Month: March 2020

The rise and rise of Chinese investment in Latin America

Last year marked the 40th anniversary of Deng Xiaoping’s economic reforms. The results of these reforms has not only been to grow China’s domestic economy but to transform its influence as an economic actor on the world stage.

In 2016, for the first time in modern history, China became a net overseas investor. That year, while global outbound foreign direct investment (OFDI) fell by 2% China’s investments surged by nearly 35%. The trend shows no sign of stopping. As China becomes an increasingly important source of financing globally the economic, political and legal map is being redrawn. For countries in the Latin America and the Caribbean (LAC) region, the impact has been striking.

Since 2000, annual trade between China and Latin America has grown from $12bn to over $300bn, making China the second biggest investor in the region while displacing the US as the leading trade partner to countries such as Brazil and Chile. China’s two global policy banks – the China Development Bank and the Export-Import Bank of China – have issued more than $150bn in loans issues to LAC countries and state-owned firms over the past 15 years, outstripping the combined loans issued by the World Bank, Inter-American Development Bank and the CAF Development Bank of Latin America.

The steady rise of China’s investments in Latin America may have produced some eye-catching statistics, but for Chinese lawyers working in the region there are even clearer indicators of the shifting geopolitical sands.

‘When I landed at the airport in Lima the first advertisement I saw was in Chinese’, says Charles Wu, a Beijing-based partner at Zhong Lun law firm. ‘There are quite a number of Chinese businesses here now interacting with each other and forming communities. It really feels like something big is happening.’

The density of Chinese businesses operating in Latin America means a trip across the Pacific is rarely a step into the unknown. ‘It was a bit of an eye-opener for me’, says Paul Wee of Norton Rose Fulbright’s Beijing office, recalling his first trip to Caracas. ‘I was advised to stay in the hotel, but my clients had a base there and life revolved around the expat community. I ate Chinese food and spoke Chinese. It was almost as if I hadn’t left Beijing.’

In the last decade, more than 2,000 Chinese companies have commenced operations in Latin America, generating nearly two million jobs for locals. While the community of lawyers servicing this cross-border trade has grown, it is, says Wu, ‘still small enough for those of us who work in the area to feel we know everyone’. But as the number of Chinese businesses operating in Latin America rises, firms are begging to sense the opportunity.

‘China to LatAm is extremely hot and it’s an area we are expecting to grow massively’, says Nicole Pineda, a partner at Harneys’ Cayman office specialising in inward and outward bound Latin American investments with a particular focus on structured finance and infrastructure finance transactions. ‘A lot of firms are setting up China to LatAm desks, and everyone is jumping on the bandwagon. The economic significance of it is probably still rather limited compared to other specialist desks, and until the work monetises with volume a lot of the interest is likely to be exploratory, but it is getting to a point where you could consider China to Latin America trade a real business line for lots of firms.’

From farms to fibre optic cables

Miguel Zaldivar, regional chief executive for Asia Pacific and Middle East at Hogan Lovells, has seen the rise of Chinese money in Latin America first hand. The firm has acted on over $100bn of Latin America-related infrastructure development financings in recent years, with Zaldivar closing a number of these deals, including the largest development financings in the history of Ecuador and Honduras.

‘I worked on a lot of financings for refineries and ports in the early 2000s and they were all run out of New York or London’, he recalls. ‘Around the time of the collapse of Lehman, US and European companies started getting displaced from infrastructure projects. By 2010, Chinese companies had started taking the lead on infrastructure financing. There came a point where I was spending around half of my year in Beijing to work on these matters, so I really had a front-row seat when it came to the shifting of power in terms of development financing.’

In these early years of China’s Latin America investment boom attention was directed primarily to satisfying the country’s growing demand for commodities and raw materials, with soybeans, metals and minerals and hydrocarbons accounting for 70% of its imports. A lot has changed in the last decade, but obtaining raw materials remains a key concern of Chinese investors.

‘The interest we are seeing is still focused on resources, which makes sense in the context of Chinese companies’ need to secure their supply chains’, says Lin Zhong of EY Chen & Co. ‘For example, China is the biggest manufacturer of lithium batteries and needs a lot of relatively rare metals and chemicals. Going upstream to acquire targets is a vital part of these companies’ continuity plans for the coming decade.’

However, Chinese investors are increasingly pursuing opportunities in transport, finance, electricity generation and transmission, information and communications technology, and alternative energy services. Xinyue Ma, China Research and Project Leader at the Global Development Policy Center at Boston University, has been collecting data on China’s trade with Latin America for a number of years. In recent years, she says, the focus of these investments has shifted dramatically. ‘The service market has been growing and recent figures show that services account for more than 70% of investments.’

Investment may be on the rise, but says, Charles Wu, of Zhong Lun, it must be put into perspective. ‘[Latin America] is an important market but it is not as important as North America or the EU. Law firms from the PRC are still primarily working on large infrastructure and mining projects, and most of the investor base is large state-owned enterprises or large public companies looking to expand their main business and find mineral resources in Latin America. That’s not to say that there aren’t smaller investments taking place, and we do occasionally work on matters for tech companies, but the frequency is nowhere near as high as in the US and Europe.’

Monica Sun, a partner in Herbert Smith Freehills’ Beijing office, adds: ‘While Latin America is growing in terms of Chinese interest we need to get this in perspective. Southeast Asia, for instance, sees far more interest still; [Latin America] is one market among many and is not by any means the dominant investment destination for Chinese clients.’

It is worth noting that many of the most ambitious Chinese-backed projects never got off the ground. Plans to build a canal through Nicaragua connecting the Atlantic and Pacific oceans, or a railway crossing the Amazon and Andes caught attention but have so far led to nothing.

There are also signs that the rise in Chinese investment may already be slowing. ‘The whole background of outbound investments is decreasing, says Molly Su, a Shanghai-based partner with King & Wood Mallesons who has been working on outbound financing projects for the past 13 years. ‘State-owned enterprises are more cautious, especially in the mining and thermal power sectors, policy banks have been tightening their credit lines, and foreign currency exchange controls in China mean it is becoming increasingly difficult for Chinese companies to remit money out of the country. While some specialised sectors such as hi-tech, medical or pharmaceutical investments may be seeing a rise, overall the numbers have been heading downward, particularly in terms of Latin America. However, project-based investments by large Chinese entities tend not to be one-offs. Once you release the funds and build up the personnel and infrastructure it means you are committed to the market. That means we can expect to see continued activity for the years to come.’

