The Chinese offensive in Chile generates the first alerts

If the Chinese state company State Grid International Development Limited (SGIDL) materializes the purchase of CGE, in US $ 3 billion, announced last week, it will become the largest player in the Chilean electricity distribution sector, with more than half of the clients. The same company bought Chilquinta a year ago, for US $ 2,230 million. And so he is on his way to being the biggest player in the industry.

The State Grid bet is not isolated. Many other companies of Chinese origin have entered Chile in recent years. And in many other Latin American countries. The trend is not stopping. And it will continue. In official records, the United States, Spain and Canada retain the largest investment stock in Chile, with more than US $ 30 billion each, so the presence of China is still “very far from the presence of other countries in our economy, ”recalls Foreign Minister Andrés Allamand. But its increase, he adds, is something natural: China is today, just 50 years after establishing diplomatic relations with Chile, the largest trading partner. In October, 42.5% of Chilean exports went to that country.

The same official Chilean records show the change in foreign direct investment: Chinese capital added US $ 4,852 million in 2019, well above Canada (US $ 2,866 million) and the United States (US $ 2,790 million). This year something similar will happen. “Despite the pandemic, five new projects from China have been added to our portfolio, adding 27 initiatives for US $ 4.47 billion at the end of the first half of 2020,” explains Alicia Zhu, head of the China Desk at InvestChile, the state agency Chilean foreign promotion.

The official Chilean position is to salute this trend, congratulate foreign capital. Both Allamand and the Minister of Economy, Lucas Palacios, say it. “We welcome foreign investment that comes to the country, because we need it for its contribution to job creation, the arrival of new technologies and for its opportunities for SME suppliers,” says Palacios.

The least official already accumulates some resentments that begin to grow along with the expansion of the interests of the Asian giant in Chile. The concern has two variants. The first is concern for the electricity sector. The second has other connotations: the power that a single country acquires in the Chilean economy.

Senator RN Rodrigo Galilea raised it this week to a large part of his party’s bench of senators and commented informally to some government authorities who ran into Congress: the purchase of CGE, which will be sold by the Spanish Naturgy, must be looked at carefully. Thus he sums up his concern: “It is totally inadvisable for a state company, from any country, to be the owner of Chilean companies that are monopolies regulated by the state,” says the senator for the Maule region, the area where CGE operates. Galilea refers to the effects on the tariff negotiations of sectors such as electricity, drinking water and telecommunications. And that their concern is independent of the nationality of the investor. “When your counterpart is a company that belongs to a State, it does not cost anything for that country to send its ambassador to ask for better rate conditions,” he exemplifies.

The specific operation will be analyzed by the National Economic Prosecutor’s Office and it already has a critic in sight. The former executive vice president of Corfo, Eduardo Bitran, warns that the State Grid operation will produce a dangerous horizontal integration that is prohibited in the health sector and that, given the presence of other Chinese state-owned companies in transmission and generation, it could also include the prohibition of vertical integration.

Those warnings do not upset, at least in public, the government authorities. “Chile has extremely robust legislation and institutions, with rules that govern both local and foreign companies. This legal framework protects the proper development of the different economic activities, which are subject to our regulations in defense of the interests of our country, ”says Lucas Palacios. Minister Allamand also responds to the specific case. “In the specific case of this investment, it must be considered that it is a highly regulated sector, where each company operates only in its concession area. The State sets the rates and closely monitors that all regulations are met ”.

Added to the concern about the concentration in the electricity sector is an incipient concern about the Chinese presence in strategic sectors of the economy. It is not, all those consulted for this report clarify, a resentment with a specific nationality, but with a specific ecosystem, with companies that are mostly part of the same business group: the Chinese State. The former national economic prosecutor, Felipe Irarrázabal, recalls that the United States has prohibited, without expression of cause and protected by national security reasons, some acquisitions of foreigners.

Senator Galilea recalls that Australia has clashed harshly with China over business matters; that the UK decided to exclude Huawei from the rollout of its 5G network; or that the United States limited the expansion of Tik Tok in its territory.

Mechanisms to restrict the access of foreign capital or states in certain activities exist in several countries such as the United States, Australia and New Zealand and some government officials admit that Chile is studying, incipiently, applying some specific filters for future specific operations. Consulted on the subject by PULSO Domingo, Minister Allamand carefully chooses his words: “Chile has long-term State policies where we have always reaffirmed our commitment to an open and non-discriminatory economy. There are countries that effectively limit foreign investment in certain areas. In any case, we pay attention to the regulations and reasons that other countries adopt in this matter. Finally, Chile has an institutional framework to ensure free competition ”.

