Argentina: Industrialists concerned over China agreements
Having signed agreements with the Chinese government in February enabling what she described as “the most important country-to-country investments in history” President Cristina Fernández appeared both surprised and angry when a group of local industrialists said they were unhappy with the terms of the deals. The background to the controversy highlights interesting issues of trade and investment policy.
Although President Fernández may be guilty of a degree of hype, there is no doubt that the cooperation agreements signed during her state visit to China on 3 - 4 February were very significant. After meeting China’s President Xi Jinping, a total of 15 agreements were signed, covering cooperation in areas like tourism, culture, health, science, mining, nuclear energy and its peaceful use, penal affairs, communications, space exploration, information and finance. Fernández said that at their earlier meeting in July 2014, she and Xi had agreed to elevate the bilateral relationship to the rank of an “integral strategic alliance”, a move that implied a qualitative step-change.
The list of concrete Argentina-China agreements reached to date is substantial, and includes the following:
- A US$11bn currency swap agreement between the central banks of the two countries, which came into operation last year and has bolstered Argentina’s dwindling foreign currency reserves (because of its dispute with US holdout creditors, Argentina is considered to be in partial default and has limited access to international capital markets). Under the terms of this agreement, Argentina last year received over US$2.3bn. According to Mauro Roca, an economist at Goldman Sachs, the currency swap “helped to reduce the perception that the country may be heading for yet another currency run”.
- Chinese funding totalling an estimated US$4.5bn for two major hydroelectric dams, the Néstor Kirchner and Jorge Cepernic projects in Santa Cruz province in the south of the country. China’s Gezhouba Group of Wuhan has secured the contract for the civil engineering work.
- Chinese funding and technology to build two new nuclear reactors in Argentina. (Argentina currently has three reactors: Atucha I and Atucha II in Buenos Aires, and Embalse in Córdoba. Atucha II, where China helped complete the engineering work, came on-stream this month). Under the terms of this agreement, China National Nuclear Corporation (CNNC) will provide the technology, while Argentina’s Nucleoeléctrica will be in charge of the design and construction work.
- Chinese funding for the modernisation of the Belgrano Cargas freight rail service.
- China’s Sinopec has signed agreements for joint oil and gas exploration with Argentina’s state-owned Yacimientos Petrolíferos Fiscales (YPF), including exploration of part of the country’s giant shale oil and gas deposits in Vaca Muerta, Neuquén province.
- An agreement to build a space observation and research centre in Neuquén province, which will support China’s space programme, designed to land three astronauts on the moon in 2016.
According to preliminary figures, Argentina’s exports to China totalled US$5.1bn in 2014 (7% of total exports), while imports from China were valued at US$10.8bn (16.5% of total imports). These figures confirm China as Argentina’s second most important trading partner after Brazil. Of particular importance are Argentina’s soya exports to China, which last year totalled just under 8m metric tonnes.
So bearing the importance of the relationship in mind, President Fernández seems to have been caught off-guard on her return to Argentina by criticism from the main manufacturers’ association, Unión Industrial Argentina (UIA), and from the exporters’ lobby, the Cámara de Exportadores de la República Argentina (CERA). The UIA focused on a framework agreement signed on 18 July last year, which in early February was still awaiting congressional approval. It said that this ‘Economic Investment and Cooperation Agreement’ gave China too many advantages. Article 5 of the agreement allows contracts to be assigned directly to Chinese companies without competitive bidding, when China is offering funding at subsidised interest rates. Article 6 also allows favourable conditions for the use of Chinese labour on projects in Argentina. A further article allows additional agreements to be reached without the need for congressional approval on the Argentine side.
In a comment attributed by the daily La Nación to Techint, a leading Argentine civil engineering group, there is “a very high risk when our industry competes with centrally planned economies, with distortionary price and subsidy policies, which do not follow the principles of fair trade”. Techint managers are also said to have warned against “de-industrialisation’ – a situation whereby Argentina becomes relegated to the role of raw materials exporter, importing manufactured goods from China.
The president condemned these comments, which she said were like “spitting at the sky”. She said she had difficulty understanding Techint’s position, since the company was benefiting from a US$400m credit from China. “It’s almost as if we should tell the Chinese not to lend them the US$400m and for them to find it elsewhere” she said. Sources in the company said the project in question is the El Tamboral hydroelectric complex, an extension of two earlier projects (Punta Negra and Caracoles). Techint’s contract is not directly with the Chinese, but with EPSE, a provincially owned entity in San Juan. As for the comments about jobs and Chinese workers, the President insisted that “I went [to China] with 112 Argentine companies, and those companies employ workers. If anything characterises this government it has been the defence of labour and business people, and I think we deserve a vote of confidence”.
Yet the controversy looks set to continue. Luis Palma Cané, an economist at Fimades, a local consultancy, says that on the surface Article 5, allowing direct contracting of work to Chinese companies when the project is being funded with soft loans from China, may appear reasonable. “But this is misleading” he notes. “When a country offers Argentina long term financing at a 3% annual interest rate, in a situation where the rest of the world won’t lend to us at less than 20%, then it is clear that something else must be involved. That something else means we are tied in to using their technology, and we can’t control the price of the work.” Dante Sica, of consultancy Abeceb.com, agrees. “We can only use Chinese technology, where there may be German or French suppliers who might offer better quality”, he points out. Palma Cané adds that because of Article 6, it is possible that the Neuquén space observation and research centre will be entirely staffed with Chinese scientists.
It is not just parts of the business community that see a downside to the China agreements. A number of labour unions, including Uocra, the construction workers’ union, and UOM (engineering workers) wrote to Planning Minister Julio De Vido to express their concern over jobs. De Vido appears to have reassured them, saying that the major Chinese-funded infrastructure works would create between 20,000 and 25,000 new jobs for Argentine workers over the next three years, and that large quantities of Chinese workers would not be flown in to do the work instead. But some say negotiations can be tough. La Nación quoted a source close to the interior and transport minister, Florencio Randazzo, who said that the contract to modernise the Belgrano Cargas freight railway was valued at US$2.47bn. The Argentine government has been required to pay a deposit equivalent to 15% of this amount, with the People’s Bank of China (PBC, the central bank) providing the rest via a 15-year loan, with an initial 5-year grace period, at annual interest rates of less than 4.5%. “What do the Chinese do?” the source asked: “Well they lend you the money, but then they demand 80% Chinese content for the work. We managed to get them down to 50%”.
