Leadership and Democracy LabWestern Social Science

The Strengthening of Peru-Sino Relations on Foreign Investment in Peru’s Energy and Resource Sector

Jacob White: Primary Article Contributor and Analyst following Peru

Rebecca Yang: Primary Article Contributor and Analyst following Peru

Roann Enriquez: Article Researcher following Peru 

Mehek Noorani: Article Researcher following Peru 

Alexa Bran: Article Researcher, Editor and Team Leader following Peru

Key words: China, Peru, China-Peru, APEC, WTO, Latin America, energy resources, energy resource investment, Chinese-Peruvian relations

Definition: Asia-Pacific Economic Cooperation (APEC)—a forum in which 21 Pacific Rim economies (including Canada, the United States, China and Peru) promote free trade amongst member economies. Meetings with leaders of member economies take place annually and are hosted by one of the member economies. Peru hosted the 2016 meeting.

The theme of the 2016 Asia-Pacific Economic Cooperation Summit (APEC) in Lima, Peru was "Quality Growth and Human Development." Peru, as the host, wanted to impress the other APEC members and ultimately become an APEC chair member. Peru's objectives as a member of APEC  is to consolidate[1]  Peru as the leading production and logistics hub between Asia and Latin America,[2]  as well as deepen trade and investment relations between Peru and other APEC economies. As Peru attempts to increase its influence amongst APEC members, they will inevitably court further energy resource investment from China or North American countries. The results of the summit may indicate the future of energy resource investment in Peru. [3] 

The results of the APEC summit were agreements on many important issues, [4] such as the challenges of a free market, environmental concerns, functional connectivity in the region and accepting the actions of the World Trade Organization (WTO). The Summit concurred that APEC members must accept the work done by the WTO in expediting the movement and security clearance of goods. Further eradicating barriers to free trade will result in larger investments. [5] APEC members have pledged to reduce tariffs, increase regional trade agreements, increase foreign investment and decrease protectionist and trade distorting measures until 2020. In regard to energy resource investment, the APEC members confirmed their commitment to double renewable energy by 2030.

Following the APEC summit,[6]  the relationship between Peru and China remains[7]  promising and is growing positively. China has been investing in the Peruvian energy sector since the 1990s.[8]  Though North[9]  American countries are looking to invest, China has the upper hand as it has already created a strong relationship with Peru. [10] 

Since China’s first direct investment in Peru’s mining industry in 1992, China has made efforts[11]  to replace the United States as Peru’s largest trading partner. In 2004, Peru granted China market economy status, catalyzing further Chinese investment in Peru’s industries, [12] primarily in the mining sector. Diplomatic and economic relations between the two countries were further strengthened with the Peru-China Free Trade Agreement in 2009,[13]  as well as 11 other bilateral agreements since that time.

The impacts of these ties can be seen with the Chinese National Petroleum Company (CNPC) purchasing Peru’s holdings in Petrobras, giving China control of over 40% of Peru’s hydrocarbon production. The more recent investment in the Toromocho copper project and the purchase of Las Bambas by MMG, a company backed by China’s Minmetals is expected to increase copper production and “contribute to at least a full point to Peru’s gross domestic product (GDP).”

Bilateral relations between these two economies are strategic and have generated $16 billion of trade in 2015. Furthermore, it is not only Peru’s mining sector that is a source of collaboration between the two countries. Peru hopes to tap into China’s tourism market with the expectation that this would increase the number of visitors to Peru[14]  ten-fold. E-commerce relations are being enhanced, as Peruvian companies enter the market with Chinese partners.

China’s influence on Peru is not limited to the economy. Culturally, China is spreading its influence by establishing Confucius Institutes, where Mandarin and China’s culture is taught to locals. Investments from China can also have the potential to politically influence policies, as left and right wing political leaders exhibit a strong desire to partner with China to maintain sustainable trade relations.

It is apparent that Peru-China relations are extensive. However, the main concern is over the [15] extent of the influence of this partnership, as well as where other foreign investment can succeed in Peru’s Chinese-dominated industries. These concerns are reflected by China’s investment in Latin American Countries (LAC). This is controversial as it may result in social and environmental problems. [16] From 2005-2014, 70% of China’s loans to Latin America went to develop infrastructure and energy projects. Many of these projects were plagued by [17] environmental disputes and[18]  labour controversies, among[19]  other issues. If China becomes the primary source of income for Latin American countries, such as Peru, their influence may become problematic for other countries looking to invest[20] .

Venezuela is a country with one of the largest oil reserves in the world, and wholly[21]  dependent on credit and investment from Chinese oil companies. Venezuela’s public funding comes primarily from its oil exports. As a result of the world economic crisis in 2008, Venezuela’s natural resources were greatly exploited because Chinese banks were determined to recuperate the loans through Venezuela’s resource commodities. China has also taken measures to further secure their commodities in Latin America through the building of the Nicaraguan Canal. This will mean that shipment security will be provided by the Nicaraguan government, and that US military will not have control in this zone by 2020. However, LAC have expressed concern over these mass investments by China, as governments fear that their economies will be restricted to their agricultural and mining industries to satisfy China’s demand. Optimists, on the other hand, believe that China will be an open door to globalizing the economies in LAC.

With the strengthening of Peru-China relations, foreign investors will need to account for China’s omnipresence in Peru’s economy. Investors will need to be cognizant of how to strategically differentiate themselves and their consumers so as to[22]  stand out from their Chinese counterparts. Diversifying their investment portfolio through innovative technologies and strategies will be important when investing Peru and its industries, where China will remain a long-term partner.