More (Chinese) Money, More Problems: Will Increased Chinese Investment In Latin America Have Unintended Consequences?

Data from the Economic Commission for Latin America and the Caribbean reveals that Chinese foreign direct investment to the region increased from a total of $5 billion during the timeframe from 1990-2009 to an average of $10 billion per year between 2010 and 2012.  In 2016, China became the second largest investor in Latin America after the U.S., and in 2017, China represented around 15% of the total foreign direct investment in the region.  New Chinese acquisition appears to focus on a few sectors, such as energy and mining.  Argentina, Brazil and Peru are the biggest beneficiaries, having received more than 80% of overall Chinese investment since 2005.  Brazil alone has received approximately 55% of Chinese investment in Latin America during this timeframe according to data from the World Economic Forum on Latin America.  It is anticipated that China’s penetration into the Brazilian economy and the economies of other countries in the region will continue, which begs the question: what other consequences will this rapid grown acceleration have for the region?  It seems likely that the ripples will be felt in the insurance industry. With the increase in industry and market expansion, an increase in the demand for energy coverage in these markets, and a larger number of claims, would also be expected.

At the beginning of this year, we provided a look back at the alarming number of  devastating natural disasters that ravaged Latin America in 2017.  Peering into the future, growing capital infusion into the region by China requires due consideration, specifically with respect to potential risk exposures arising both from rapid growth of certain sectors and from the natural/historical conditions of the region.

Pesquisa FAPESP, a magazine edited by the São Paulo Research Foundation, published an article on the results of a study of 50 years of calamities in South America, tracking the impact of 863 natural disasters over a period of five decades.  The study, conducted by Prof. Luci Hidalgo Nunes of the Institute of Geosciences at the University of Campinas in Brazil, drew various conclusions about the increase in urbanization and development of populations in the region.  Among them, the study found that “[o]f the approximately 180,000 disaster-related deaths, 60% were caused by earthquakes or volcanic activity—a type of occurrence concentrated in the Andean countries such as Peru, Chile, Ecuador and Colombia."

Victor Marchesini, a researcher for the Natural Disaster Surveillance and Early Warning Center (CEMADEN) in São Paulo, notes that disasters “occur as a result of a combination of natural threats and the vulnerabilities of the inhabited areas.”  

While the substantial capital infusion from China will propel economic growth in Latin America, investors must be cognizant of the history of natural disasters and potential increased exposures that comes with dramatic growth in urbanization contributing to the cost of doing business in the region.   While Latin American businesses will grow, benefiting from expansive Chinese investments in the region, this growth may be tempered by increased risk exposure given the region’s history of natural disasters.