Brazil to China: Show us the Money

Brazilian President Lula is in China today hoping to secure new investment commitments. Many observers appear to have mistaken verbal commitments with actual funds, but Brazilian officials don't. In 2005, many cited China's $7 bln investment pledge to Brazil as a sign of the expansion of the PRC's influence and its help to developing countries. Yet Brazil reckons of that $7 bln commitment, just a little more than $141 mln has been delivered.

Moreover, China is more likely to buy raw materials from Brazil and use them to make manufactured goods that compete with Brazilian producers. A little more than 3/4 of Brazil's exports to China are accounted for by soy, iron and petroleum.

Lula would like to return home with a new commitment from China for $10 bln for Petrobras, and $800 mln for the state development banks and the financing of ports and waterways. Yet, there is a fundamental disagreement over what trade is actually taking place. In late April, Brazil's Trade Ministry publicized data that showed China bought $10.7 bln of goods from Brazil. China's figures put the number at $18.8 bln. From its point of view, China could argue that Brazil has not adhered to its commitment either. Most importantly from China's point of view is the fact that Brazil has not formally recognized China as a "market economy". Such a designation is highly coveted by China as it would make anti-dumping sanctions more difficult to stick. Brazil accuses China of dumping a wide array of goods, including, bicycle tires, table fans, audio speakers and eyeglass frames, according to press reports.

In the last four months of 2008, Brazil scored large competitive gains against China as the Brazilian real fell nearly 40% against the yuan. Since the end of last year, the real has gained 27% and there appears to be some scope for additional BRL appreciation.

While Lula is unlikely to return from China empty handed, investors need to see past high sounding commitments and wait until they are actualized. The distinction may not have been appreciated before, but Brazil's experience suggest it should be appreciated going forward.