Following the financial crisis of 2008, China undertook a huge stimulus programme aimed at boosting its construction and infrastructure sectors. This found a political ally in the Belt and Road initiative, seeking to put this excess capacity to productive use in foreign markets. However, in recent years there has been a new policy aimed at restricting the outflow of capital.

A wave of purchases of overseas assets, particularly in the hospitality and entertainment sectors, led the Chinese leadership to put a brake on outbound investment. In part, this has been fuelled by a policy of keeping US dollar reserves stocked, though attempts to steer China’s economy toward domestic consumption have also played a big part. While this new policy has tightened the spending of SOEs and policy banks, it has not restricted private entities to the same extent. With Latin American markets opened by the first wave of investments, private entities have found it to be an attractive destination to invest.

Since 2000, state-owned companies accounted for 70% of all Chinese investments in Latin America and the Caribbean. However, the picture is changing rapidly. Foreign direct investment (FDI) from Chinese private entities looking to tap Latin America has risen from almost zero to over $100bn a year since 2005, with large sums targeted toward the acquisition of companies in the service sector.

The rise of private money tends to get overlooked, but it is the most important part of the story for China-LatAm relations. Partly this is because banks, law firms and other professional advisers have focused on SOEs as a source of revenue. ‘It’s not that they’re low-hanging fruit, but they are an attractive client’, says Antonio Riva Palacio Lavin, counsel at Curtis, Mallet-Prevost, Colt & Mosle. ‘When a firm is engaged by an SOE it has found a large, stable investor that will bring a lot of money to the region. But across the Latin America and Caribbean region there is a huge amount of private investment. Obviously, it depends how you define private, because in China there often isn’t such a clear line between state-owned and private business when you get to a certain size, but you have large banks in the Mexican market, you have airlines establishing direct flights from China to the region. There is a lot of investment going on. One of the very first things I did with a Chinese private company was to help them set up a joint venture in North West Mexico to import products from the US, finish them in Mexico and ship them to China. The trade links are much more numerous and complex than the SOEs and resources discourse that gets played out.’

‘The headline public deals that get you exposure when they close are great for publicity’, adds Nicole Pineda of Harneys, ‘but in the long term it’s the volume transactions we’re more interested in. The growth in private investments is a sign that Chinese interest in Latin America is healthy and stable for the long term.’

This rise of private money may also help to explain why the amount of investment appears to be falling. ‘There are fewer of the capital-intensive, state-backed megaprojects that formerly dominated the investment landscape, but there are in fact more investments taking place today, and these investments are coming from a wider variety of sources’, says Ma. ‘Alongside that, M&A is becoming the major type of investment as opposed to greenfield investment. More than 60% of the money that Latin America receives from China is in the form of M&A investments.’

Investments have not only diversified away from the traditional focus on raw materials. While just four countries – Venezuela, Brazil, Ecuador and Argentina – have received over 90% of the loans Chinese entities have issued to Latin America in the last 15 years, those advising Chinese clients are seeing a broader geographical interest.

‘The appetite for Latin America is still high, but it is less concentrated in certain countries’, says Hogan Lovells’ Zaldivar. ‘Interest used to be focused on Venezuela and Brazil. Now we are seeing China is reaching out to other countries in the region and investing in places like the Dominican Republic and El Salvador. That is a really interesting change.’

The battle for Latin American trade

In a region that has been long seen as the United States’ backyard, China’s growing influence has led to inevitable political reactions. In 2018, US Secretary of State Mike Pompeo warned Latin American nations to be wary of “predatory” lending by Chinese investors trapping countries in low-value chain raw material sales at the expense of building their manufacturing and services capabilities. Yet for many businesses in Latin America, the arrival of Chinese money could not have come at a better time.

The Trump administration has called for cuts in foreign aid to Latin American countries, a move that will likely push affected countries closer to China. The US has also withdrawn from the proposed Trans-Pacific Partnership (TPP), a trade agreement which was set to boost its ties with Chile, Peru and Mexico, while calling for the renegotiation of the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico.

‘Anecdotally, this is definitely a huge thing’, says Riva Palacio. ‘Even without looking at the hard numbers, anyone who works in this space can see that in a number of Latin American countries entrepreneurs and businesses are exploring markets beyond the US, and China is becoming increasingly attractive to them.’

Latin America is also becoming increasingly attractive to Chinese investors who face political pressure in more established markets. For example, Mexico is now working with Huawei to build out its telecoms infrastructure, while Australia and a number of European countries have faced pressure to find alternative suppliers.

‘The challenge for Chinese businesses is that markets like the US and EU are now attracting investment from other sources’, says David Blumental, a Hong Kong-based partner at Latham & Watkins. ‘At the same time, China has found it harder to acquire the things it really needs, particularly in the form of new technologies from the US. As a result of that double bind, Chinese companies are finding that the opportunity to expand into new markets across Africa and Latin America is increasingly attractive. They can sell products and acquire resources without facing the same political restrictions and competition from rival investors.’

However, says Miguel Zaldivar, it is a mistake to see China’s interest in Latin America as politically motivated. ‘I don’t see politics. What I see is Chinese companies that need to run their factories, export their goods and buy market share. If you look at the economic terms of the financings it is clear they are not subsidised. These are actually heavily negotiated transactions. And if you see the engineering, procurement and construction (EPC) agreements they are exactly like any other EPC contract. To call it politics is a distortion of the reality. Chinese investors have simply seen that there are great opportunities in Latin America, they have realised that they can compete in that market now and they are very, very aggressive and they are moving in.’

Paul Wee has worked on many of the largest outbound deals to come from China, including several in Latin America. The assumption that Chinese loans to Latin America are offered on favourable terms with political strings attached is, he says, fanciful.

‘The general assumption that financings from China Inc. come on favourable terms and with less stringent checks is a gross oversimplification that needs to be put into context. The cost of any loan will depend on the quality and source of the financing. As a renminbi financing often has a lower cost compared to a US financing, Chinese banks are likely to be a cheaper source of financing. A lot of assumptions get thrown around about Chinese loans being subsidised. Generally, they are not subsidised. From the Chinese banks’ perspective, the loans are offered at market rates. It’s just that the Chinese banks have a lower cost of funding in renminbi.’

