China, Brazil unveil $20b mutual fund

By Chen Qingqing Source:Global Times Published: 2017/5/31 23:33:41

Deal will expand cooperation, boost reform: experts

Brazilian samba dancers perform at the 2017 Beijing International Fair for Trade in Services in May. Photo: IC

Graphics: GT

China and Brazil jointly announced the launch of a $20 billion mutual fund for capacity cooperation on Tuesday (Brazil time), a move that will boost openness and economic reform in the South American country, experts noted.

The fund, within which China is set to raise $15 billion and Brazil to raise $5 billion, will help Chinese companies investing in Brazil and accelerate the industrial process in the country, domestic news site reported on Wednesday. China has been increasing its investment in Brazil recently, reaching an accumulated value of nearly $40 billion and spread over sectors such as infrastructure, manufacturing, electricity and agriculture, Chinese Ambassador to Brazil Li Jinzhang was quoted as saying in a post published on the website of the Chinese Embassy on Wednesday.

The two countries initially agreed to establish a $20 billion mutual fund in 2015, with the aim of expanding capacity cooperation, reported in June 2015. The new fund will help address economic imbalances in Brazil, including its fiscal deficit, low savings rate and the trade imbalance, Xie Wenze, a research fellow at the Institute of Latin America under the Chinese Academy of Social Sciences, told the Global Times on Wednesday. "Commodities trade and foreign investment will be the first to benefit from this fund," he said.

In Latin America, a large part of China's outbound direct investment has gone to Brazil, which is one of the better-governed countries in the continent, according to a report published by the Brookings Institution in January. Some major projects have already been implemented in the energy and electricity sectors. For instance, China Three Gorges Corporation successfully obtained 30-year franchise rights for the Brazilian Jupia hydropower station and Ilha Solteria hydropower station for around $3.7 billion in November 2015. Another Chinese energy giant, State Grid International Development, a subsidiary of State Grid Corporation of China, announced in July 2016 that it would buy a 23 percent stake in CPEL Energia Sam, Brazil's largest power distributor, with a total investment of $4.5 billion.

"The company is exploring quality investment opportunities in the energy and electricity sectors overseas, and the investment in Brazil is one example," Shu Yinbiao, chairman of State Grid, was quoted as saying in a document the company sent to the Global Times on Wednesday.

Brazil has seen a record volume of exports in 2016, with a particular rise  in industrialized and semi-manufactured products like lumber, oil products and passenger cars, Brazilian news site reported in January, citing the Brazilian Ministry of Industry, Foreign Trade and Services. And the main destination for Brazilian goods was China, which imported $35.13 billion of goods from Brazil in 2016, data from China's Ministry of Commerce showed.

More cooperation, despite risks

Despite the current political uncertainties in Brazil, its exports of certain products such as oil and iron ore to China have been surging, Xie noted. The country's agriculture sector has great potential, and with help from more financing channels, "more Brazilian food products could be exported to China," he said.

The mutual fund will play a positive role in enhancing cooperation in complementary sectors, Lu Shanming, a manager at the investment department of the China-Brazil Investment Development and Trade Center, told the Global Times on Wednesday.

"Some sectors in Brazil need greater financial support, such as infrastructure, manufacturing, high-tech and agriculture," Lu said, adding that the fund will be market driven.

On Tuesday, Brazilian President Michel Temer sent a formal request to join the Organisation for Economic Co-operation and Development amid a corruption scandal that threatens to unseat him, according to Reuters.

Brazil currently has relatively unfavorable market conditions and rising protectionism, but by working with China to improve trade activities and foreign investment, the country is likely to be more open, Xie noted. "An extended openness will in return push forward its economic reform," he said.  

In the short-term, Chinese investors should be wary of the political risks in Brazil, according to Xie. "But as a populous country, Brazil can provide business opportunities in the long run, and the mutual fund will create a platform for Chinese investors to negotiate with their Brazilian counterparts," he added.

Posted in: ECONOMY

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