This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 06 BRASILIA 002367 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON PREL ETRD EINV EAGR PHUM
SUBJECT: CHINESE ECONOMIC INVOLVEMENT IN BRAZIL -- LARGELY 
TRADE-DRIVEN 
 
REF: A) STATE 138041 
B) 04 BRASILIA 1185 
C) 04 BRASILIA 2885 
D) 04 SAO PAULO 1659 
E) 04 RIO DE JANEIRO 1772 
F) Brasilia 0212 
G) SAO PAULO 0324 
H) BRASILIA 2295 
I) BRASILIA 2317 
 
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED -- PLEASE PROTECT 
ACCORDINGLY 
 
¶1. (SBU) Summary: China's involvement in Brazil's economy 
primarily is trade-driven.  Despite the fanfare and the 
billion dollar-price-tag investment projects trumpeted 
during President Hu Jintao's November 11, 2004 visit to 
Brazil, Chinese investment remains a tiny fraction of FDI in 
Brazil.  By contrast, the trade relationship is much more 
robust, although not without tensions.  China consumed 
between 5% and 6.2% of Brazilian exports in the last three 
years and provided between 4.4% and 6.6% of Brazilian 
imports during the same period.  While the trade balance in 
2003 and 2004 heavily favored Brazil, Chinese imports 
increasingly are closing the gap.  Growth in imports of 
Chinese shoes, textiles and toys, for example, have sparked 
calls for restraints on Chinese imports and resurrected 
fears over the concession of market status to China during 
Hu's visit.  This, combined with China's opposition to 
Brazil's bid for a permanent UN Security Council seat, has 
dulled the luster somewhat of the "strategic partnership" 
the Lula administration has sought to establish with China. 
End Summary. 
 
¶2. (SBU) Background: This cable responds to ref A tasking 
for information on China's involvement in Brazil.  Refs H 
and I covered environmental and political aspects, 
respectively, of the Brazil-China relationship.  This cable 
examines the economic relationship. 
 
Euphoria Fades with Shrinking Trade Surplus 
------------------------------------------- 
 
¶3. (SBU) While geopolitical objectives, such as obtaining a 
seat on the UN Security Council, underlie Brazil's policy of 
seeking a "strategic partnership" with China, a boom in 
Brazil's exports to China in 2003 and 2004 and the 
expectation of substantial Chinese investment in 
infrastructure projects in Brazil provided the Lula 
administration with additional economic rational for 
actively courting the Asian giant.  China's persistently 
high growth rates and seemingly insatiable demand for inputs 
to feed that growth fueled images of China as a key partner 
within the Lula administration's overall strategy of export 
led growth and greater financial stability through export 
led current account surpluses.  China has also been a key 
ally for Brazil within the G-20 group of countries, which is 
pressing for agricultural trade reform within the WTO Doha 
Development Agenda negotiations. 
 
¶4. (SBU) A surge in Brazilian exports to China in 2003 
provided a favorable backdrop for President Lula's trip to 
Beijing in May 2004, during which President's Lula and Hu 
discussed the possibility of pursuing Mercosul-China free 
trade negotiations.  Amidst rising expectations of a 
growing, advantageous trade and investment relationship, 
President Lula rolled out the red carpet for President Hu 
during a reciprocal 5-day state visit to Brazil the 
following November (ref C).  At the time, President Lula 
predicted that trade with China would double within three 
years, to reach $10 billion.  However, talks did not go as 
the GoB planned, with President Hu leaving with the prize of 
"market economy" recognition, while avoiding a clear 
endorsement for Brazil's bid for a permanent UN Security 
Council seat. 
 
¶5. (SBU) As the "Economist" noted recently, the initial 
euphoria in Brazil over a strategic partnership with China 
appears to be giving way to disappointment, and in some 
quarters, anger and fear.  While Chinese officials have 
characterized Brazilian and Chinese economies (and trade) as 
"complementary," local analysts and commentators lament 
Brazil's role as commodity supplier to China while the trade 
flow in the opposite direction consists mainly of 
manufactured and semi-manufactured goods.  Considerable blow- 
back from the Brazilian private sector has put the Mercosul- 
China trade negotiations project on the GoB backburner, with 
no date being set for completion of even the terms of 
reference for a feasibility study.  Brazil's agricultural 
community still smarts over China's rejection of soybean 
shipments costing millions last year on dubious 
phytosanitary grounds.  Stung by the GoB's acceptance of 
China's demand for market economy recognition, and fearful 
of rising Chinese imports, Brazil's private sector has been 
clamoring for a more circumspect approach by the GoB to 
commercial relations with China (refs D, F and G). 
 