The other prevailing assumption surrounds policy conditions. ‘Whenever you’re talking about a government borrower or a government-linked company the assumption is that China doesn’t impose any policy considerations. The facts are more or less right, but the interpretation placed on them – typically, that a policy-light approach is China’s attempt to exert influence or win new friends – is wrong. From China’s perspective it is perfectly natural to operate a non-interference policy. Even government borrowers do not have policy considerations imposed on them.’

Chinese investment to Latin America by country (US$bn), 2003-2016

(Source: Bureau van Dijk, fDi Markets)

The popular wisdom overlooks the large number of exceptions that exist. ‘Even though Chinese institutions generally wish to avoid interfering in the domestic politics of borrowers, there are an equal number of Chinese financings out there that do not conform to that logic. If you’re talking about the covenants, security packages, requirements for guarantees or whatever needs to be put in place to ensure a loan gets repaid then, believe me, Chinese banks would not give an inch. They are very stringent when it comes to the security package and guarantees.’

While loans issued by Chinese development banks typically have higher interest rates than those issued by international development banks, they do not come with the same environmental, social and governance (ESG) restrictions, meaning they can be put to use more cheaply. However, the game is not without risk to either side.

China has begun to demand Venezuela repay some $20bn in debts and last year ended a “grace period” for debt relief. Ecuador, one of the smallest countries in Latin America, has been the third biggest recipient of loans. Deals struck under President Rafael Correa have seen nearly $20bn flow into the country. In return, 90% of Ecuador’s crude oil will be sent to China for the next five years. These examples sound a note of caution about the potential for political strings to come attached to these loans. Latin American countries have run up a trade deficit with China of more than $60bn, and with the political and economic indicators taking a plunge in a number of countries, their ability to repay these debts will tested to the extreme.

‘One interesting thing I am seeing is the breach of investment contracts by host-country governments’, says Lin Zhong. ‘These nations are in financial crisis and it has led to a breach of their commitments. Some countries in the region also impose a very high tax rate, which is de facto expropriation of our [Chinese] clients and has led to law suits there. We try to protect them through bilateral arrangements between the Chinese government and local counterparts, and also through certain dispute resolution mechanisms such as the investment dispute resolution centre at the World Bank, but the practice is becoming more prevalent.’

There are signs that Latin American countries may become more wary of Chinese money, but the trend for the coming year will be one of continued China to Latin America trade, says Xinyue Ma. ‘The last 12 months have seen greater trade flows between China and Latin America and this is consistent with the antagonisms of the Trump administration. Certainly, there is a greater opportunity for China and Latin America to trade and work together. Considering the macroeconomics of many Latin American economies is not very stable it is going to be a very important but not very stable area going forwards from the Chinese perspective.’

However, there are two sides to this relationship, and for China’s trade with Latin America to continue both sides will need to show willing, concludes Zaldivar. ‘There is a lot of political change in Latin America right now. They recognise the importance of China to their countries. But they are still in the learning stage. There’s a lot of talk but there has to be more action between the parties for the trade flows to continue. The Chinese position is quite stable, but it is a learning process by new governments in Latin America.’

The (new) rules of engagement

In 1964, the year Alibaba founder Jack Ma was born, China’s annual GDP was around $60bn, meaning the then most populous nation on earth’s economy was roughly the same size as Italy’s. That same year President Goulart of Brazil was overthrown in a coup d’état. It would have seemed unlikely to anyone born in this period that the two countries would become leading trade partners.

On both sides of the Pacific, entrepreneurs and business leaders who grew up expecting to sell their product to the US market are now having to play by a new set of rules that are yet to be fully defined. It will be left to the lawyers to work out exactly what they should look like.

‘One of the most significant developments I have seen in international trade is that a large number of companies are now having to find ways of establishing rules for how they can interact with each other’, says Antonio Riva Palacio Lavin, counsel at Curtis, Mallet-Prevost, Colt & Mosle.

‘Cattle growers in Mexico are selling meat in China, Chinese honey harvesters selling their product in Mexico. In a way, that is far more interesting in terms of the legal consequences than seeing a large SOE going into Latin America to build hydroelectric plant. Those larger projects are almost too big to fail. The numbers involved are so large that everyone has an interest in it going ahead. When the numbers are smaller there is less incentives for the banks, regulators and business leaders to make a project succeed. That’s when you start to find yourself challenged as a lawyer.’

The growing demand for China to Latin America cross-border work was one of the reasons Curtis established a presence in Beijing. With offices in Mexico City and Buenos Aires, the firm found itself needing to service both a growing number of Mexican and Argentinian clients wishing to do business in China, and a steadily increasing flow of Chinese clients operating in Mexico and Argentina. Riva Palacio, a Mexican national, spent five years acting as the firm’s chief representative in Beijing, helping to build its cross-border advisory practice. He says that while Chinese clients expect their firms to have an on-the-ground presence in international markets, they do not necessarily appreciate the complexities of operating in such a radically a different legal environment.

‘The biggest cultural barriers we have seen is that Chinese clients tend to place countries and their laws into very broad categories’, he comments. ‘From this perspective, the law is either US law, European law, or something less robust that will give them much more leverage or negotiating power. To generalise massively, there can be an assumption that from a legal perspective engagements with Latin America will be much more akin to Africa than Europe or the US, which is not accurate. Part of the process we have been through with our Chinese clients is to sit down with them and explain the features of each particular system of law, which aspects of that law would help them to enter a market, and what the limits of such law is for achieving their objectives. It is important to always make it clear that there is no homogeneous body of law and that national differences matter.’

Lost in Translation

In large part these challenges stem from a lack of familiarity between Chinese and Latin American parties. Trade may be picking up, but Latin America is very far from being China’s backyard.

There are still few direct flights from China to the continent, and Chinese businesses looking to Latin America will find that relative costs are higher and networks less well-established.
Latin America’s legal and business environments also remain somewhat mysterious to Chinese buyers.

‘Adapting to the Latin American market culturally is one of the bigger barriers to Chinese investment, and this is especially the case when it comes to appreciating differences in labour relations and legal and regulatory frameworks’, comments Xinyue Ma, China Research and Project Leader at the Global Development Policy Center at Boston University. ‘Historically, Chinese businesses have moved slowly in Latin America, learning how to operate in the market through trial and error. Recent history has shown that Chinese companies take a long time to adapt to the local regulatory and market environment.’

