Chinese-Peruvian trade Peru s role as China strategic supplier

Transcription

1 Student Research Projects/Outputs No.046 Chinese-Peruvian trade Peru s role as China strategic supplier MBA 2010 China Europe International Business School 699, Hong feng Road Pudong, Shanghai People s Republic of China

2 Chinese-Peruvian trade Peru s role as China strategic supplier 1. Executive Summary The relation between China and Peru started during the 19 th Century through a wave of immigration that brought Chinese peasants to Peru and led to the creation of important cultural links. A second flow of migration happened at the beginning of the 20 th century when highly educated Chinese escaped from the political unrest in China. After a period of social instability in Peru generated by the important immigration flow, the Chinese immigrant integrated in the society and actively contributed to the economy. In the 1970 s, political relations between the two countries strengthened given the common lefty political ideology that ruled the 2 countries. In 1971, the Peruvian government recognized the People s Republic of China as the only legal representative of Chinese people which led to the establishment of diplomatic relation between the 2 countries, being Peru one of the first Latin-American countries to set diplomatic ties with China. The establishment of the diplomatic ties has turn out to be crucial in the creation of an economic partnership between the 2 countries. The economic cooperation and trade has strengthened in the last years. As a result, on March of 2010, the Free Trade Agreement between China and Peru officially entered into force, increasing the trade volume rapidly. As a consequence, China became Peru's second largest trading partner. The strong and friendly relationship between China and Peru is contributing to the development of both countries. On one hand China is interested in assuring the supply of raw materials (mainly copper) to support its growth; on the other hand Peru benefits as a strategic partner of China from its investments. The challenge the 2 countries are now facing is to reinforce their strategic partnership by creating additional economic links in sectors other than mining. The focus has recently turned to the fishing and agricultural industries where not only there is a raw material export but also a value added proposition focus on technology transfer. 2

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4 2. Introduction As part of the EU-China MBA Exchange Scholarships program, MBA students have to research on a hot topic of the Chinese economy. To that extend, this essay is used to gain a better understanding of the relation between China and Latin-America. The paper will focus on the relation between China and Peru. Specifically, we will describe how the cultural and political links led to the creation of economic and commercial ties from which both countries benefit. China assures his supply of minerals and Peru benefits from Chinese investments that contributes to the development of the country. 3. Cultural links The abolishment of slavery in Peru in 1854 generated a lack of manpower. In order to overcome this, Peru issued a law promoting the immigration of Asian workers, giving financial rewards to investors who brought Chinese coolies, or unskilled peasants. This law fostered the immigration from China since the country was going through a deep recession. It is estimated that around 90,000 coolies arrived to Peru between 1849 and 1874 to work especially in the agricultural fields and to collect the guano, natural fertilizer coming from seagulls, which was one of Peru s most important export product at the time. Chinese coolie The Chinese coolies were considered good workers. It is known that wherever they worked, production and productivity increased, so export of sugar, cotton and guano also increased. As a result, Chinese coolies contributed to the development of Peru s economy. Moreover, Chinese coolies were able to save money from the work in the field which allowed them to open small businesses in nearby towns contributing to the Peruvian economy. The second migratory wave happened from 1904 to 1909 due to political unrest in China. This unrest caused great fear among Chinese educated people. Many prosperous and educated Chinese families, especially from Guangzhou, looked for other places to settle 4

5 down. They sent family members to other countries, among them Peru, where they could escape to in case the situation worsened. Because there were already Chinese people in Peru, it was considered one of the key countries to migrate to. These highly educated immigrants opened new businesses in Peru and wanted to hire additional Chinese workers that came to Peru. This way, the Chinese population continued increasing. Despite the social tension generated by the immigration, gradually, the Peruvian population realized that the spirit of Chinese immigrants had always been to integrate themselves to society, not only in education but also in customs, activities and culture. At the same time, they have maintained their Chinese values and heritage; for example, in 1920 there were two Chinese schools, a theater and many Chinese temples in Lima. Lima s Chinatown Chinese people have lived in Peru for 160 years now, and they make up the largest ethnic group of the population. It is estimated that 10% (between 2.8 and 3 million people) of the Peruvian population has Chinese background. The cultural influence can be observed in simple things such as food; Peruvian-Chinese food called Chifa is one of the most popular foods in the country and has also influenced Peruvian dishes. Different aspects of the Chinese culture are now part of the regular life of Peruvian citizens. 4. Diplomatic relations between China and Peru Business in or with China is closely related with politics due to the intervention of the government in the economy which shapes the way of doing business in or with China. Generally speaking, in order to create economic links between two countries, first, diplomatic relations have to be consolidated at a government level assuring that political and economic interests are aligned between the parts. In the next step, the Government acting through State Owned Enterprise will enter the market, showing the way to other smaller private companies. The evolution of the Chinese-Peruvian relation is a clear example of this process. 5

