The China Signal - July 2
IUU fishing, concerns over Sinovac's efficacy, an international school in Brazil, lithium battery production MOU in Argentina, and China's ties with LatAm's tobacco industry
G’day, and welcome to The China Signal! This week, China announces a temporary ban on squid fishing off the coast of Argentina after facing international pressure over IUU fishing; concerns grow in Chile over the efficacy of the Sinovac vaccine; a new Chinese international school in Brazil; a lithium battery production MOU in Argentina; and a deep dive on China’s ties with Latin America’s tobacco industry. Plus much more. Read on.
Illegal, Unreported and Unregulated Fishing
China has announced a temporary ban on its fishing fleet -- the world's biggest -- from catching squid in parts of the Pacific and Atlantic Oceans after overfishing pushed populations to the brink of collapse.
China reels in as much as 70 percent of the global squid catch, and its vessels sail as far as West Africa and Latin America to sate the growing appetite for seafood in the country.
But Chinese vessels will suspend operations in major global squid spawning grounds in the southwest Atlantic near Argentina from Thursday until September 30, and parts of the Pacific from September to November, the agriculture ministry said Monday.
The ban follows an international backlash against China's giant overseas fleet, with claims that they are overfishing and damaging fragile marine ecosystems.
Areas covered by the moratorium are breeding grounds for two of the most popular squid varieties -- the Argentine shortfin squid and the Humboldt squid.
Alarm is growing in Chile over the more contagious Delta variant of the coronavirus, which was confirmed in the country last week and has caused contagion spikes elsewhere.
Chile has vaccinated 82% of its 15 million target population with at least one dose and 70% are fully vaccinated against COVID-19. This week it is inoculating residents under age 18, as young as 12-years-old.
Questions have been raised about whether Sinovac Biotech’s CoronaVac primarily used in Chile can protect against the variant that has also been associated with more severe disease.
Last week, a researcher at China’s Center for Disease Control said antibodies triggered by two Chinese COVID-19 vaccines he did not name were less effective against Delta than other variants, albeit still offering some protection.
Public health chief Paula Daza said it was “very likely” that Chile would issue a third dose to its citizens, potentially of a different vaccine from their previous shots, noting: “it might be a way of bolstering the effectiveness of vaccines.”
I highlighted the lower effectiveness of China’s vaccines as one of the major risk factors threatening Beijing’s vaccine diplomacy in my recent testimony to the USCC.
China’s ambassador to Chile, Niu Qingbao has defended accusations against Sinovac’s effectiveness.
“Chinese ambassador to Chile defends Sinovac’s effectiveness”
The Chinese ambassador to Chile, Niu Qingbao, defended the effectiveness of the Chinese Sinovac vaccine against COVID-19 after it was questioned by Italy’s Prime Minister Mario Draghi in a publication by The New York Times.
Through a letter to the editor published in El Mercurio, Niu Qingbao indicated that "Chinese vaccines are safe and effective". He asked the Chilean population not to fear the Sinovac vaccine, given that it is the main vaccine that has been used in Chile.
El embajador de China en Chile, Niu Qingbao, defendió la efectividad de la vacuna proveniente de su país de origen contra el COVID-19, Sinovac del laboratorio Coronavac, luego de los cuestionamientos internacionales que recibió por parte del primer ministro italiano, Mario Draghi, y una publicación del medio The New York Times.
A través de una carta al director que publicó en El Mercurio, Niu Qingbao indicó que “las vacunas chinas son seguras y eficaces”, por lo que pidió a la población chilena no temer, ya que la principal vacuna que se ha aplicado en Chile es la de Sinovac.
Brazil and China are in talks around strengthening the countries' bilateral cooperation in science and technology, particularly in areas such as artificial intelligence, smart cities, space technologies and healthcare areas such as vaccine development and genomic sequencing, as well as the exchange of scientists and researchers.
I also identified closer scientific collaboration as a key strategic objective of Beijing’s vaccine diplomacy in my aforementioned USCC testimony.
The areas of mutual interest for potential cooperation were discussed during a virtual meeting between the Brazilian science, technology and innovation minister, Marcos Pontes, and China's science and technology minister Wang Zhigang on 17 June.
Moreover, the ministries agreed to discuss the details of the meeting of the Science, Technology and Innovation subcommittee of the Sino-Brazilian Commission for High Level of Agreement and Cooperation, scheduled to take place in September this year.
For Wang Zhigang, the meeting is "a starting point" in terms of strengthening cooperation between the two countries in science and technology matters. The Chinese minister agreed with Brazil's proposed areas of common interest, but pointed out the need to establish financing mechanisms to put the joint actions into practice.
The institution, which opened its doors in February, intends to “provide international standard teaching in Brazil following the Chinese education model,” while remaining integrated with the national Brazilian curriculum.
“We promote traditional Chinese culture and prepare talents to make outstanding contributions to economic development and cultural exchange between the two countries,” says the school, in a press release.