¶6. (SBU) With China's opposition to the G-4 proposal on UN 
Security Council expansion and Brazil's shrinking trade 
surplus with China, calls to reevaluate the bilateral trade 
relationship appear to be gaining traction within the GoB. 
Registering "disappointment" with China's position on 
Brazil's bid for a UN Security Council seat, Foreign 
Minister Amorim recently told the press a decision to renege 
on Brazil's promise to recognize China as a market economy 
could only be taken at the presidential level.  Nonetheless, 
the GoB has already put "on-hold" promulgation of the 
relevant implementing regulations. 
 
¶7. (SBU) In response to private sector concerns, the GoB is 
also considering measures to restrict rising Chinese imports 
of textiles and apparel, shoes, machinery, toys, and optical 
lenses.  While China has suggested the possibility of 
negotiating voluntary export restraints during the upcoming 
visit to Beijing of Minister of Development, Industry and 
Trade Furlan, the GoB claims the application of safeguards 
is a "parallel" process.  Minister Furlan himself has stated 
that a decree to permit safeguards against certain Chinese 
products will be finalized prior to his departure for China 
on September 15.  An agreement with Argentina in August to 
share information on Chinese imports, presumably for better 
policy coordination, also appears designed to strengthen 
Brazil's hand in managing its trade relationship with China. 
 
¶8. (SBU) When, and under what circumstances, safeguards 
would actually be imposed, however, remains an open 
question.  Recently, Foreign Ministry trade experts told a 
visiting U.S. Congressional staff delegation that surges in 
Chinese imports only appear to be taking place in certain 
subcategories of textiles and footwear -- and not across the 
broad range of such goods.   The textile and apparel sector, 
which absorbed a 47 percent increase in Chinese imports from 
January through July of this year, claims problems are 
particularly acute for polyester cloth, women's synthetic 
material sweatpants and men's cotton sweatpants.  For shoes, 
problem products include cloth sneakers, shoes made from 
synthetic material and some types of men's leather shoes. 
Under the machinery heading, protection is being sought for 
plastic injection machines. 
 
¶9. (SBU) All in all, China will no doubt remain one of 
Brazil's top export markets and an important trade partner 
for Brazil for the foreseeable future.  However, the GoB's 
expectations regarding this relationship appear to be 
undergoing an adjustment to reflect a more realistic 
assessment of related national interests and policies. 
 
Trade Statistics 
------------------ 
 
¶10. (SBU) In the late 1990s, two-way trade between Brazil 
and China was relatively balanced and hovered around $2.2 
billion (see statistics below), except for a disruption in 
late 1998/199 due to Brazilian financial difficulties. 
After recovering in 2000 to previous trade levels, Brazil's 
exports to China took off, pulling up two-way trade figures. 
By 2002, total trade between the two countries had almost 
doubled to $4.1 billion, fueled by a 132 percent increase in 
Brazil's exports to China over the two-year period.  A 
further 86 percent leap in Brazilian exports in 2003 bumped 
two-way trade up to $6.7 billion making China Brazil's 
fourth largest export destination and overall trading 
partner.  Brazil's trade surplus with China in 2003 stood at 
a record $2.4 billion. 
 
¶11. (U) Although overall trade has continued to grow, and 
China now stands as Brazil's third largest export market 
(fourth if the EU is considered as a bloc), 2004 was a 
turning point as growth in imports from China (73 percent) 
substantially outpaced growth of trade in the opposite 
direction (20 percent).  That trend has strengthened in 
2005; imports from China during the first seven months of 
the year increased by 47 percent compared to the same period 
in 2004, while exports to China increased by only 4 percent. 
As a result, Brazil's trade surplus with China through July 
2005 ($0.73 billion) is down by one-half from the same 
period the previous year.  Imports from China increased at a 
rate well above the average of 18 percent registered for 
Brazil's total imports for the first seven months of this 
year. 
 
¶12. (U) The composition of Brazil's exports to China is 
heavily weighted toward primary products with soybeans and 
iron ore together accounting for slightly more than half; 
China remains Brazil's number one export market for these 
products.  Other top exports to China include steel, crude 
oil, soybean oil, leather, chemical pastes from wood, and 
poultry.  In contrast, Brazil's imports from China tend to 
be manufactured or semi-manufactured products.  Top imports 
from China include cellular telephones and parts, computers 
and parts, liquid crystal devices, integrated circuits, 
cloth and certain chemicals. 
 