6 In November 2 nd 1971, only after Peru recognized the one China policy, China and Peru established for the first time in their histories diplomatic relations. Peru was then one of the first Latin American countries to forge diplomatic ties with the Asian country. Since the establishment of those diplomatic ties, the two countries have enjoyed frequent political cooperation and economic exchanges in culture, education, science and technology beginning a road of collaboration which has helped to bring a substantial development in bilateral topics of mutual interest. Peruvian stamp celebrating the 25th anniversary of the Chinese- Peruvian diplomatic relations Examples of this political cooperation are that, on January 28 th, 2001, the Chinese Ministry of Foreign Trade and Economic Cooperation signed a bilateral agreement on China's entry into the WTO, with the Peruvian Ambassador or that during in the APEC (Asia Pacific Economic Cooperation) Summit in 2004 in Chile, President Alejandro Toledo declared that Peru admitted China s market economy status. Lima showed with those actions his willingness to be a political ally of Beijing and to become a strong economic partner of China. As a consequence of this fluent relation, in January 2005, China and Peru agreed to establish an all-around cooperative partnership. To that extend, China s Minister of Commerce, Bo Xilai, and Peru s Minister of Foreign Trade and Tourism, Mercedes Araoz, met in Hanoi, Vietnam, in November 2006, to explore real possibilities to strengthen trade links. A few months later, in March 2007, both countries announced to launch the China- Peru FTA Joint Feasibility Study. The two sides signed the agreement in

7 Presidents Hu Jintao and Alan García during the welcoming ceremony hosted in Lima in 2008 Meanwhile the Peruvian government, in a state visit to China 2008, positioned itself against the boycott of the Beijing Olympics and against Taiwan's and Tibet s independence. The agreement was officially ratified by both countries governments on December 6, 2009 and came into effect on March 1, According to the President of the Peruvian-Chinese Chamber of Commerce (Capechi), Chinese investments in Peru have recently reached $1,200 million and are expected to reach $10,000 million in the next five years, driven by the strengthening of bilateral relations. Chinese investments in Peru are expected to be mainly in the mining industry, either in the expansion of current operations or the development of mining projects. Among the investments announced, we can highlight the followings: Shougang Hierro Peru, owned by the Chinese government and which operates the iron mine in Marcona, plans to invest $1,200 million in the next years Zijing Mining Group, also a SEO and which develops the copper project Rio Blanco will increase their investments to $1,500 million in the next years. Minmetals, owned by the Chinese government will invest $2,500 million in the gold project Rio Galeno. Aluminum Corporation of China (Chinalco) will invest $2,000 million in the development and execution of the Copper project Toromocho. 5. Peru s role as strategic supplier While traditional trading happened between a western country and an emerging economy or between 2 western countries, a new flow of trade is raising between emerging countries. A growing influence of the BRICS countries in Latin America is reflecting this new modality in the international economic arena. 7

8 Those relations emerged, in the Chinese-Peruvian case, from the necessity of China to import commodities. China is interested in the natural resources that Peru has in the mining industry and more specifically in his copper to carry out the electrification of the country. China intends thus to create a lasting Strategic Partnership with Peru that could guarantee his future supply. Trade between Peru and China USD Million (FOB) Source: Aduanas - Peruvian Customs Agency To that extend, not only China is exploiting Peru s natural resources but also contributing to the development of the country. The aid under the program of Official Assistance for Development also known as AOD from China to Peru reached $18.5 million in the period, which was essentially invested in health, education, culture, environment and agriculture fields. China attaches great importance to its relations with Peru. However, Peru is also interested in building this Strategic Partnership with China. A clear example of this is the acquisition of the Toromocho Project by Chinalco. Toromocho s reserves are estimated at 1.5 million tons, consisting mainly of copper, molybdenum and silver, and it is considered one of world s largest undeveloped copper projects. China through Chinalco acquired the mine in 2006, and will invest $2 billion in the development of the Toromocho Project. The estimated cost of extraction when Chinalco acquired the mine was around $410 per ton and the selling price of copper ore was $8,200 per ton, implying a huge profit on the mine operations given the low price paid the Peruvian government agreed on. The importance of this investment for the Peruvian government is reflected in the following figures: The Toromocho project will generate 2,500 and 7,500 direct and indirect jobs respectively over a 34-year period. Minera Chinalco Peru will generate 5,000 jobs during the mine construction stage for the Toromocho Project. 8

