Brazil is slowly taking over as the standard-bearer for Chinese investment in Latin America as the people’s republic diversifies away from…

Brazil is slowly taking over as the standard-bearer for Chinese investment in Latin America as the people’s republic diversifies away from oil-dependent ideological allies such as Venezuela

Beijing’s growing presence in what Washington considers its “backyard” has allowed Latin American leaders an amount of welcome independence from the US and has freed them to pursue pet projects. Between 2010-14, $90bn in lending from China to Latin America exceeded disbursements to the region from the World Bank and Inter-American Development Bank (IADB), according to a report from Boston University’s Global Economic Governance Initiative

Nowadays, the purse across the Pacific is no longer quite so open. The steep drop in oil prices is correlated with a weakening in investments by China into oil-dependent nations. In Latin America, that means China is pivoting away from “left-leaning” friends such as Venezuela or Ecuador towards other countries, including Brazil and Chile

“The Chinese government has become more cautious when it comes to loans since Xi and Li took power, especially loans to countries like Venezuela and Ecuador,” says Li Renfang, Latin American analyst at Southwest University of Science and Technology, of Xi Jinping and Li Keqiang, respectively China’s president and premier. “

“In the past, Chinese investment in those countries had ideological and political undertones but today we give more weight to economic concerns,” says Mr Renfang. “

China’s new caution stems not only from lower oil prices, but also the fact that its own growth is slowing, which has cooled its ability to spin off cash into investments overseas. However, the interdependence built over the decade-long commodities boom is not easily shaken. A slowdown in China’s GDP has hit currencies hard in Latin America. The August crash of the Shanghai stock market sent Brazilian equities to their lowest level since 2009

A study by Eileen Fahey, chief credit officer at Fitch Ratings, showed that the countries and companies in Latin America that are most exposed to a slowdown in Chinese demand are also the ones that trade with, or borrow most heavily from, China. This creates the potential for a vicious cycle as China and commodity markets cool in tandem

“There was a discernible drop in both the number of transactions and overall project value” after the collapse in oil and commodity prices in the summer of 2014, says Andrew Davenport, chief operating officer at RWR Advisory, a Washington research company that tracks global Chinese and Russian deals. RWR

Before the collapse, transactions had been rising steadily following a jump in activity in 2011. While it may take some time before China has truly diversified its investments in Latin America, Mr Davenport says: “There is evidence that the ship is turning in this direction.”

This shift favours Brazil, the commodities powerhouse that is already China’s second-largest supplier of iron ore and soybeans

“Brazil is a prime investment destination for China,” says Fan Hesheng, director at the Institute of Latin America Studies at Anhui University. “Venezuela carries many risks because it relies on oil too much. Its economic structure is not well organised and if it takes a hit from falling commodity prices it will present a lot of trouble.” “

China’s opening came only after Brazil ran into difficulty accessing capital from western banks. A corruption scandal has impeded state-owned energy company Petrobras’s access to bond markets. Enter China, which rode to the rescue with a $10bn line of credit in May. Half is from China Development Bank, which underwrote most of China’s oil-backed loans to Venezuela a few years ago

Other big deals followed. In May, Vale, the mining company, sealed a credit agreement of up to $4bn with state-owned Industrial and Commercial Bank of China (ICBC). And Three Gorges, a Chinese hydropower company, bought two dams and a trading subsidiary from Brazilian infrastructure group Triunfo in August, for up to $538m

The opportunities revealed by the oil bust could open the door to direct Chinese investments in Brazil that have proven elusive in the past. For example, a wave of Chinese manufacturing agreements concluded 10 years ago mostly failed to materialise — but now Chinese money could flow into the oil sector. And Chinese companies had been generally locked out of direct holdings in Brazil’s agricultural sector, until Cofco’s purchase of Dutch grains trader Nidera last year