                  TABLE I 
          Brazil-China Overall Trade 
                (USD Million) 
                                     Surplus/ 
         Exports   Imports   Total   Deficit) 
         -------   -------   -----   -------- 
1995     1.204     1.042     2.246    0.162 
1996     1.114     1.133     2.247   (0.019) 
1997     1.088     1.166     2.254   (0.078) 
1998     0.905     1.034     1.939   (0.129) 
1999     0.676     0.865     1.541   (0.189) 
2000     1.085     1.222     2.307   (0.137) 
2001     1.902     1.328     3.230    0.574 
2002     2.520     1.554     4.074    0.966 
2003     4.533     2.147     6.668    2.386 
2004     5.440     3.711     9.151    1.729 
2004(1)  3.352     1.871     5.223    1.481 
2005(1)  3.489     2.755     6.244    0.734 
 
(1) January through July. 
 
Source: Ministry of Development and Trade, AliceWeb database 
(http://aliceweb.mdic.gov.br). 
 
 
Steel and Steel Products 
------------------------ 
 
¶13. (U) Steel and steel product exports to China peaked in 
2003 reaching almost $730 million.  Although exports of 
these products fell by almost one-half in 2004, they still 
accounted for around 7 percent of Brazil's exports to China 
in value. 
 
                TABLE II 
          Steel Trade by Value 
          (Value - USD 1,000) 
 
          Exports     Imports 
          --------    ------- 
2000       27,665      5,931 
2001       46,342      4,474 
2002      128,720      4,651 
2003      729,558      4,593 
2004      367,535     12,160 
 
 
                TABLE II 
          Steel Trade by Volume 
        (Quantity - metric tons) 
           Exports     Imports 
          ----------   ------- 
2000         86,817    13,436 
2001        164,153     3,385 
2002        464,297     3,517 
2003      2,422,777     3,561 
2004        988,137     9,617 
 
Source: Brazilian Steel Institute Databook, 2001-2005. 
 
 
Iron Ore 
-------- 
 
¶14. (U) Trade in iron ore is one-way to China and has been 
growing substantially since 2000.  In 2004, iron ore exports 
accounted for 20 percent of Brazil's exports to China. 
 
              TABLE IV 
          Iron Ore Exports 
             (USD 1,000) 
          ----------------- 
1996            43,648 
1997           179,432 
1998           440,876 
1999           241,177 
2000           271,192 
2001           482,633 
2002           597,225 
2003           764,857 
2004         1,114,956 
2005(1)        809,688 
 
(1) January through July. 
 
Source: Ministry of Development and Trade, AliceWeb database 
(http://aliceweb.mdic.gov.br). 
 
 
Energy 
------ 
 
¶15. (U) Bilateral trade in liquid natural gas and coal has 
been minimal.  However, Compania Vale do Rio Doce (CVRD), 
the world's top iron ore mining company, reportedly is 
studying the use of coal to supply its energy needs after 
experiencing problems obtaining environmental permits for 
hydroelectric power projects; CVRD could import coal from 
its coal project in China.  Brazilian exports of crude 
petroleum to China increased eight-fold in 2004 and in the 
first seven months of 2005 are already running 42 percent 
higher that exports for all of last year. 
 
                TABLE V 
      Crude Petroleum Exports 
           (Value-USD 1,000) 
        ------------------- 
2000            36,124 
2001            39,847 
2002                 0 
2003            22,266 
2004           178,338 
2005(1)        254,106 
 
(1) January through July. 
 
Source: Ministry of Development and Trade, AliceWeb database 
(http://aliceweb.mdic.gov.br). 
 
 
Timber and Timber Products (not including furniture) 
--------------------------------------------- ------- 
 
¶16. (U) Imports of timber and timber products from China are 
low and stable.  Brazilian exports of timber and timber 
products appear to have stabilized after increasing 56 
percent between 2002 and 2003. 
 
                TABLE VI 
          Timber Products Trade 
            (Value-USD 1,000) 
 
         Exports   Imports 
         --------  -------- 
1996       1,029   1,343 
1997       1,550   1,909 
1998       2,084   2,620 
1999       9,334   1,216 
2000      33,734   1,166 
2001      46,223   1,007 
2002      78,254   1,414 
2003     122,144   1,400 
2004     137,044   2,733 
2005(1)   74,746   1,193 
 
(1) January through July. 
 
Source: Ministry of Development and Trade, AliceWeb database 
(http://aliceweb.mdic.gov.br). 
 
 
Cement 
------ 
 
¶17. (U) Brazilian exports of cement to China are negligible. 
The value of Brazilian imports of cement from China remains 
low; after tripling in 2003, the level has remained 
relatively stable. 
 
             TABLE VII 
          Cement Imports 
            (USD 1,000) 
          --------------- 
1999            3 
2000            2 
2001            0 
2002           56 
2003          165 
2004          155 
2005(1)       106 
 
(1) January through July. 
 