9 The amount of money Minera Chinalco Peru will spend every year on purchases in Perú once the Toromocho Project enters into operation has been calculated at 250 million dollars. Minera Chinalco Peru will contribute at least 40 million dollars toward building the new town of Morococha. More than 5,000 inhabitants of Morococha will benefit from a new cost-free home. During its 36 years of operation, Minera Chinalco Perú will contribute: With a price of $ 1.50 per pound of copper: 2,223 million dollars in taxes to the Peruvian State. 1,112 million dollars in the canon minero tax. 417 million dollars in royalty payments. 644 million dollars in profits that MCP will distribute among the workers. With a price of $ 3.00 per pound of copper: 7,600 million dollars in taxes to the Peruvian State. 3,800 million dollars in the canon minero tax. 760 million dollars in royalty payments million dollars in profits that MCP will distribute among the workers. Although to date, the mining industry is the major economic tie between China and Peru, the objectives of both governments is to reinforce the economic ties of both countries. China stands ready to work with Peru to enrich the content of their strategic partnership and advance practical cooperation in various areas. To that extend, additional commercial links other than in the mining industry are being built who will help to strength his strategic alliance. To that extend, the FTA was signed in 2010 and as a consequence non mining imports from Peru increased in % with a special emphasis in fishing ($872 million and a 25% increased) and non-traditional agriculture ($33 million and an increase of 68%). Recently, Peruvian Foreign Minister Rafael Roncagliolo declared "We hope that this strategic association that we have with China will spread into multiple dimensions". On the Chinese side, Hui Liangyu emphasized that agriculture and animal husbandry hold an important position in both countries and the two sides have a lot of good experience and practice. Both sides should give full play to the role of joint committee on agricultural 9

10 cooperation, strengthen cooperation on technology transfer, and promote common development of animal husbandry of the two countries. 6. The threats Although the current relation in both countries is in good shape, the recent election of leftist President Ollanta Humala has put tension on the string after the announcement of three bills raising taxes and royalties on the lucrative mining sector, fulfilling a campaign promise. The taxes are expected to shrink mining companies margins some of whom are Chinese owned. Mining companies will now pay royalties of between 1 percent and 12 percent of their operating profits and a windfall profits tax of 2 percent to 8.4 percent of their net profits while before they were only paying royalties of 1 percent to 3 percent of sales and between 4 percent and percent of their operating profits. Though the mining companies agreed to the rates, they have warned that further increases could affect the sector's competitiveness in the world's No. 2 copper and silver producer. Peruvian Foreign Minister reassured that Peru respects all the already signed agreements with other countries including China, though some changes have to be done. 7. References Revista del Centro Andino de Estudios Internacionales [2010] Relaciones Economicas Peru-China Author: Alaine Fairlie Reinoso Available from [accessed: 11 November 2011] Camara de Comercio Peruano China [2011] General Information about the commercial relationship between Peru and China. Available from: [accessed: 11 November 2011] America Economica [2011] Inversiones Chinas en Peru llegarían a US$ 10,000M el próximo quinquenio Author: Agencia Peruana de Noticias Available from: [accessed: 11 November 2011] BBC Mundo [2011] Peru, prioridad para inversions Chinas Author: BBC Mundo Available from: on_wbm.shtml [accessed: 11 November 2011] 10

11 America Economica [2011] En primer ano del TLC, el Peru exporta a China 140 productos nuevos y no tradicionales Author: Agencia Peruana de Noticias. Available from: [accessed: 11 November 2011] Minera Chinalco Peru [2011]. General Information about the organization Available from: [accessed: 11 November 2011] 11