In particular, she says, dealing with environmental and social safeguards have traditionally been problematic for Chinese outbound investments, especially in Latin America where countries are more likely to have strong regulatory mechanisms in place, even if the execution and enforcement of those mechanisms is sometimes patchy. ‘Unlike multinational banks, Chinese development banks do not have such a rigorous mechanism or internal safeguards. They are not compelled to avoid certain types of investment or abide by certain environmental and social standards and processes.’

Jennifer Zhang, a partner with DeHeng Law Office in Beijing, says these issues date back to the early days of China’s enhanced engagement with the developing world. ‘What we learned in the 1990s is that Chinese banks are not familiar with a range of standards that are considered the norm elsewhere, whether that’s environmental standards, labour protection standards or any other form of non-financial commitment that comes with a typical development financing. It is not that the development banks or other financing institutions set out to deliberately violate these standards, it is simply that they were used to the Chinese way of financing and ran into problems. From that early experience development banks learned rapidly how to structure things in a way that meets the required standards relevant to the country in which they are investing, but some problems remain. Things like community protections remain relatively unfamiliar to Chinese lenders because they are rarely encountered at home.’

Even Chinese businesses that are well established in Latin America can find it difficult, adds Lin Zhong of EY Chen & Co. ‘Complying with local regulations in terms of visas, immigration and local labour law can be a challenge for Chinese parties and often requires additional legal support, especially if there is some kind of labour outsourcing arrangement.’

Analysis issued by The Ministry of Commerce of the People’s Republic of China (MOFCOM) in 2015 based on a detailed study of 254 companies involved in outbound investments showed that failure to manage labour relations was the biggest hindrance to Chinese investments in the Latin America, followed by issues arising from failure to understand political and regulatory structures.

Examples of Chinese-backed projects being derailed due to concerns over their broader social impacts are numerous. The Rosita hydroelectric project in Bolivia, agreed in 2016 with backing from China Three Gorges Corporation, has been placed on hold due to insufficient prior consultation with indigenous communities likely to be affected by the project, while two Chinese-financed dam projects in Santa Cruz, Argentina were suspended by the Argentine Supreme Court in 2016 pending environmental impact assessments on the proposed sites.

But it is not only the Chinese side that needs to be educated. ‘While the number of lawyers relative to the population is high In most Latin American countries, there are elements of local legal practice that have comes as a surprise’, says Charles Wu of Zhong Lun.

‘To take one example, the notarisation process is very burdensome for signing public deeds in many Latin American countries. To complete the process you must appoint a time to go to the notary office with an approved notary officer; signing in the presence of a witness is not taken as sufficient proof that the document was approved by the signatory. Company officials are often told that there is legal requirement to be physically present in the country to transact business while at the same time being refused visas. Such formalities do not make business easy. It is also the case that, even on some major projects where the counterparty is a Latin American government, key documents will only be made available in Spanish.

Further, it can be difficult to persuade the local party, particularly if they are government or state-owned entities, to agree to international standard arbitration. They will insist on either the arbitration chamber in their home country or, for private parties, they will perhaps consent to having a hearing in Miami but no further afield. Hong Kong, London, Singapore – they won’t accept any of those.’

But as Zhang points out: ‘Latin American lawyers need to understand that Chinese investors have their own system for outbound investment. If you are looking for Chinese capital it seems only reasonable to accept that it will come with characteristics that are familiar to Chinese lenders.’

It is also clear that Chinese entities are becoming much more adept at executing cross-border investments. Miguel Flaksman is executive managing director at Brazil-based Banco BOCOM, which since 2015 has been majority owned by China’s Bank of Communications. He says a new generation is showing that the old adages no longer apply.

‘Business people and entrepreneurs coming from China are adapting to local market conditions at a much faster rate. At the same time, they are really making an effort to learn how to do business in those markets. They have experience of a range of jurisdictions and know that not everything works the same way. You can definitely see that the younger breed of investors is far more exposed to a variety of standards. The do not experience the cultural misunderstandings that had traditionally led to problems.’

Latham & Watkins’ David Blumental has been doing outbound work for Chinese clients since 1998 and agrees that the level of sophistication among Chinese clients has increased significantly. ‘Not only are Chinese business teams much more familiar with international approaches to doing deals, but their expectations of external counsel are now significantly higher. It is now common to be engaged by a Chinese company with a large in-house team containing a lot of very well-qualified lawyers who are familiar with international legal structures.’

In-house teams at Chinese companies are also becoming more demanding, notes Molly Su, a finance partner with King & Wood Mallesons. ‘Chinese clients are more sophisticated and are asking for more from their counsel. They have their finance team with international education background, they know about the international documentation. The ability for an SOE to negotiate is getting much better than before, and the expectations they place on external counsel are much higher than before. Leading firms in China have to be up there with the best practices globally.’

There has also been a pressure to cut costs, adds Lily Zhang of Harneys. ‘Recently I attended a dinner with a famous Chinese investment group that has a lot of active outbound investment deals. Their legal team told me that they are more and more concerned about the cost of engaging outside counsel in the context of outbound investment deals, and that in-house counsel will now do a lot of the work to remove these costs.’

The rapidity with which Chinese businesses have matured in their approach to Latin America can be seen across the board, from the role of in-house counsel to the quality of the underlying documentation used in financings. DeHeng’s Jennifer Zhang regularly advises Chinese commercial banks and financial institutions, including China Development Bank and Exim bank, in their lending to Latin America. There has been a trend, she says, of running financings under international standards and with a higher degree of security demanded.

‘From the outside these transactions can look very simple but the loans typically rely on a parent guarantee. If the parent company becomes insolvent the Chinese bank has no recourse to recover assets. If the borrower is an SOE then it is relatively simple to secure parent guarantees, but if it is a private company then it is not so simple, particularly when the company wishes to invest in Latin America.’

Molly Su has seen similar developments in the approach taken by major policy banks. ‘Ten years ago policy banks provided finance based solely on guarantees from the SOE that was preparing to undertake the project. The bank tried to wrap up the transaction very quickly on a simple structure and was certainly not willing to fly to Latin America to do outside due diligence. Now they are becoming much more internationalized in their approach. They may require local assets as security or use English-law governed documents to underwrite the loan.’