Source: Ministry of Development and Trade, AliceWeb database 
(http://aliceweb.mdic.gov.br). 
 
 
Investment: Show me the Money 
----------------------------- 
 
¶18. (U) As the GoB does not track contracted investment, it 
is difficult to get a firm picture of China's investment 
plans in Brazil.  Based on published accounts, six 
commercial agreements were discussed during Hu's visit in 
November 2004 (ref C).  These included: 
 
1) A cooperation agreement between China's Eximbank and 
China Petrochemical Corporation (SINOPEC) and Brazil's 
Development Bank (BNDES) and Petrobras in a $1.3 billion 
Gasene project to run a gas pipeline from Rio de Janeiro to 
Bahia; 
2) An agreement between Companhia Vale do Rio Doce (CVRD) 
and Yongcheng Coal and Electricity and Shanghai Baosteel; 
3) A joint venture to produce alumina between CVRD and 
Aluminum Corporation of China; 
4) A joint venture between ZhuZhou Rolling Stock Works and 
Mitsui and the Metal Mechanic Consortium of Espirito Santo 
to produce rail cars; 
5) A basic accord between Electrobras, Companhia de Geracao 
Termica de Energia Electrica, Citic Group, and China 
Development Bank; and, 
6) Purchase of Chinese equipment by Cosipar, financed by the 
Import Bank of China. 
 
¶19. (U) The breathless headlines of the moment put the total 
value of these deals at over $10 billion (to be invested 
over several years).  Since most of these projects are joint 
ventures and we do not have breakdowns of the Chinese 
investment/financing commitments under each project, the 
actual level of expected/planned Chinese investment likely 
is significantly lower.  Brazilian Central Bank data on 
monthly Chinese investment flows in 2005 does not show a 
significant increase in Chinese direct investment since the 
Hu visit.  Based on flows through June 2005, Chinese 
investment is on a course to exceed $10 million for the year 
as a whole but this would still be below 2001-2004 average 
Chinese FDI of $14.4 million per year. 
 
Policy Support 
-------------- 
 
¶20. (SBU) The negotiation of the proposals and deals 
associated with the Hu visit had significant official PRC 
policy support and some offers of official PRC financing. 
The unique context of these proposals/deals, which were seen 
as deliverables for Hu's visit, makes it hazardous to 
generalize from these cases about the overall level of 
Chinese government policy support for Chinese investments in 
Brazil. 
                  (U) Table VIII 
        Chinese Direct Investment in Brazil 
 
Year                US$ Million    Percent of Total 
----                -----------    ---------------- 
 
1985 (Stock)               3.0     less than 0.1 
1995 (Stock)              27.9          0.67 
2000 (Stock)              37.7     less than 0.1 
2001 (Annual Flow)        28.1          0.13 
2002 (Annual Flow)         9.7     less than 0.1 
2003 (Annual Flow)        15.5          0.12 
2004 (Annual Flow)         4.4     less than 0.1 
2005 (Flow through June)   5.1     less than 0.1 
 
Source: Central Bank (1985, 1995 and 2000 stock data based 
on formal FDI survey; 2001-2005 flow data based on balance 
of payments data.) 
 
 
¶21. (SBU) While the pace of Chinese investment in Brazil 
undeniably has picked up since 2000, China remains a tiny 
player among foreign investors in Brazil, a country which 
has attracted an average of slightly over $20 billion in FDI 
every year since 1996 (and never less than $10 billion 
during that period).  Based on Central Bank data, it appears 
that Chinese investment as a percentage of total FDI in 
Brazil was at a peak in 1995 and has fallen since then. 
While the Central Bank data would not count as Chinese any 
Chinese capital that flowed through an offshore tax haven 
(e.g. Bahamas, Isle of Mann), GoB officials have told us 
they believe that much of the money that flows into Brazil 
from such offshore havens is repatriated Brazilian capital. 
We do not have hard data on Chinese portfolio investment 
flows, but based on our contacts in Brazilian financial 
markets, do not believe these flows to be significant. 
 
                     (U)  TABLE IX 
                   Chinese FDI in Brazil 
                   Distribution by Sector 
                       2000-2004 Flows 
                          (Percent) 
 
Wholesale 
  Commerce                 17.6 
 
Construction                4.3 
 
Mining                     37.0 
 
Manufacturing of: 
 
 - Plastics/Rubber          4.1 
 
 - Machinery/Equipment     23.0 
 
Others                     14.0 
 
 
Source: Central Bank Balance of Payments Data 
 
DANILOVICH