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Tuesday, 27 November 2018 11:19

Handle with care

Chinese investors have ploughed $10 trillion into the Latin American economy, and the flow of money is set to continue, but law firms must learn how best to serve clients from the Far East if they want to capitalise on this opportunity

latamdec18 p14 photoWith Chinese investment pouring into Latin America, there is plenty of work available for the savviest lawyers who are able to sniff out a business opportunity. However, making the most of such opportunities is not always straightforward. Lawyers have learnt from experience that the best strategy often involves engaging with Chinese investors’ lawyers, rather than communicating directly with Chinese executives, for example. Meanwhile, some lawyers argue that it is in Chinese investors’ best interests to hire the best local lawyers in Latin America, rather than the cheapest, because as one partner succinctly puts it “cheap turns out to be expensive”.

China is now one of the major cogs in the Latin America’s economy, with the region now being the second-largest regional recipient of Chinese investment, according to China’s foreign minister Wang Yi. Indeed, China is now the largest trading partner of Brazil, Chile and Peru. Major Chinese investments made in Latin America this year included Chinalco’s $1.3 billion expansion of the Toromocho copper mine in Peru, Three Gorges Group’s $240 million acquisition of Chilean company Atiaia Energía (which is responsible for the Rucalhue hydroelectric project) from Brazil’s Cornélio Brennand Group, and Three Gorges’ $1.4 billion purchase of concessions to operate two of Brazil’s largest hydroelectric dams.

Meanwhile, other major deals in 2018 have seen China’s Southern Power Grid buy a 27.7 per cent stake in Chile’s largest electricity transmission system, Transelec, for $1.3 billion, and Chinese ride-hailing service Didi Shuxing buy its Brazilian counterpart 99 Taxis for an undisclosed amount, following a $100 million investment in the company in 2017.

However, while Chinese investment and loans will help a region that consists of many countries striving to procure financing and build infrastructure to meet the demands of their growing populations, while also increasing exploitation of resources such as minerals and oil, such investment is creating a number of significant challenges for law firms. “China is currently Brazil’s largest foreign trade partner, and in recent years, China-based companies have invested massively in acquiring brownfield and greenfield projects in Brazil, taking advantage of the severe recession and economic downturn experienced by the country and therefore benefiting from less competition and more attractive investment conditions,” says Fernando Meira, a partner at Pinheiro Neto Advogados in São Paulo. “In terms of opportunities for law firms, Chinese clients have demonstrated they are long-term investors, rather than short-term speculators, and they are therefore generally interested in pursuing opportunities that are not yet matured, and which require significant further investment,” he says. It means Chinese investors tend to be more resilient to the natural ups and downs of economic cycles and political risks, according to Meira. “This long-term view, coupled with the fact that they have virtually unlimited access to liquidity, makes them very active players.”

Chinese clients may not necessarily have much experience of investing in Brazil, and this gives lawyers the opportunity to earn the role of “trusted adviser”, Meira argues.

“The cultural differences trigger a need for them to invest time in understanding the nuances and learning how to do business in Brazil, which in some areas, like labour and tax, is still very complex, and sometimes dysfunctional,” he says. “For instance, the vast number of tax and labour lawsuits that Brazilian companies are generally involved in requires time for one to understand the underlying reason – this education process represents a great opportunity for law firms to develop a trusted adviser relationship.”

Sergio Díez, partner and head of the Asia-Pacific desk at Chilean law firm Cariola Díez Pérez-Cotapos, recommends that local lawyers in Latin America engage with the lawyers of Chinese investors, rather than directly with Chinese executives, “to make the process simpler for everybody”. He also recommends that Chinese investors hire the best local lawyers in Latin America, and not simply the cheapest, “because the cheap turns out to be expensive”. In addition, Díez also suggests that Chinese investors need to “do things ‘by the book,’ as creativity in competitive processes is not welcomed”.

Meira identifies communication as one of the major challenges in dealing with Chinese clients. “Experience shows that communication tends to be a big obstacle,” he says. “The younger generations are more fluent in English, but the actual decision makers, who tend to be older, have greater difficulties, and we often host meetings with translators.” Meira adds: “The cultural differences also play an important role in how negotiations are carried out. Culturally, Chinese people tend to listen more and talk less and are also very formal. But over time I think that cultural barriers will be softened and the gaps will be narrowed.”