A further development, says Paul Wee of Norton Rose Fulbright, is that Chinese banks are participating in syndicates and co-financings rather than accepting all the risk a project in Latin America entails.

‘More and more I am seeing Chinese banks not wanting to go it alone when it comes to financing big, sizable projects. There is a concerted effort to make it a co-financing, not just with other Chinese banks but with international banks and financial institutions.’

An increase in trade is inevitably followed by an increase in disputes. Lawyers active in the cross-border space are seeing a big growth in arbitrations at the China International Economic and Trade Arbitration Commission (CIETAC), including significant cases concerning countervailing duties and anti-dumping. ‘There are far more disputes involving Chinese and Latin American parties than gets reported, simply because of the nature of the process’, says Xinyue Ma.

It is a trend we can expect to see continue as international trade becomes weaponised, forcing both Chinese and Latin American parties look for new markets. Riva Palacio highlights one of the more interesting unintended consequence of this political tension.

‘As the US ceases to be the single easiest and most attractive market for Chinese manufacturers they are shifting their products elsewhere. Chinese products that did not previously flood European or Latin American markets are now starting to do so, and that is causing frictions in Europe, Japan, Korea and a number of Latin American jurisdictions. These jurisdictions, and specifically Latin American jurisdictions, are starting to ramp up their countervailing duty investigations, their anti-dumping investigations against Chinese products. That comes with an increase in work not just with defending these companies against these investigations but in helping them plan for those investigations and for a new reality where they will be facing this kind of scrutiny that they didn’t necessarily have to face before. It is the start of a new world and the legal outcomes are still unknown’.

How will China’s trade relationship with Brazil develop over the coming year?

I am a moderate optimist. There is uncertainty in the region, but in the case of Brazil you are talking about the largest economy in Latin America, and an economy which is important enough regardless of uncertainty elsewhere.

Until recently, there was also a degree of uncertainty surrounding Bolsonaro’s government and how it would stand in relation to China, especially following Bolsonaro’s vocal alignment with Trump administration in the US, and certain negative comments concerning China which were made during the Brazilian elections in 2018. There was doubt as to what Bolsonaro would think of the BRICs as a concept. However, the outcome of a first official visit to China by Bolsonaro in October 2019 and the 11th BRICs summit, held in Brasília, in November 2019 was generally perceived as very positive by signalling a pragmatic, constructive approach to the development of Brazil-China cooperation.

China has been the largest trading partner of Brazil since 2009, both for exports and imports. Indeed, China imports almost twice as much from Brazil as does the US. Maintaining a strong relationship is therefore taken very seriously by senior ministries in Brazil.

What are you seeing with respect to large-scale Chinese investments in Brazil?

The main thing we have been seeing is Chinese companies signalling interest to participate in the investment partnership programme (PPI) of the Brazilian government. This scheme, launched in 2016 under President Temer, has been embraced by Bolsonaro. When qualified as priority matters under the PPI, concessions and other public-private partnership projects receive special attention of the relevant authorities in Brazil, typically with the support of Brazil’s National Development Bank (BNDES) in structuring and modelling. This has been attracting both domestic and foreign players and unlocking substantial investment for energy and other relevant infrastructure projects in Brazil.

While early interest from Chinese parties in the PPI was not as high as expected in certain sectors (with the notable exception of the energy sector), there is perhaps an opportunity to align Brazilian PPI projects with the Chinese Belt and Road Initiative and expand cooperation as a result. Following the bilateral meetings in October and November 2019, the Chinese delegation announced that they were looking forward to reviewing the PPI opportunities in more detail and potentially participating in the tenders.

As an example, in November 2019 there was a much anticipated oil and gas tender under the PPI. The Brazilian government had big expectations concerning this tender though it was seen as a relative failure as Western multinationals did not participate. The Brazilian state-owned Petrobras participated and managed to attract Chinese operators as partners, albeit in minority positions. That was a positive sign in terms of Brazil-China cooperation, and we hope to see expansion of Chinese investment in other sectors such as regional and urban infrastructure, as well as technology, including 5G. On the latter, of course, we have the US on the other side who will be making comments and will be very interested to see what form Chinese interest takes.

A further positive development we are seeing is Chinese private companies and institutional investors entering or exploring the market, exploring the opportunities and trying to understand risks. We were expecting that to happen more intensively in 2019, but the prevailing uncertainty slowed it down. This trend should pick up in 2020, particularly in energy and infrastructure, with private entities taking a minority position, and in other sectors such as telecoms and technology.

This is particularly important in light of the changing nature of financing in Brazil. First, the local development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), has been focusing on project structuring and becoming less active when it came to issuing loans. Second, we continue to see the development of infrastructure debentures and alternative debt instruments to finance projects in Brazil. Both of these trends mean we should see a greater diversification of financing, including through enhanced collaboration between Brazilian and Chinese banks and the involvement of multilateral regional banks, including regional development banks such as the New Development Bank (NDB) – the ‘BRICS bank’ – which recently opened a regional office in São Paulo. We will watch this closely because if it develops properly the conditions will be right for more projects and M&A involving Chinese parties.

Has the increase in trade and investment led to a rise in disputes between Chinese and Brazilian parties?

It is notable that when it comes to arbitration we are seeing a more positive alignment between Chinese and international parties than is commonly acknowledged. That being said, we don’t see often Chinese-seated arbitrations involving Brazilian parties. In addition to ‘neutral’ seats in Europe or in the US, we notice a trend of international clients, including Chinese clients, feeling more comfortable arbitrating in Brazil, which has been rightly perceived as an arbitration-friendly jurisdiction. The fact that the ICC court opened a case management office in São Paulo in 2017 and launched a new set of hearing facilities in 2018 both reflects and tends to reinforce this trend.

In fact, there is a good reason for international clients to arbitrate in Brazil. If the arbitration is seated in Brazil it counts as a domestic arbitration for the purpose of enforcement in Brazil. This allows the foreign party to enforce the arbitral award directly against the Brazilian party in a Brazilian court, bypassing a potentially lengthy recognition process through Brazil’s superior court of justice (Superior Tribunal de Justiça – STJ). Chinese parties are well advised to consider these issues as part of their risk assessment and investment decision processes when negotiating with Brazilian entities.