The International Chinese School was created with financial support from Chinese companies and expats in Rio de Janeiro, with the authorization of the Chinese consulate in the city. Indeed, the project has been the brainchild of consul Li Yang, ever since he was posted to Rio de Janeiro four years ago.
The school has roughly 60 students — reduced due to coronavirus restrictions — but expects to reach between 180 and 200 pupils in the post-pandemic period. “While the school was created with the idea of offering education to the children of Chinese immigrants, most of the students do not come from Chinese families,” points out Maurício Santoro, political scientist and international relations professor at the State University of Rio de Janeiro.
Indeed, of the entire student body, 60 percent of children are Brazilian, while 30 percent are Chinese or of Chinese origin.
“Detailed progress in lithium batteries: China Ganfeng interested in lithium battery production in Jujuy Argentina”
Governor Gerardo Morales, Minister Matías Kulfas and the vice president of Ganfeng Lithium signed a memorandum of understanding for the manufacture of lithium batteries in Jujuy, a strategic resource in the world economy
The signing ceremony was carried out via teleconference and had the participation of the Argentine ambassador to China, Sabino Vaca Narvaja; the ambassador of the People's Republic of China in Argentina; Zou Xiaoli; and the vice president of Ganfeng Lithium, Xiaoshen Wang; who signed the minutes of agreement on behalf of the Chinese company.
El gobernador Gerardo Morales, el ministro Matías Kulfas y el vice presidente de Ganfeng Lithium rubricaron un memorándum de entendimiento para que en Jujuy se fabriquen baterías de litio, recurso estratégico en la economía mundial
El acto de rúbrica se desarrolló vía teleconferencia y contó con la participación del embajador de Argentina en China, Sabino Vaca Narvaja; el embajador de la República Popular China en Argentina; Zou Xiaoli; y el vicepresidente de Ganfeng Lithium, Xiaoshen Wang; quien firmó el acta acuerdo en representación de la empresa china.
The Jujuy province, led by Governor Gerardo Morales has been analysed by Margaret Myers as a prime example of growing local, sub-national relations between China and Latin America in her December 2020 report “Going Local: An Assessment of China’s Administrative-Level Activity in Latin America and the Caribbean”. I covered the report in TCS December 11, 2020.
The operation was a small part of a Panama-based network of shell companies sending huge amounts of Chinese cigarettes from the Colón Free Trade Zone — the second largest port in the world, at the Atlantic end of the Panama Canal — into Latin American countries where there is no legal market for them, according to an investigation by the Organized Crime and Corruption Reporting Project.
Reporting by the group, a global investigative journalism organization, found that firms are connected to convicted smugglers, as well as China’s massive state-owned tobacco company, The China National Tobacco Corp. is by far the world’s largest cigarette company. It controls almost half the global market, selling most of its cigarettes to the approximately 300 million smokers in China. But the sprawling conglomerate — often referred to simply as China Tobacco — is angling for an even larger share, and it has been forging new markets from Africa to Europe.
Journalists from the Organized Crime and Corruption Reporting Project and its partners found that China Tobacco cigarettes have flooded into countries from Mexico to Peru. The writing on the packs is Spanish, suggesting that they are made specifically for Latin American markets — even though Chile is the only country where it’s legal to sell them.
One Panamanian company shipped $34,000-worth of cigarettes and alcohol to the Chinese embassy in Ecuador, a country where Chinese brands make up about a quarter of the illicit market.
The embassy told reporters that the massive shipment was "diplomatic material and is for the exclusive use of the Embassy."
China Tobacco is taking a leaf from the playbook of “Big Tobacco,” shorthand for the group of companies that has long dominated the global trade: British American Tobacco, Imperial Brands, Japan Tobacco International, and Philip Morris International, which owns Marlboro.
In the 1990s, packs of Marlboro began pouring into Colombia, undercutting and eventually dominating local brands, said Daniel Rico, a Colombian expert on criminal economies. Then Philip Morris negotiated with Colombia’s National Tax and Customs Directorate.
“One day they went and told the (National Tax and Customs Directorate) that they wanted to legalize, but they already had the whole market under control,” said Rico, who is director of the research firm C-Analisis. “Smuggling is a way to expand the market.”
Colombia is awash with illegal cigarettes once again. But instead of Marlboros, the packs carry names like Golden Deer and Silver Elephant, along with other CNTC brands.
Experts say that Panama — where authorities last year seized 28 containers containing illegal cigarettes before they were shipped elsewhere — is the most important regional hub for this illicit trade.
“The big distribution point for Chinese, Uruguayan and Paraguayan cigarettes is Panama,” said Rico, mentioning two countries also notorious for producing illicit smokes. “All of this arrives in the Colón Free Zone, and it is then distributed throughout Latin America.”
Loose regulations and lax enforcement mean that companies can abuse the rules of the zone with few repercussions, according to Maria Lorena Cummings, director of the Colón Chamber of Commerce’s financial sector.
