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TAGS: ETRD EINV EFIN PREL TBIO PE CH
 
SUBJECT: PERU-CHINA TRADE DIVERSIFIES, BUT INVESTMENT STRUGGLES 
 
¶1.  Summary: With a bilateral trade relationship growing stronger, 
the GOP is trying to attract increased Chinese investment to Peru. 
Since 2004, China has overtaken the United Kingdom and Chile to 
become Peru's second largest export market and second largest import 
market (behind the U.S.).  Peruvian trade with China is mostly 
focused on minerals exports, but recent figures for 2006 show 
agricultural exports to China increasing by more than 100 percent 
(year on year growth).  Trade Minister Mercedes Araoz has even 
floated the idea of a free trade agreement with China, but faces 
internal pressure from sectors such as textiles that complain from 
unfair competition. 
 
¶2.  Chinese foreign direct investment in Peru is still small 
compared to U.S. and European FDI in Peru, and it is concentrated in 
mining.  The single largest Chinese investment in Peru has been in 
an iron ore mine, but the project has been burdened by labor 
problems and operating losses.  Nevertheless, it is clear that 
despite those difficulties, China views Peru as an important 
investment destination, judging from a recent official tour of Peru 
by Chinese investors, publicity over recently-arrived Hong Kong bank 
HSBC and the announcement at the November 2006 Hanoi APEC summit of 
the PRC's official invitation to President Alan Garcia to visit 
China.  End Summary. 
 
MINIMAL CHINESE INVESTMENT 
-------------------------- 
 
¶3.  With $122.2 million in 2005, China's share of the $14 billion of 
Foreign direct investment in Peru was only 0.86 percent, far below 
U.S. and Spanish investments of over $4 billion each.  Despite this 
comparative difference, the Chinese have started to invest more 
significant amounts, mostly in the mining sector. 
 
PROFITS AND PROBLEMS AT IRON ORE MINE 
------------------------------------- 
 
¶4.  China's main investment in Peru is the Shougang Steel 
Corporation's 1992 purchase of an iron ore mine in central Peru. 
Shougang (formerly known as the Capital Iron And Steel Company) is 
one of China's oldest state-owned companies, and China's fourth 
largest steelmaker.  In 1992, Shougang paid $118 million for the 
state-run Steel Peru mine to create Shougang Steel Peru S.A.A, 
Peru's main iron ore producer.  Shougang Steel Peru's mining and 
processing plants are located in a desert area called Marcona (about 
250 miles south of Lima).  The company registered exports of $256 
million in 2006, an increase of more than 18 percent over 2005. 
 
¶5.  Despite these profits, Shougang Steel Peru has been plagued by 
strikes and worker unrest, and the conflict is frequently in the 
headlines.  The Chinese management's differences with labor unions 
and local politicians led recently to a five-month strike that began 
in June 2006.  The strike forced management to shut down production 
for several months.  It was settled in October 2006, and resulted in 
some improvement in equipment, working conditions and wages.  Actual 
losses were not published, but the media estimates that the company 
lost over $3 million in sales.  Observers familiar with the plant 
say the Chinese have made minimal actual investment in the plant's 
production or equipment since it took over. 
 
¶6.  The GOP has recently hosted two visiting Chinese business 
investment delegations, including one in November 18-25, focusing 
mostly on gold, coal, steel, and phosphate production, as well as in 
the construction, road, energy generation, plastics, real estate, 
chemical, computer, agricultural machinery, textile, and service 
industries.  The GOP has also established a Peru-China Business 
Committee to foster commercial and investment relations between the 
two countries.  This committee is made up of Peruvian companies such 
as Sociedad Agricola Drokasa (agriculture), Inca Tops (textiles), 
Corporacion Pesquera Inka (fishing), Sunshine Export, Banco 
Interbank (banking), among others. 
 
EXPORTS TO CHINA: FOCUSED ON MINERALS 
------------------------------------- 
 
¶7.  While the U.S. remains the main destination for Peruvian exports 
($5.2 billion in 2006), China is now the second largest export 
market for Peruvian products with exports to China totaling $2.2 
 
billion in 2006, an increase of more than 200 percent over $597 
million exported in 2002.  Minerals increased their share of total 
exports to China, growing to $1.5 billion in 2006 from $256 million 
in 2002.  Total Peruvian exports for 2006 were $23.4 billion. 
 