How does Veirano position itself to help clients capitalise on Chinese/Brazilian cross-border opportunities?

Veirano’s commitment to servicing Chinese and Brazilian bi-lateral trade is underscored by the fact that we have decided in 2019 to adopt a Chinese name (未来, reading “Wèi lái” and meaning “Future”). As far as we are aware, this is the first time a full-service law firm in Brazil has adopted a Chinese name. It helps provide a standardised form of the name of our firm for Chinese parties, ensuring consistency of branding. Most important, it signifies that we are a fixed presence in the Chinese market.

We already have significant experience of working with Chinese partners. Our founding partner, Ronaldo Veirano, has been attentive to the Asian market for at least 20 years. Our partner Pedro Freitas is director of the Brazil-China Business Council (CEBC), of which Veirano is a founding member. Our senior counsel Evandro Carvalho, head of the Centre of Brazil-China Studies of the FGV University (Fundação Getúlio Vargas) in Rio de Janeiro, is esteemed among Brazilians and Chinese parties alike as one of the leading sinologists in Brazil today.

Founded in 1972, Veirano has been a leading firm in energy, infrastructure, telecommunications and other regulated sectors for decades. When it comes to handling transactions in regulated sectors we have a savvy, project-oriented frame of mind. We know the main players in these sectors through our participation in trade organisations. As such, we are not just legal experts but market experts who understand sector-specific drivers and how they interact with the legal risks.

What’s driving Chinese investment into Chile?

Latin America in general has experienced a fast rise in investments from Chinese companies during the last decade. The increased investment is especially clear from year 2010 and has accelerated as a result of the Belt and Road Initiative (BRI). The manifestation of this trend suffered a sort of “delay effect” in Chile, but since 2016 we have been witnessing a steady increase of enquiries from Chinese companies in the country and, more importantly, a higher success rate in transactions and a speedier implementation of investment plans.

Most transactions are still Chile-inbound and SOE-driven; approximately 80% of Chinese investment into Latin America are government-related according to a report by the OECD and Atlantic Council. The most high-profile transactions are still in infrastructure and commodities-related sectors, such as mining, energy, agribusiness and food production.

However, in the past years, we have detected an increasing activity and interest from POEs like Huawei, MoBike, DiDi, car manufactures, and other private companies. Interest in technology-related sectors (such as the plan to connect Asia with Chile through a fiber optic cable, in which the giant Huawei has been a key player) has also noticeably increased.

How is Carey positioning itself to help clients capitalise on these opportunities?

Carey has consolidated its status as a leading adviser to Chinese corporates on their operations in Chile and Latin American entities looking to enter China. In recent years, we have acted on some of the most significant matters connecting Chinese and Latin American interests.

The firm has been exploring the Chinese market in situ since 2012, placing great emphasis on understanding the local culture and business practices, and the motivations of China in connection with Latin America,. For that reason, we decided to open a physical presence there and, in 2016, incorporated a subsidiary in Shanghai: Carey Business Consultancy (Shanghai) Limited. Since then, it has become the only full-service Chilean law firm with offices in the People’s Republic of China.

However, we realised that to be successful in China it was critical to establish alliances with the right players in the market. This comprises both local PRC and international law firms that have decades of experience in China. These firms have become strategic partners and a source of mutual referral of work.

These firms can rely on us for cross-border work when they need assistance in Chile or even a coordinator for regional work in Latin America; and, at the same time, we can offer our Chilean (and other non-Chinese, especially Latin-American) clients a strong and diverse network of local experts suitable to their specific needs, that has resulted in a very effective way for assisting them in their internationalisation strategy in Asia.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

Challenges have decreased considerably and in a very rapid manner. We used to see important language and culture gaps; lack of relevant experience and sophistication during transactions; long
internal approvals; poor cooperation with advisors; among other obstacles. Currently, we would say that the biggest remaining challenge relates to how decision-making is made inside state-owned enterprises and, in general, a lack of understanding on how this type of companies operate, their internal structures, motivations, form of communication, etc. This is an important barrier not just for Latin American entities but also for local regulators.

In addition to these business-related considerations, the most important legal considerations for our clients when dealing with Chinese counterparties refer to environmental, labor, and antitrust matters. However, Chile has a well-known friendly environment towards FDI and, unlike other countries and recent trends, Chinese investment is treated under the same conditions as any other foreign or Chilean investor (i.e., national treatment is granted to FDI investments coming from China or other nations).

What’s driving Chinese investment into Colombia?

We have seen more Chinese parties shifting investment attention overseas to projects in Latin America. While Colombia has not historically seen a large number of Chinese investors the wave of infrastructure projects in Colombia has driven the attention of large Chinese SOEs and private companies.

Matters in which we have been involved are typically driven by SOEs; but we expect to see an increasing number of Chinese private investors and entities looking for opportunities in Colombia. Our Chinese prospective clients are usually interested infrastructure projects, including ports, public utilities, and mass transportation. Another area of interest is energy: clients will frequently ask for opportunities in generation, transmission and distribution of electricity.

How is Posse Herrera Luis positioning itself to help clients capitalise on these opportunities?

Business interaction between China and Colombia is increasing. As a firm we have taken the decision of getting to know the Chinese business and legal market, so that we may pass along such knowledge and cultural sensitivity to our clients. This means getting to know the country and our local legal partners. Building and maintaining business relationships with local law firms and SOEs is essential for successfully doing business and assisting our Chinese potential clients.

We consider that the support of local Chinese counsel is critical to achieve an effective interaction with clients, since their assistance may help to bridge the cultural gap and to pass along valuable information which in turn we can use to better serve our clients.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

Having different cultures and different languages is always a challenge, as well as situations resulting from different work styles and dynamics. Cultural understanding is key. Latin American parties must learn that formality is a key element in business negotiations with Chinese counterparties. Of course there are also many difficulties arising out of using different technologies and working in very different time zones, which may lead to working during times away from the office, or early in the morning and evenings.

The decision-making process in projects with PRC clients may take longer than in projects with domestic clients. The speed of projects may be different, and obtaining internal approvals for a project may be a lengthy process. In general, transactions involving PRC clients may take longer than what it would take for a domestic client.