Any company within the zone can buy Chinese cigarettes tax free, and they can play the system in order to pay almost no duty to export them. It’s easy to make a false export declaration, especially since very few containers leaving the port are checked.
As a signatory to the global World Health Organization’s Framework Convention on Tobacco Control, China has pledged to find alternate income streams for tobacco farmers. But as the amount of land under tobacco cultivation declined at home, CNTC [China National Tobacco Corporation] has been looking to other countries to make up for the shortfall, raising questions about China’s commitment to the convention.
In 1997, China imported US$12 million worth of Brazil’s tobacco, amounting to just 1 percent of the South American country’s exports. By 2019, China accounted for more than 19 percent of Brazil’s tobacco exports, valued at almost $386 million.
The big increase began not long after CNTC entered Brazil in 2002, setting up China Tabaco Internacional do Brasil to buy the leaf. Starting in the early 2010s, through its joint venture with Alliance, China Tobacco was able to secure supplies more directly by signing contracts with Brazilian farmers.
Labor abuses, as well as extreme debt and disease, have long been known to plague Brazil’s tobacco industry, yet the problems persist. Insiders say this is at least partly due to the close relationships between politicians and the industry.
Municipal authorities, including mayors, have been known to put pressure on inspectors, according to one official involved in enforcing labor laws, who spoke on condition of anonymity because he did not want to harm his relationship with local authorities. He said there have been cases of an inspector refusing to do a job, “because he is afraid of persecution within the municipality.”
Officials from tobacco-growing areas are often strong supporters of the industry, as it makes up the backbone of the local economy, pointed out Turci, coordinator of the tobacco strategies observatory. This means they are reluctant to force growers to implement measures against problems like pesticide exposure, green leaf disease, or child labor.
In total, CBT donated 180,000 reals ($74,000) in 2014 to eight congressional candidates, six state and two federal. All were running in either Paraná, Santa Catarina, or Rio Grande do Sul, the southern states where Brazil’s tobacco industry is concentrated.
Alliance was even more generous than CBT in 2014. It donated 630,000 reals ($256,334) to 23 candidates in the three southern states. One of them, Raimundo Colombo, received 50,000 reals and was elected governor of Santa Catarina. He went on to work with the lobby group Union Interstate Tobacco Industry, known as SindiTabaco.
Broader Latin America 🏔🏝
As China ramps up its investment in LAC, the composition of the investment also experienced a major transformation in the last decade. Once heavily concentrated in fossil fuels, metals, agriculture and other natural resources, Chinese investment in LAC has increasingly tilted towards manufacturing and services industries such as transport, electricity, financial services and information and communication technology (ICT). The electricity generation and distribution sector, in particular, has become a major target of Chinese investment, with more than a dozen acquisition deals across LAC with an average size over US$1 billion. Not even the intensification of the U.S.-China trade frictions could dampen China’s investment spree in this area. In October 2019, the State Grid Company of China purchased Chiquinta Energia, the third largest electricity distributor in Chile, for US$3 billion. Two months later, China Yangtze Power International acquired Luz del Sur, the largest electricity company in Peru, for US$3.6 billion. Both acquisitions were among the largest FDI ever received by Chile and Peru.
In this paper we demonstrate that since mid-2010s China has shifted its overseas investment toward sectors where it has comparative advantage while the recipient countries are less competitive, a pattern that is also observed for other major FDI source countries. In other words, at the firm level China’s overseas investment behavior is converging to the international norm that the FDI source countries try to exploit their comparative advantage in international trade vis-à-vis the recipient countries.15 We also show that such a transformation can be linked to China’s efforts to reduce its excess capacity, much of which has been accumulated in sectors where China has developed comparative advantage in the global markets over the years.
From LAC’s perspective, given China’s changing overseas investment behavior, there is scope to exploit the complementarity in other sectors besides utilities where China demonstrates comparative advantage and LAC the opposite. These sectors include consumer goods and telecom services, as indicated by their relative RCA indices in Table 2. Although the effects of FDI on productivity growth have been shown to be larger in the manufacturing sector than in services, the economic literature shows that brownfield investments could be more beneficial than greenfield investments in increasing domestic firms’ productivity levels and growth across sectors (Du et al (2008), Jefferson (2002), Lin et at. (2008), Bartel and Harrison (2005), Arnold and Javorcik (2009)) and projects with shared domestic and foreign ownership generate larger vertical spillovers than fully foreign-owned subsidiaries (Javorcik and Spatareanu (2008)). To the extent that Chinese investment is also driven by its needs to relocate capital away from sectors with overcapacity domestically, LAC stands to benefit by directing Chinese investment to address LAC’s own investment gaps. As shown in this paper, as well as in the related literature, a stable macroeconomic environment, favorable growth outlooks and strong institutional frameworks are also important pull factors of foreign investment.