The former Chilean ambassador to China between 2014 and 2017, Jorge Heine, finds the “sudden concern about the ownership of energy infrastructure” curious. It says: “The electricity sector in Chile was originally developed largely by the Chilean State. It was privatized during the military government and then those same private companies sold the companies abroad, making huge profits. When that happened, no one objected or invoked its strategic character, but was applauded wildly. Now that Chinese companies invest in the sector, a strange concern arises ”.

The Chinese embassy, ​​whose head Xu Bu, left the legation in Santiago, responded to PULSO Domingo for all these matters in a concise and general way, recalling that they are the largest export market in Chile and, for 10 consecutive years, the main origin of Chilean imports. “Investment cooperation is an important part of China-Chile economic and trade cooperation. Chile’s level of economic development is high among Latin American countries, and its market is mature, stable and with a high degree of openness, which is why it has become an important destination for investments by Chinese companies in Latin America ”, the Chinese embassy in Santiago responded.

SGIDL, the likely future owner of CGE, is part of the Chinese state company State Grid Corporation of China, a firm that already has an indirect stake in Chile in Transemel and Electrogas. In addition to SGIDL, other Chinese state companies have direct or indirect interests in other Chilean electricity companies, such as Transelec or Pacific Hydro (see infographic). In other sectors, such as infrastructure, there are other state-owned companies from the Asian giant present in Chile, such as China Railway Construction Corp. Limited and China Communications Construction Company Limited.

Chinese SOEs are controlled by a single entity, the State-owned Assets Supervision and Administration Commission (SASAC), a ministerial-level entity of the People’s Republic of China and subordinate to the State Council. It has supervisory and administrative powers over its companies, with the exception of financial firms, such as banks.

Every five years, SASAC draws up its strategic development plans and decides in which areas and markets they are going to invest in order to supply the country with inputs and services, in addition to looking for good business from a financial and influence point of view. can exercise China.

SASAC controls 96 State-Owned Enterprises (SOE) in key industries such as mining, energy, telecommunications, transportation, infrastructure, or agribusiness.

In the report prepared by the FNE on the acquisition of Chilquinta, the buyer stated that SASAC did not interfere in the day-to-day operations of State Grid, but that it would have a passive investor role and that the firm would enjoy full independence. Despite this, SASAC has the power to appoint senior executives of the companies it controls.

Many of the state entities have been privatized in recent years, generating the companies known as “red chips”, through public openings in some related jurisdiction, such as Hong Kong or Singapore, to raise funds for their global expansions. Despite this, they continue to maintain political control of the State, which can occur directly or indirectly and is generally crystallized in closed shareholders’ agreements, where there are different series of actions.

Legend Holdings Corporation, controller of the renowned Chinese technology Lenovo, is a network chip that in 2019 surprised by buying the Chilean salmon company Australis for almost US $ 1 billion.

Mauricio Benítez, leader of the BDO Chile-China Country Desk and who has advised several companies from that country, says that, although there are private Chinese companies such as Alibaba, Tencent or Mobike, “to function, they need some relationship with the Communist Party Chinese, because some government authorization is always needed to operate or the State will require services from these private companies. There will always be some kind of relationship with the State, even if it is not in writing or China is not in the property. Felipe Irarrázabal raises, on the same, a question: “One could wonder to what extent the Chinese State exercises decisive influence in each of the private companies with Chinese capital.”

This special relationship of the Chinese political regime with its companies, public and private, makes a substantial distinction with investors from other countries. The journalist Richard McGregor calls it China Inc. A Chilean specialist defines it this way: “China is a single large company. It is a great monopoly ”. They remember him, regarding the entry of Tianqi, two years ago, to the property of SQM. It was a private company, but its ambassador Xu Bu made the weight of the Chinese state feel on the shoulders of authorities and regulators.

Anyway, the option of restricting the steps of the Asian giant in Chile is not easy. Everyone knows it. The weight of China in the world economy, and in Chile, makes it impossible to limit its actions without exposing itself to retaliation. The issue, thus, is not one of free competition. Is another one. It is geopolitical. “It is a new imperial economy, which this time is not dominated by the Anglo-Saxon world,” says a former Chilean authority who, for this reason, prefers not to be identified.