Chinese investors are pumping money into a wider range of industry sectors in Latin America. Alberto Cardemil, partner at Chilean law firm Carey, says: “China has invested some $10 trillion in the region, and while at the beginning investment was concentrated in traditional sectors of the economy such as mining, energy and infrastructure, now we are seeing it move into agro-industry, food and beverages, banking and finance, telecommunications, renewable energy and automotive, among others.” Cardemil adds that, while around 80 per cent of the investment has so far come from state-owned firms, there is growing interest from private companies.”
However, the issue for Chinese investors, and their legal advisers, is that they tend to take more time to make investment decisions and as a result that they can ultimately lose out to other international investors, some lawyers argue. Meanwhile, a number of lawyers also bemoan the fact that they often find themselves providing advice for free at the outset, and this means firms may be inclined to prefer to work with clients from other jurisdictions. “Another challenge is the use of alternative communications mechanisms, such as WeChat, which makes counselling the client difficult - coupled with a sudden loss of communication prior to or during the counselling process, a lack of knowledge of the market, and less sophistication on behalf of the client, this can lead to misunderstandings,” says Ignacio Tornero, associate at Carey in Chile.

Juan Paulo Bambach, partner at Philippi Prietocarrizosa Ferrero DU & Uría (PPU) in Santiago argues that Chinese investors should investment in projects at an earlier stage, particularly when it comes to natural resources, which is a sector that has proved particularly attractive to Chinese investors, along with agro-industry and raw materials.

“Chinese investors have traditionally snubbed investment in the early stages of projects, but there is a big opportunity, and economic benefits, in entering at an early stage and actively contributing to development, especially in mining, where Chinese capital, as well as their experience in exploration, prospection and pre-feasibility phases, would be welcome,” he says. “Getting in early, despite the greater risk, improves their access to greater opportunities, and would allow for a greater Chinese contribution to technology, technical services and consultation, suppliers and physical assets, as well as financing,” Bambach says.

Mitigating the impact of Brexit
In addition to opportunities in mining, infrastructure, and energy, Chinese investors are also looking to Latin America to mitigate the impact of Brexit, the renegotiated North American Free Trade Agreement, and the US’ imposition of tariffs on Chinese goods, on their supply chains or manufacturing operations, says Sergio Moreno, manager for indirect tax and global trade at Ernst & Young in Miami. “In the face of these recent events, the main challenge traders and investors face is the uncertainty of not knowing what will disrupt their planning,” he says. However, the signing of the US-Mexico-Canada Agreement (USMCA) and the continued expansion of free trade agreement networks throughout Latin America could bring confidence to Chinese investors, Moreno adds. “There are many opportunities in the region that can provide benefits to trade operators and investors, including the use of special programmes such as free trade zones in Mexico, and this may help limit the impact of US tariffs,” he says.
Chinese investment in Latin America is growing despite significant obstacles, such as distance, cultural differences, legal uncertainty in some markets, and exchange rate fluctuations, according to Adolfo Pineda, a partner at law firm BLP in Honduras. That said, Pineda says events in Venezuela has deterred Chinese investors from doing deals in the country.

There are some clouds on the horizon. Pineda says Latin American governments do not offer sufficient incentives for Chinese companies to invest in their economies, while returns on investment are generally slower in Latin America than in China, He adds that, with reference to sectors such as renewable energy, the lower cost of components in China, coupled with the fact that Chinese manufacturers can benefit from lower labour costs at home, means domestic investment is often a more attractive option.

Yet there are also reasons for optimism. Pineda points out that Beijing is seeking to create a new ‘silk road’ by investing more in Latin America to allow for China’s worldwide trade expansion. And herein lies a massive opportunity for legal advisers. Pineda says: “One of the biggest attractions of Latin America for Chinese investors is Panama, as it allows for the distribution of Chinese products to Europe, the US and Latin America.” Those firms that effectively adapt to the unique requirements of Chinese investors are sure to experience ever-increasing demand for their services.