Dancing with a Dragon: What Big Chinese Investments Mean for Latin America

Jack Walsh

October, 2017

In 2013, the Nicaraguan government approved a 50-year concession to a Chinese consortium -  HKND Group - to finance and manage the construction of an interoceanic canal. This development is known as the Nicaragua Canal, extending 270km connecting the Caribbean Sea and Pacific Ocean.

This project would set a new precedent in the region. Presently, the state is home to the Panama Canal, which is 77km in length and also interoceanic. The Nicaragua Canal seeks to defy the Panama Canal as its plans expect it to be twice as deep and three times in length.

The development slices through virgin tropical forests, fragile ecosystems, and indigenous lands. The $50 billion (USD) project – theoretically the largest man-made displacement of land in history – involves a deep-water port in each ocean, an airport, two free trade zones, a railroad, a wet canal and a pipeline.  It has all the purported makings of an environmental catastrophe; threatening to uproot thousands, and would allow for the passage of the world’s largest vessels -  the length of Manhattan skyscrapers - that are currently forced to circumvent the continent.

Work officially began in 2014 on the country’s Pacific coast, in spite of intense opposition from environmentalists and human rights groups, Nicaraguan President Daniel Ortega would finally get his canal. Ortega has spearheaded support for such a project for nearly a decade, and optimistically predicted that it would both reduce dependency on foreign assistance and create hundreds of thousands of jobs, “eventually doubling the country’s gross domestic product”. Many Nicaraguans, tired of low wages and eager to build a brighter future, embraced the idea.

However, three years later, the Nicaragua Canal seems to be either paralyzed or nonexistent, and Ortega has avoided publicly discussing its status. There has been little evidence of Chinese investment, no land set aside for labor camps, and few signs of new developments.  The New York Times reported in April of 2016 that cows graze in the field where the head of HKND, billionaire Wang Jing, ceremoniously initiated construction.

Observers point to several factors behind the mega-project’s implosion. There are two primary notions; Wang lost 80% of his fortune when China’s stock markets tumbled in 2015, and the $5.25 billion planned expansion of the Panama Canal - doubling its shipping capacity.

Despite its failure, Nicaragua’s proposed canal is also indicative of a broader pattern of Latin American governments welcoming Chinese financing for flashy, expensive, and often environmentally destructive projects. Many of which never deliver promised results. 

China has become a major investor in the region, loaning over $120 billion to Latin American countries since 2005.  Unlike advances from the U.S., IMF, or the World Bank, the Chinese do not attach stringent policy conditions to their loans.  For developing states that face immense challenges securing international financing without simultaneously acceding to harsh and damaging austerity measures, the easy terms and big-ticket schemes dangled by Chinese investors have been a windfall in the short-term. 

Across the region, Chinese capital has bankrolled new roads, hospitals, and power plants, spurred economic growth, and given governments more leeway in meeting development goals.

For countries like Nicaragua, the second poorest in the Western Hemisphere, it can prove difficult and politically unappealing for leaders to reject mega-projects like HKND’s trans-isthmus canal.

However, it is also the case that China's financing and investment role in Latin America has predominately been centred either on natural resource industries in order to secure supply, or on related infrastructure to facilitate the movement of goods.  Ranging from a mega-refinery in Ecuador to a trans-continental railroad between Brazil and Peru. The mining, drilling, road construction and digging that has been triggered by access to Chinese wealth and investment. This makes it easier for oil, copper, soybeans, and other raw materials to end up in Chinese markets, and for Chinese exports to get shipped back the other way. 

Unlike their American and European counterparts, the Chinese firms that manage these projects operate under notoriously substandard parameters of transparency and environmental and social responsibility.

In welcoming these resource-based projects – often located in environmentally sensitive areas – Latin American countries ultimately risk surrendering their economic diversity and independence, limiting themselves to being global suppliers of primary products. 

Nicaragua may have just missed out on its share of China’s riches, but at the price of its greatest natural assets, it was never clear exactly how this exchange would lead to greater prosperity.