at least for now. While both Brazil and Argentina had to resort to emergency loans from the IMF and other creditors three years ago in order to keep their economies afloat, Brazil has continued to adhere to the IMF's stringent economic plans and repay its financial obligations on time.

Argentina, on the other hand, defaulted on $3 billion of the IMF's loan and as a result can no longer get additional funding from the agency. But while there had been considerable fear that going against the IMF would scare off potential foreign investors, China single-handedly could be boosting the business climate in the country, increasing its allure to entrepreneurs worldwide.

Certainly, going against the demands of the IMF was seen as a sound maneuver politically, and cutting itself off from future loans from the agency is actually beneficial for the economy in the long run, according to some analysts.

"Saying no is good," said Pepe Robles, research director of El Mundo de Trabajo, an economic research institute in Buenos Aires. He pointed out that continuing to abide by the IMF's prescriptions was politically unacceptable, given such intense public hatred towards the agency that erupted into riots on the streets when senior agency officials were know to be in town.

Gustavo Marquez, principal labor adviser at the Inter-American Development Bank in Washington, agreed, arguing that what Argentina needed most now was a strong government that could win the confidence of its people, rather than a weak political leadership that bowed to the demands of international institutions.

"There needs to be stability in the political system" above all else, Marquez said, which may have been near impossible should the IMF continued to be regarded as being in control of Argentina's finances.

The question now is whether China will succeed in its gamble with Argentina or not.

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