WP/21/160 Chinese Investment in Latin America: Sectoral Complementarity and the Impact of China’s Rebalancing by Ding Ding, Fabio Di Vittorio, Ana Lariau and Yue Zhou IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2 © 2021 In ternatio na l Mon eta ry Fund WP/21/160IMF Working Paper Western Hemisphere Department Chinese Investment in Latin America: Sectoral Complementarity and the Impact of China’s Rebalancing Prepared by Ding Ding, Fabio Di Vittorio, Ana Lariau and Yue Zhou1 Authorized for distribution by Krishna Srinivasan June 2021 Abstract Over the last decade China’s investment in Latin America and the Caribbean (LAC) has increased substantially in volume and become more diversified from natural resources to other industries. Using cross-border mergers and acquisitions data, we demonstrate that since mid-2010s China’s overseas investment has tilted toward sectors where China has a comparative advantage in the global markets, a trend similar to that of other major f oreign direct investment (FDI) source countries. Moreover, China’s rising overseas investment can be linked to the rebalancing of Chinese economy, and LAC stands to benefit from its complementarity vis-à-vis China in sectors where the rising Chinese overseas investment can be met with LAC’s own investment gaps. The COVID-19 pandemic could have a long-lasting impact on global value chains and FDI flows, which poses both challenges and opportunities to LAC in attracting FDI, including from China, to support the region’s long-run economic development. JEL Classif ication Numbers: F21, F23, G34 1 The authors are grateful for the comments from Diego Cerdeiro, Rishi Goyal, Weicheng Lian, Jorge Roldos, Krishna Sriniva san and participants of the IMF Western Hemisphere Department (WHD) seminar. All errors of th e p a per a re o f th e authors. IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 3 Keywords: Foreign Direct Investment, Mergers and Acquisitions, China’s Rebalancing, Latin America and the Caribbean Authors’ E-Mail Addresses: DDing@imf .org; FDiVittorio@imf .org; ALariauBolentini@imf.org; yzhou14@worldbank.org. 4 I. INTRODUCTION The surge in China’s capital exports to the rest of the world since the turn of the century h a s transf ormed the international f inancial landscape. Once the world’s largest destination of FDI, China has emerged as an important source of international financing especially for developing countries that have traditionally relied on capital f rom the Western world. China’s rising overseas investment, while welcomed by the recipient countries, has also been met with suspicions that the investment surge might be driven by China’s geopolitical objectives more than commercial interests, and the lack of data transparency could add to debt distress concerns of so me recipient countries (e.g., Hurley et al. 2018; Horn et al. 2019; O’Connor 2019). In this paper we zero in on China’s investment in Latin America and the Caribbean (LAC), a region that has traditionally received FDI mostly from the advanced economies. Over the last two decades, China has shown a growing interest to strengthen its economic and financial linkages with LAC, first through trade and then followed by investment.2 When considered as a whole, the percentage of LAC’s exports to China of its total exports increased from 1.3 percent in 2000 to 14.5 percent in 2020. The stock of Chinese investment in LAC as a share of China’s total overseas investment stock, after remaining stable for most of the early 2000s, increased from 12 percent in 2014 to a peak of 21.4 percent in 2017. As China ramps up its investment in LAC, the composition of the investment also experienced a major transformation in the last decade. Once heavily concentrated in f ossil fuels, metals, agriculture and other natural resources, Chinese investment in LAC has increasingly tilted towards manufacturing and services industries such as transport, electricity, financial services and information and communication technology (ICT).3 The electricity generation and distribution sector, in particular, has beco me a major target of Chinese investment, with more than a dozen acquisition d eals across LAC with an average size over US$1 billion. Not even the intensification of the U.S.-China trade frictions could dampen China’s investment spree in this area. In October 2019, the State Grid Company of China purchased Chiquinta Energia, the third largest electricity distributor in Chile, f or