PRC-based clients who wish to enter the Colombian market should pay attention to and ask thoroughly about labor and environmental regulations, and the protection that our legal system grants to foreign investments. A Chinese client will also be concerned about getting a fair and just dispute resolution mechanism. If the project involves a public tender, then the concern is shifted to how fair and objective the selection process is, and whether there is a bias in favor of local bidders.

On the other side, Colombian companies wishing to do business in China must think about issues such as how to operate legally in China, how to obtain adequate protection of intellectual property, compliance with local foreign exchange regulations and compliance with local tax and import duties.

What’s driving Chinese trade and investment into Argentina?

Over the years, there has been unabated interest of Chinse parties in strategic areas of investments in Argentina: energy, infrastructure and natural resources, which fall within both Chinese and Argentine governments’ priorities in promoting investment and mutual cooperation. With our rich expertise and unique experience in advising Chinese companies in the relevant industries, Beretta Godoy is ready and willing to be your trusted Argentine counsel in building a future together.

How is Beretta Godoy positioning itself to help clients capitalise on these opportunities?

Beretta Godoy works extensively with Chinese companies, in particular state-owned enterprises with strategic operations in Argentina. Having advised numerous Chinese investors in their projects, we thoroughly understand the legal, commercial, cultural and linguistic challenges they face in Latin America’s business environment. Our trilingual team of professionals fluent in Spanish, English and Chinese works seamlessly with the clients’ legal team and external PRC counsel in delivering practical advice and service that address these challenges.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

Under the bilateral investment treaty between China and Argentina, Chinese investors are entitled to the protection against discrimination, the guarantee of fair and equitable treatment and against expropriation, and the right to freely transfer their returns out of Argentina. Further bilateral framework agreement and protocols are in place with a view to promoting investment cooperation, highlighting priority areas such as energy generation, telecommunications, land transport and port infrastructure, etc. Direct award to state-owned enterprises of infrastructure projects in these areas is possible upon the fulfilment of certain conditions set out in the relevant treaties.

Uruguay is one of the main gateways to doing business in Latin America. This is so because of social, political and legal reasons.

Uruguay is well known for its political and social stability. Independent publications usually rank Uruguay at the top in terms of democracy, rule of law, low levels of corruption, and the independence of its judiciary. The country is well irrigated and has rich and diverse agricultural production. Such conditions, coupled with a flexible regulatory and legal regimes, have made of Uruguay one of the main legal platforms to conduct business in Latin America.

Some of the main characteristics of the system are:

• Inflow and outflow of foreign currency is absolutely free, there are no exchange controls and there is no foreign investment registry. Foreign investment merits the same legal treatment as domestic investment.
• Contracts expressed in any foreign currency are fully enforceable. Foreign judgments and arbitral awards are equally enforceable with no review over the merits. Uruguay’s flexible corporate system allows for a single shareholder or a single director, whether resident or non-residents; the transfer of the stock is effected by means of the physical delivery of the stock certificate.
• Companies are only taxed on locally sourced income. Companies with no activities in Uruguay remain essentially untaxed. Uruguay has entered into a wide extended network of both double taxation and information exchange agreements; as of today Uruguay is a member of the OECD Fiscal Affairs Committee.
• Uruguayan free trade zones have played a key role in the attraction of foreign investment. The most important privately owned investments in Uruguayan history have been conducted under a free trade zone status.
• Uruguay is an immigration-friendly country. As long as local means of support can be evidenced, applicants can start working in Uruguay right after the beginning of the immigration application procedure.

What’s driving Chinese investment into the Dominican Republic?

Even though the Dominican Republic always had commercial relations with China, the business relationship between these countries is rapidly evolving. The reason behind is that in May 2018, the Dominican Republic and the People’s Republic of China established diplomatic relations, an alliance which promises to increase and strengthen cooperation in areas such as infrastructure, finance, technology, tourism, education and energy. In fact, we have seen an immediate and significant response from Chinese investors after May 2018. It is also worth noting that in the last two years, China has become the Dominican Republic’s second largest export partner.

The sectors where the greatest interest is displayed by Chinese investors are, first of all, energy. Specifically, there is interest in the generation of clean energy (solar and wind projects), as well as the development of transmission lines. We have also seen an increase in interest in developing public infrastructure projects, such as roads and cable cars.

How is Pellerano & Herrera positioning itself to help clients capitalise on these opportunities?

For more than a decade, our firm has advised Chinese investors or companies looking to deploy Chinese capital. In recent years clients of this nature have increased.

First of all, Pellerano & Herrera is the first and only law firm in the country that has an established China desk made up of a multidisciplinary team of lawyers with expertise on the Chinese market, with particular know-how and understanding of the needs of Chinese companies. We offer comprehensive advice on all business-related legal matters, custom tailored for the special profile and needs of Chinese investors. From market-entry strategy to guidance on bridging cultural differences, we can assist in all stages of your activities in the Dominican Republic. The leaders of our Chinese desk, Ricardo A. Pellerano and Alessandra Di Carlo, visit China regularly to meet clients and potential clients located in different cities.

In order to set up this China desk, our firm engaged the ongoing services of a consulting firm with vast knowledge of the Chinese commercial market to assist us, mostly to surpass the cultural differences; providing strategically guidance to the team on matters related to Chinese clients and potential clients.

As part of this process, our firm translated its Doing Business in the Dominican Republic legal guide into Mandarin. For the past 28 years, Pellerano & Herrera has been publishing this guide, which is known as the official investment tool of the Dominican government, to help those interested in investing in the country and provides basic information about the laws that regulate its economy and society, as well as the Dominican investment climate. Additionally, we have translators available in the Chinese language when needed. However, in most cases we have noticed that this is not necessary, since most executives of Chinese investment companies fluently handle the English and/or Spanish language, as the case may be.

Pellerano & Herrera also has a wide experience of advising Chinese clients on some of the most significant matters in the Dominican Republic. Among other clients and cases, our firm has helped important Chinese construction companies to establish operations in the Dominican Republic and provided guidance in connection with these companies’ participation in public infrastructure biding processes. We have provided assistance for the acquisition of a power purchase agreement (PPA) and a concession for development of a wind energy generation project in Dominican Republic whereby the finance was granted by a Chinese company, being this the first Chinese investment to energy sector of the country.

