Growing closer? Renewable energies can entice China to Brazil

Although Brazilian President Luiz Inácio Lula da Silva did not make China a big talking point during his election campaign, it looks likely that relations between the two nations will become closer than under Jair Bolsonaro.

When Lula headed the government from 2003 to 2007, the country became significantly more involved with the Asian economy, with China eventually becoming Brazil’s biggest trading partner in 2009. 

Relations cooled somewhat after some anti-China rhetoric from Bolsonaro prior to his 2018 election and a visit to Taiwan, but the economic realities of Brazil's links to China proved too hard to resist. Now Lula is back at the helm, it seems probable that the countries will get politically closer.

This is happening at a time when China is becoming more sensitive to concerns about climate change and Brazil is also seeking to boost its environmental agenda.

Given this scenario, China is expected to see Brazil as an arena where it can make significant investments in renewable energies.

BNamericas speaks to Tulio Cariello, research director of the prominent China-Brazil business council (CEBC), to find out more about what the relationship between Brazil and China could bring in the coming years.

BNamericas: Does the change of government in Brazil represent a shift in the relationship between Brazil and China?

Cariello: My answer has to be divided into two parts; one about the economic area and the other about the political arena.

In the economic area, where we're talking about trade between the countries and investments, I see more of the same, because despite the narrative against China by certain allies of former president Jair Bolsonaro, in practice the economic relationship between the countries did not suffer any disruption in the last four years.

There was a lot of speculation and even fears during the years of the Bolsonaro administration that the relationship with China was going to deteriorate, but in practice what we saw was an increase in the flow of trade and more investments taking place.

In terms of politics, yes, there are changes.

BNamericas: What kind of changes?

Cariello: There has been a political distancing between China and Brazil in recent years and this will likely start being reversed now.

It's important to note that Brazil's political distancing from China followed a Brazilian foreign policy that has been very withdrawn in recent years.

In the past, Brazil had won significant space in forums of global debate, in multilateral forums, but in the last four years, Brazil's participation in the global debate has diminished greatly.

With Lula, I see the Brazilian government being more committed to rebuilding bridges in the international arena, including strengthening political relations with China.

This greater political alignment may have an effect on the issue of investments in the medium term, since China is making aspects related to measures to combat climate change a priority in its agenda and Brazil is a country that has a lot of potential in this area. 

BNamericas: How will these aspects tend to impact Chinese investments in Brazil?

Cariello: Historically, China has been a major investor in Brazil in the electric energy sector through large companies such as CTG Brasil, which is the local unit of the Three Gorges Corporation and also through State Grid, in addition to being a major investor in the oil sector. 

From now on, given an agenda more linked to sustainability aspects in which the Chinese government and companies are engaged, they will show more interest in investments related to renewable energies.

But it's not just renewable energy that interests them. China is also interested in investing in Brazil in the areas of information technology and logistical infrastructure.

In general, Brazil will continue to be the leading country in the region in terms of attracting Chinese investment.

BNamericas: Are Chinese investments in Brazil generally made through direct investments in projects or in established companies?

Cariello: Chinese companies like to enter Brazil by buying local companies rather than taking on projects directly. This happens because they end up incorporating teams that are already formed, people who already know the regulatory aspects, sectoral details.

This is happening in the ICT area, for example, with Chinese companies buying Brazilian companies and this model is also likely to be replicated in the infrastructure area.

But one very sensitive aspect for Chinese companies, which is considered when they are evaluating assets, is to understand how much of that asset being purchased adds value to the sustainability efforts that China is generally engaged in today.

BNamericas: With a president in Brazil who is more politically aligned with China, will that increase the chances of having a free trade agreement between the Mercosur trade bloc and China?

Cariello: Debate about a free trade agreement between Mercosur and China is still at a very early stage.

Mercosur, as a bloc, still has lots of internal problems to resolve, which is why I don't see an agreement moving forward in the short term.

Furthermore, free trade with China would impact many industrial sectors in Brazil and across Mercosur that wouldn't be able to compete with China. Such an agreement would be much more beneficial to China at the moment, so I don't see much chance of progress.

BNamericas: Talking about trade, are there likely to be changes in the types of products traded between Brazil and China?

Cariello: Almost all of what China imports to Brazil is industrialized and semi-manufactured products and they're happy with that.

Brazil sells commodities to China, which is where Brazil is more competitive. I don't see this profile of trade between the two countries changing.

BNamericas: The performance of the Chinese economy affects the entire global performance, given the size of its economy. What can we expect from the Chinese economy this year and next?

Cariello: The Chinese GDP grew 3% in 2022, well below the government's target of 5.5%, which isn't very common.

But looking ahead, it's already possible to say that China will no longer grow at double-digit rates or close to that, as was common in the recent past. What explains this is that there is a combination of headwinds, such as the real estate market crisis there, the trade conflicts that have increased between China and the US, and the continuation and associated effects of the Russian war in Ukraine.

This year China is very focused on the public health issue in relation to the pandemic.

The government there will work to avoid a major health crisis, with the end of the so-called zero COVID policy, mainly to avoid health chaos in small towns, which don't have as much hospital structure. This year will certainly be a difficult year for the Chinese economy because of that.

Looking more at the medium term, the Chinese government is more committed to seeking higher-quality economic growth, without necessarily achieving the dizzying double-digit growth rates of the past.

This new vision of the Chinese government, with better quality in growth, involves a policy that is more focused on investments in technology and it is also more connected to concerns about sustainability-related issues.