August 12, 2017 8:59 pm JST

Chinese companies expanding presence in Brazil

Government eager for infrastructure investment amid stagnating economy

NAOYUKI TOYAMA, Nikkei staff writer

Rio de Janeiro-Galeao International Airport. Major Chinese conglomerate HNA Group will buy a stake in the airport's management company. © Reuters

SAO PAULO -- Infrastructure investment by Chinese companies in Brazil is gathering steam as economic activity stagnates in the South American country.

HNA Group signed a deal in July to partially acquire the rights to manage Rio de Janeiro-Galeao International Airport, in the latest in a series of grid, port and other infrastructure purchases in Brazil by Chinese companies in recent years. The trend is expected to accelerate because Chinese companies are seen as possible buyers of many other infrastructure including water supply and sewage systems and oil-refining facilities.

HNA, a leading Chinese conglomerate, will purchase a 31% stake in the company that manages the Rio airport from Odebrecht, according to an announcement by the major Brazilian construction company which did not disclose the value of the sale.

The airport, refurbished for the 2016 Summer Olympics in the city, is the second busiest in the country. Among investors in the management company is the operator of Singapore Changi Airport.

Odebrecht decided to sell the stake as part of its asset-selling program to raise funds for the payment of a fine for its involvement in a graft scandal. The move has matched HNA's infrastructure-buying drive in Brazil.

Investment in Brazil by Chinese companies has centered on infrastructure in recent years. State Grid Corp. of China purchased Brazil's biggest electric power distributor in January. In April, local press reports said a Chinese state-run conglomerate was at the final stages of negotiations to buy Container Terminal of Paranagua, a container terminal operator at the major Brazilian port.

Recently announced acquisition deals by Chinese companies in the state of Rio de Janeiro alone total an estimated 32 billion reals ($10.23 billion), according to the Brazilian newspaper Globo. They include China National Nuclear Power's participation in a nuclear power plant and China National Petroleum Corp.'s acquisition of oil refining facilities from Brazil's state-run oil company Petrobras.

Investment offensives by Chinese companies are especially noticeable at a time when the Brazilian economy has contracted for the second year in a row.

Major telecommunications company China Mobile and telecom equipment maker ZTE have shown interest in leading Brazilian telecom service provider Oi, which went bankrupt in June last year. China Development Bank has reportedly begun studies to offer loans for a possible deal.

Oi wants to utilize Chinese capital to develop the proposed fifth-generation telecom standards. But continuing cutthroat competition in the Brazilian telecom market forced Oi to go bust with liabilities totaling 65.4 billion reals, the largest on record in the country. It is uncertain how the company will rebuild itself.

Corporate acquisitions by Chinese companies include many questionable deals. For example, the operator of the Rio de Janeiro airport is not financially healthy because of excessive investment.

Chinese companies are going for acquisitions "in disregard of profitability," said an executive at a major Japanese trading house.

Nevertheless, the presence of Chinese companies in Brazil has kept increasing due to the acceleration of their buying binge.

Foreign capital needed

The Brazilian government's strategy of grasping at any straw to attract foreign investment for the nation's economic recovery is acting as a spur for Chinese companies' investment offensive.

Brazil is considered unfriendly to foreign businesses because of its long-held protectionist policy. In recent years, however, the government has been pushing ahead with the privatization of public-sector entities and deregulation in a bid to attract foreign capital to the country.

The government kicked off procedures in mid-July to privatize the water supply and sewage bureau, in line with its policy of selling infrastructure to make up for falling tax revenue amid the economic slowdown.

Chinese companies are good customers for the government as they do not spend much time on assessing assets.

Investment in Brazil by Chinese companies totaled $8.4 billion in 2016, up 13% from the previous year, according to the China-Brazil Business Council.

The investment has been accelerating, amounting to more than $6.1 billion in the first six months of 2017, according to market research firm Dealogic.

While infrastructure purchases by Chinese companies provoke strong opposition from time to time, there has been little backlash in Brazil to date.

As the Brazilian economy falls further into a deplorable state, the local assessment of Chinese companies is favorable, because they take risks to invest in the country, a Globo reporter said.

Chinese-made automobiles and home appliances are unpopular in Brazil because they are widely regarded as inferior in quality. But Chinese companies are appreciated in infrastructure investment, partly because local people can see little difference in the quality of infrastructure, the reporter noted.

Asia300

China National Nuclear Power Co. Ltd.

China

Market(Ticker): SHG(601985)
Sector:
Industry:
Utilities
Electric Utilities
Market cap(USD): 17,786.37M
Shares: 15,565.42M
Asia300

China Mobile Ltd.

Hong Kong

Market(Ticker): HKG(941)
Sector:
Industry:
Communications
Wireless Telecommunications
Market cap(USD): 207,555.45M
Shares: 20,475.48M
Asia300

ZTE Corp.

China

Market(Ticker): HKG(763)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 18,755.05M
Shares: 4,190.01M

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