------------------------------------------- 
Top Six Peruvian Products Exported to China 
(in USD millions) 
------------------------------------------- 
Product             2005   2006   Percent Change 
--------------------------------------------- --- 
Copper Concentrates 502.7  926.9   84.4 
Fish Meal           585.5  427.8  -36.9 
Lead Concentrates   139.8  271.7   94.3 
Molybdenum          220.8  103.7  -112.9 
Petroleum Bitum Oil  17.0   99.7   486.5 
Iron Concentrates   142.1   86.2  -64.8 
(Source: Adex, SUNAT) 
 
¶8.  Exports to China are dominated by a few mining companies, among 
them Antamina Mining Company (33.96 percent of total exports) with 
$769 million, followed by Shougang Steel Peru (6.93 percent), 
Southern Peru Copper (6.08 percent), and BHP Billington Tintaya 
(4.59 percent). 
 
¶9.  While starting from a small base, Peru's agricultural exports to 
China have been showing impressive growth:  from $1.7 million in 
2005 to $4.6 million in 2006 (an increase of more than 170 percent). 
 The top five agro industrial export categories were processed 
seaweed (32.6 percent), grapes (24.4 percent), tara (tally stick 
18.7 percent), strawberries (6.8 percent), and canned tomatoes (4.9 
percent). 
 
IMPORTS FROM CHINA: TWENTY-FOLD GROWTH 
-------------------------------------- 
 
¶10.  Imports from China to Peru have shown astronomical growth, 
jumping from $41.6 million in 2002 to $910 million in August 2006. 
Products imported from China have moved from basic (artificial fiber 
textiles, toys, and dolls) to more sophisticated value-added ones, 
like electronics (televisions, telephones, and radios). 
 
------------------------------------- 
Peruvian Imports from China 2005-2006 
(in USD millions) 
------------------------------------- 
Product                       2005  2006 (to August) 
--------------------------------------------- ------- 
Machine Parts and Accessories 18.5  29.2 
Memory Units                  22.0  22.7 
Telephones                    21.3  22.5 
Radio Receptors               24.2  20.3 
Motorcycles                   21.5  20.0 
Other Input Output Units      15.7  18.6 
(Source: Adex, SUNAT) 
 
¶11.  The GOP has tried to promote increased trade with China, and in 
September 2006 Trade Minister Mercedes Araoz floated the idea of 
negotiating a free trade agreement with China.  This announcement 
was met with criticism by Peru's local textile sector.  Local 
textile companies are in fact lobbying to impose safeguards on 
textile imports from China.  In a recent safeguards action, INDECOPI 
(National Institute for Defense of Competition and Intellectual 
Property) ruled that no harm was caused to the local industry by 
Chinese textile imports.  In fact, INDECOPI noted that there 
actually was an increase in tax revenue for the government as well 
as an increase in employment because of Chinese imports. 
 
¶12. In April 2006, the Hong Kong-Shanghai Banking Corporation (HSBC 
Bank Peru S.A., the wholly owned subsidiary of HSBC Latin American 
Holdings (UK) Limited) received authorization by Peru's supervising 
body to start banking operations in Lima in October 2006. HSBC Peru 
officials said they would focus their activities on the corporate 
banking sector and local and international companies with a level of 
sales superior to US$ 20 million, as well as some commercial 
banking.  At a recent event, the bankQs management said HSBC was 
bullish on the economic outlook of the Peruvian economy and its 
prospects for long-term growth. 
 
THE ROAD AHEAD 
-------------- 
 
¶13.  Despite Shougang's difficulties and the bad press these have 
given China here, the trade and investment relationship continues to 
strengthen.  The increase in non-mineral exports is encouraging 
Peru's counter-cyclical agricultural exporters of fruits and 
vegetables.  While minerals still fetch top dollar in China, the 
GOP, according to Juan Carlos Rios, Peru's Commercial Counselor 
based in Beijing, is encouraging Peru's exporters to focus on 
satisfying Chinese domestic demand with more value-added products in 
the areas of agriculture, fishing, textiles, and mining, and 
focusing on quality rather than volume.  With the GOP preparing to 
host APEC in 2008, we expect even greater interest from Beijing in 
the rapidly expanding Peruvian economy. 
STRUBLE