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iadb and china launch $1 billionus latam investment fund

China is setting up a $1bn fund with the Inter-American Development Bank to make equity investments in Latin America, in a new move into financing in a region where it is already a major trade partner.   The fund, which should start operations this year, is a partnership between China’s state-run Export-Import Bank and the IDB. Each side will put in $150m and the two banks are currently selecting asset management firms to manage the investments and raise funds from the markets, the IDB says.

“We are looking to focus on areas where Latin America has enormous deficiencies, like infrastructure,” Luis Alberto Moreno, IDB president, told the Financial Times in Uruguay at the bank’s annual meeting. “It’s something that is quite novel and it is a route which we hope to continue to open up with the Chinese authorities.”

He says the fund is a concrete way for the IDB to play a pivotal role in boosting co-operation, trade and development with China, which became a member of the Latin American lender in 2009.   As well as infrastructure, the fund is expected to make equity investments in mid-cap companies and in the natural resources sector, focusing on commodities-based natural resources such as agribusiness and forestry ventures, said Hans Schulz, the IDB’s head of structured and corporate finance.

Equity provided by the fund will complement loans and credit guarantees that the IDB and China Eximbank already provide directly in the region. Chinese state banks have lent more than $75bn to Latin America since 2005, and in 2010 gave more than the World Bank, IDB and the US’s Export-Import Bank, according to an independent academic report released last month.

China, which has overtaken the US to become Brazil and Chile’s top trade partner, is a major customer of Latin American raw materials, like soya, copper and iron ore, but has increasingly targeted the region with investments in other key areas, including hydrocarbons in Brazil and Argentina, and banking. However, trade with Mexico and Central America is very unbalanced, underscoring how non-resource based Latin American economies struggle to compete with China on manufacturing.

“The demands and aspirations in economic and technical co-operation between China and Latin America and the Caribbean are growing gradually,” said Liu Liange, vice-president of the Chinese lender. “The IDB and China Eximbank have undertaken this initiative to develop an investment mechanism to meet the common interests of Latin America, the Caribbean and China.”

Under the principle of co-governance, the fund will be supervised jointly by both institutions. Mr Schulz said it would be up to China to determine if its contribution will be in renminbi. 

“This reflects a deepening of ties, a broadening of our approach or strategy. It’s not just about extracting natural resources,” said Mr Schulz. “This provides a platform for a broadening and ever deepening engagement.” 

The new fund highlights deepening co-operation between Latin America and Asia, and the annual meeting received a preliminary report, written jointly by the IDB and the Asian Development Bank and due to be unveiled at the Asian lender’s May meeting in Manila, on long-term opportunities and challenges in co-operation between the two regions.

Mauricio Mesquita Moreira, the IDB’s principal trade and integration economist and one of the report’s authors, told the FT: “It is very idealistic to think that in 10-20 years’ time, there will be a radical change in the composition of Latin American exports to China … The drive for natural resources is only going to get more intense.”

 Copyright The Financial Times Limited