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Six years on, Brazil-China Fund yet to back a single project

. Feb 18, 2021
Brazil China Fund yet to back one project six years on Premier Li Keqiang and then-President Dilma Rousseff announced the Brazil-China Fund in 2015. Photo: Marcelo Camargo/ABr

Announced with great fanfare six years ago, the Brazil-China Fund has yet to finance a single project with the USD 20 billion it has at its disposal. The fund is struggling to attract any market interest, which analysts put down to fluctuating exchange rates, a high degree of bureaucracy, and scant interest from the Brazilian government.

Brazil and China announced the fund’s creation in 2015, as the latter needed to export its surplus industrial capacity and had the cash to do so in strategic locations. Chinese authorities traveled the world that same year, inking deals with the European Union, Russia, Indonesia, and several other countries.

</p> <p>For Brazil, it was the right time to create a fund tasked with expanding the country&#8217;s productive capacity, after witnessing an abrupt end to a near decade-long commodity supercycle and seeing investment shrink.</p> <p>&#8220;At this time of slowdown in the international economy, reciprocal trade and investment between Brazil and China can and will mean an improvement in our economic situation,&#8221; <a href="http://g1.globo.com/politica/noticia/2015/05/brasil-assina-35-acordos-com-china-em-visita-do-premie-li-keqiang.html">said</a> then-President Dilma Rousseff, upon signing the agreement.</p> <p>Incorporated two years after its launch, the fund foresaw a contribution of USD 15 billion from the China-LAC Industrial Cooperation Investment Fund (Claifund) — established around the same time — and another USD 5 billion from Brazil’s Caixa Econômica Federal and the Brazilian Development Bank (BNDES). Meanwhile, equivalent Chinese funds were <a href="https://brazilian.report/business/2017/10/17/china-influence-brazils-economy/">financing dozens of projects</a> worldwide.</p> <h2>Bureaucracy behind the Brazil-China Fund</h2> <figure class="wp-block-image size-large"><img loading="lazy" width="799" height="533" src="https://brazilian.report/wp-content/uploads/2021/02/36149020243_8711516813_c.jpg" alt="The Brazil China Fund was formally established in 2017 with great expectations. However, exchange rate volatility and complex bureaucracy have stymied its potential. Photo: Beto Barata/PR" class="wp-image-56868" srcset="https://cdn-statics.brazilian.report/wp-content/uploads/2021/02/36149020243_8711516813_c.jpg 799w, https://cdn-statics.brazilian.report/wp-content/uploads/2021/02/36149020243_8711516813_c-300x200.jpg 300w, https://cdn-statics.brazilian.report/wp-content/uploads/2021/02/36149020243_8711516813_c-768x512.jpg 768w, https://cdn-statics.brazilian.report/wp-content/uploads/2021/02/36149020243_8711516813_c-600x400.jpg 600w" sizes="(max-width: 799px) 100vw, 799px" /><figcaption>The Brazil-China Fund was formally established in 2017 with great expectations. However, exchange rate volatility and complex bureaucracy have stymied its potential. Photo: Beto Barata/PR</figcaption></figure> <p>The fund set up a committee consisting of three members from each country to review projects interested in receiving finance. On the Brazilian side, this included secretaries from the Office of the Chief of Staff, Planning Ministry, and Foreign Affairs Ministry. Officials from the People’s Bank of China, China Development Bank, and the State Administration of Foreign Exchange represented the Chinese contingent.</p> <p>Renato Baumann, who served as assistant secretary for international affairs at the Planning Ministry between 2016 and 2018, says the committee examined six consultation letters during his time at the Brazil-China Fund. None of the projects <a href="https://brazilian.report/opinion/2018/06/25/brazil-chinese-relations/">ended up going forward</a>. Some found other alternatives for credit, others had what Mr. Baumann describes as a &#8220;lack of consistency.&#8221;</p> <p>But these projects were only ever analysed at the technical level, says Mr. Baumann, who is now an economist with the Institute of Applied Economic Research (Ipea). The committee never met or created a statute for the fund. Mr. Baumann says the Chinese officials were reluctant to share any information about how the fund would work on their end, and the Brazilian members of the committee never even found out the names of their Chinese counterparts.</p> <p>Indeed, the requirement for several authorities to sign off on each project made the process of obtaining financing from the Brazil-China fund cumbersome. Developers turned to other more streamlined credit instruments available on the market.</p> <p>When asked about the current state of the Brazil-China Fund, the Economy Ministry said that soon after its creation it became apparent that the fund&#8217;s governance model &#8220;did not achieve the expected results, nor the <a href="https://brazilian.report/business/2018/11/14/brazil-trade-china-commodities/">necessary attractiveness</a> for the submission of qualified projects.”