Brazil’s Protectionist Policies Are Souring Chinese Investment

first glance. It offers rich crops of coffee, grains and sugar. And it’s bursting with a wide range of minerals, including iron ore, copper, quartz, graphite, gold and bauxite, which is the main source of aluminum.

Several years ago, it seemed like a business deal made in heaven: an opportunity to foster a mutually beneficial relationship that could maintain China’s growth and ramp up Brazil’s.

But China finds itself sorely disappointed these days, perhaps because it pushed for too much too fast. Or perhaps because Brazil is simply too nationalistic for its own good.

Either way, the relationship has lost its luster. And Brazil is suffering for it.

Lofty Ambitions

As we noted in Investment U, in May 2010, China’s Sinochem Group paid $3 billion for a 40% stake in Peregrino, an oil field off Brazil’s coast.

In October 2010, China Petroleum & Chemical Corp (ADR)(NYSE:SNP) spent a whopping $7.1 billion investing in the Brazilian subsidiary of Repsol SA(MCE:REP).

And before 2011 was even half over, Eike Batista – who was Brazil’s richest man at the time – was throwing his own money into the Acu Superport project, a 10-berth pier facility 400 kilometers north of Rio de Janeiro. The pier was being built in large part to accommodate shipments of iron ore between Brazil and China.

By mid-November 2012, Chinese investments into its partner totaled $25 billion and, as the BBC reported at the time, some Brazilian school children were even “starting to learn Mandarin.”

But Brazil got spooked somewhere along the way. Maybe it felt threatened by the increasing Chinese presence. Maybe it thought China wasn’t paying its fair share. Or perhaps it felt confident enough to start trusting its own businesses over foreign companies.

Whatever the reason, Brazil’s so-called protectionist policies – including tax increases and restrictions on land purchases, which are confining outside parties – have caused serious setbacks in Chinese investment.

In fact, Business Insider reports: “Chinese executives have grown frustrated with stagnant economic growth, heavy costs and what they see as a political and popular backlash against their presence. As a result, Chinese investment is falling, and as much as two-thirds of the roughly $70 billion in projects announced since 2007 is either on hold or has been canceled.”

Use Caution

Let’s face it: Brazil could use a boost these days.

It came roaring back after the worldwide recession in 2009 with GDP growth of 7.57%. But in 2011, that number tanked to 3.7%. And in 2012, it marked an unacceptable low of 0.5% growth for the third quarter.

So far, 2013 has been better, but that doesn’t mean Brazil’s economy has been good. It made a 1.4% jump in the first quarter, 1.9% in the second and 3.3% most recently.

Admittedly, if the United States could grow that much, we’d be happy. But we’re already a well-established economy. Brazil is still emerging, and therefore should be recording much higher numbers.

Yet right now, it doesn’t seem capable of reaching its potential on its own. It’s especially true when considering the money, jobs, infrastructure modifications and other perks China is more than willing to offer.

At this point, Brazil hasn’t grasped that it’s punishing itself more than anyone else. And it doesn’t seem like the current government is willing to get a much-needed clue anytime soon.

With that in mind, investors – Chinese or otherwise – should approach Brazil with serious caution until some major change takes place.

by Jeannette Di Louie, Investment U Research

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

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