Our firm works with PRC-based law firms to help facilitate matters. As the exclusive member firm in the Dominican Republic for Lex Mundi – the world’s leading network of independent law firms with in-depth experience in 100+ countries worldwide – we have direct access to the member firm in China, in those cases where we need to liaise.

Among our clients are the most prominent Chinese companies from different industries, such as banking, construction, mining, energy, infrastructure and technology. We have also assisted the Chinese offices of international law firms, such as White & Case, Clifford Chance, Dentons and Jun He, in legal matters in the country.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

In our opinion, the most important challenge is cultural difference. It is a fact that we must accept. Our cultures are very different, and that difference, without a doubt, is reflected in the way of doing business. Naturally, this must imply an imminent and necessary change in the way of thinking of our Latin American countries, as is the case of the Dominican Republic, as countries receiving the investment. Distance, indisputably, is another challenge. However, with the available digitalisation and technology, this gap will be increasingly reduced.

For investors of any nationality, understanding these difficulties is key. In the case of Chinese investors, we always recommend paying special attention to the due diligence phase prior to an investment or acquisition, since considering the cultural differences, language differences and what may be a completely new legal framework. It is important to be aware of all aspects of a project. At the end of the day, part of our distinctive assistance, and our added value, lies in precisely helping the client to overcome these challenges smoothly.

What’s driving Chinese investment into Peru?

Many in Peru expected to have an important flow of PRC-based companies in the last years but investment has reduced considerably.

The sectors in which we see particular interest are construction, infrastructure, energy and transportation. There are several interesting opportunities in these sectors with, essentially, public projects such as a gas pipeline from the central jungle of Peru all the way down to its southern coast, and a commuter train around Lima, Peru’s capital.

How is García Sayán positioning itself to help clients capitalise on these opportunities?

We try to find alternative solutions to the aforementioned challenges, especially to get the documents in order to comply with the requirements established by Peruvian laws. For this, we usually work with the Chinese Peruvian Chamber of Commerce and the Chinese consulate, which are very helpful issuing letters to the local authorities explaining the purpose and characteristics of certain documents issued in China in order to make such documents acceptable for purposes of all legal procedures. As an example, we have been able to have the Public Records Office accepting the municipal license of a PRC’s company willing to stablish a Branch in Peru, as its certificate of good standing which is the regular requirement and a document of a different nature.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

All our PRC clients are SOEs aiming to enter into contracts with the Peruvian State; hence, in addition to incorporating a local branch or subsidiary, they needed to deal with the proper regulator in order to obtain specific registrations depending on the activity they plan to perform.

Peruvian government entities have set certain processes or requirements for local or foreign investors which may be complied-with as long as they understand and share similar documentation and procedures. PRC companies will have to deal with the limited scope of action of, for example, Chinese Notary Publics, which cannot issue all the certifications that a regular Notary Public in Peru or in other countries with an analogous legal system can do.

More than legal considerations, however, there are practical matter to be taken into account. Language is an issue. Many representatives speak some English and very little Spanish; hence attending meetings with an interpreter may cause certain communication problems with government officers. There are also cultural issues such as negotiation styles, where Chinese citizens have an advantage, although having them speaking in Chinese in front of their local counterparts may not be always advisable. Sometimes the decision making process may generate delays when an approval from a higher authority, located in China, is needed. The time difference plays a key role in this last situation.

Finally, courtesies and discounts are expected as part of the Chinese culture, but clients have to be careful not to participate in practices that could be later related to compliance regulations infringement.

What’s driving Chinese trade and investment into Mexico?

Trade and investment between China and Mexico is growing but remains small when compared to other countries in the region. For example, while China is now Mexico’s third largest trading partner the value of this trade is less than a tenth of Mexico’s trade with the US.

Increased interest from Chinese entities is driven by interest in the telecommunication and auto parts sectors. There has also been some increase in financing for projects related to transportation and infrastructure, though this does still not meet the full potential of Mexico-China bilateral relations.

So far, all of China’s notable investments in Mexico have been made by SOEs. These investments have been focused on transportation (mainly in connection with railways and trains), infrastructure and projects (for example, the Mayan Train Project), mining and energy (specifically in renewable energies and exploration and extraction of hydrocarbons, including oil refining), telecommunication and auto parts.

How is Basham positioning itself to help clients capitalise on these opportunities?

To help clients navigate the rise of Chinese trade and investment, Basham is setting up a China desk. In the long-term this will include Mexican lawyers fully knowledgeable about Chinese business, culture and language.

Because Chinese entities are still relatively unfamiliar to Mexican clients, we provide as much information as possible, giving a clear and detailed explanation in connection with ongoing investment opportunities and projects being developed or planned in Mexico, including the challenges that such projects represent. In addition, we work as firm to ensure the lawyers advising on these projects and serving clients engaged with PRC counterparties are fully aware of the cultural and legal requirements typically associated with these counterparties. We also
work to help our clients overcome the cultural barriers that exist between Latin American parties and PRC parties.

From our experience of these matters, we identify the following important considerations:

Tax considerations and impacts: It is important to be clear on who will be covering the corresponding taxes of the operation;

Immigration: It is essential to analyse the immigration status of any Chinese workers that will be brought to the project, when applicable. More generally, it is important to undertake due diligence around labour, especially when Chinese workers will be brought to the project;

Compliance: Carrying out a detailed and accurate due diligence revision of the project to verify compliance with Mexican legislation;

Clients must also understand which guarantees are to be executed as part of the transaction, the extent to which FCPA and anti-bribery laws come into play, any relevant import and export legal dispositions and anti-corruption issues that may arise.

What are some of the challenges Latin American entities need to be mindful of when engaging with PRC counterparties?

In business as in general culture, Mexico is closely aligned to the US. Therefore, there is a significant cultural barrier when it comes to doing business with Chinese counterparties. Developing Chinese business contacts and networks should be a long-term aim of any Mexican entity that is looking to capitalise on growing Chinese trade and investment.

The cultural and language barriers and differences are particularly notable when one compares how businesses are developed and managed in Latin America with how they are handled and managed in the PRC.

The best way to remedy this is to create an environment in which both parties can trust and understand each other, facilitating a positive business relationship. However, Mexican parties must be aware that bureaucracy in connection with some PRC internal procedures may result in delays to the project timeframe.