</p> <p>But the government must shoulder its own share of the blame. For months, the ministry maintains it is exploring ways to increase the committee&#8217;s efficiency, without setting any concrete targets or deadlines. Meanwhile, Brazil is attracting its lowest level of investment in recent history.</p> <h2>An unattractive prospect</h2> <p>Alan Fernandes, CEO of Chinese investment bank Haitong&#8217;s Brazilian operations, blames the fund&#8217;s lack of attractiveness on volatile exchange rates.</p> <p>When the fund was officially established in May 2017, the U.S. Dollar was valued at around BRL 3.25. The <a href="https://brazilian.report/tech/2021/01/08/cryptocurrencies-become-hedge-against-instability-in-latin-america/">currency</a> has slumped considerably since, with the greenback worth BRL 5.40 at the time of publication. Mr. Fernandes says that such a scenario may deter potential borrowers from taking out loans in USD, as it would be deemed overly expensive and risky, as the Brazilian Real could fall further in the future.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/5333053"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>According to data from the Brazilian Association of Financial and Capital Market Entities (Anbima), the issuance of debentures grew from BRL 64 billion in 2016 to BRL 184.6 billion in 2019, before falling somewhat to BRL 122 billion last year. This recent growth demonstrates the market&#8217;s preference for obtaining <a href="https://brazilian.report/newsletters/brazil-daily/2020/10/29/fintechs-sidestep-the-economic-crisis-in-brazil-raise-over-usd-1-billion/">financing</a> by way of local mechanisms — and coincides with the launch of the Brazil-China Fund.</p> <p>Furthermore, Brazil’s Securities Commission allows funds to be raised by way of <a href="https://brazilian.report/latin-america/2018/06/18/eu-mercosur-china/">capital markets</a> in a much simpler and less time-consuming manner than through the Brazil-China Fund.</p> <h2>Rolling back the development bank</h2> <p>After years of expansion under center-left governments, the Brazilian Development Bank has changed tack in the last four years, ridding itself of the long-term credit lines that projects aligned with the Brazil-China Fund would require.</p> <p>Mr. Fernandes says that the fund&#8217;s inactivity does not mean there is a lack of Chinese investment in Brazil. Chinese companies already operating in the country, such as China Three Gorges Group, State Grid, CGN, SPIC, Gezhouba, and CCCC, continue to devote resources to Brazil, particularly in the energy, port, road, agribusiness, and sanitation sectors.</p> <p>&#8220;We expect the government to push forward projects in the rail sector this year (&#8230;) If these bids happen, we can expect active participation from Chinese companies,&#8221; Mr. Fernandes says.</p> <p>While Chinese companies show a continued interest in investing in Brazilian infrastructure, the Latin American and Caribbean Academic Network&#8217;s Chinese <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/10/27/foreign-direct-investment-in-brazil-fell-by-half-during-pandemic/">foreign direct investment monitor</a> shows a dwindling appetite for Brazil over the past three years, with attention turning to Chile and Peru.</p> <p>At the same time, China&#8217;s overseas investment has declined in recent years, a trend made even more intense by the coronavirus pandemic. As a result, the country is pumping more money into the domestic market.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/5333148"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>The China Global Investment Tracker website monitors all transactions over USD 100 million made by Chinese institutions in several countries. The worldwide total exceeded USD 255 billion in 2017, but fell to just USD 64.2 billion last year. In Brazil, the dropoff was even sharper: from USD 14 billion in 2016 to a paltry USD 1.6 billion last year.</p> <p>Academics and pundits hypothesize that the stagnation of investment is a response to the hostility the Bolsonaro government has shown toward China. Túlio Cariello, analysis and research coordinator for the Brazil-China Business Council (CEBC), rejects this idea.</p> <p><a href="https://brazilian.report/business/2020/10/15/brazil-trade-with-u-s-sees-worst-result-in-11-years/">Trade between the two countries</a> exceeded USD 101 billion in 2020, even with the coronavirus pandemic, an indication that bilateral relations remain strong. Mr. Cariello believes that lower investment is a result of slower growth in China.</p> <p>&#8220;Before, Chinese companies were diversifying their portfolio and investing in assets that had nothing to do with their core business,&#8221; he says. &#8220;Now they are more cautious.”</p> <hr class="wp-block-separator"/> <p class="has-text-align-center"><em>This article was originally published by <a href="http://dialogochino.net/">Dialogo Chino</a> and republished under the Creative Commons license</em>

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Bruna Maia

Bruna Maia is a Brazilian business and finance journalist.

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