How will China’s trade relationship with Brazil develop over the coming year?
I am a moderate optimist. There is uncertainty in the region, but in the case of Brazil you are talking about the largest economy in Latin America, and an economy which is important enough regardless of uncertainty elsewhere.
Until recently, there was also a degree of uncertainty surrounding Bolsonaro’s government and how it would stand in relation to China, especially following Bolsonaro’s vocal alignment with Trump administration in the US, and certain negative comments concerning China which were made during the Brazilian elections in 2018. There was doubt as to what Bolsonaro would think of the BRICs as a concept. However, the outcome of a first official visit to China by Bolsonaro in October 2019 and the 11th BRICs summit, held in Brasília, in November 2019 was generally perceived as very positive by signalling a pragmatic, constructive approach to the development of Brazil-China cooperation.
China has been the largest trading partner of Brazil since 2009, both for exports and imports. Indeed, China imports almost twice as much from Brazil as does the US. Maintaining a strong relationship is therefore taken very seriously by senior ministries in Brazil.
What are you seeing with respect to large-scale Chinese investments in Brazil?
The main thing we have been seeing is Chinese companies signalling interest to participate in the investment partnership programme (PPI) of the Brazilian government. This scheme, launched in 2016 under President Temer, has been embraced by Bolsonaro. When qualified as priority matters under the PPI, concessions and other public-private partnership projects receive special attention of the relevant authorities in Brazil, typically with the support of Brazil’s National Development Bank (BNDES) in structuring and modelling. This has been attracting both domestic and foreign players and unlocking substantial investment for energy and other relevant infrastructure projects in Brazil.
While early interest from Chinese parties in the PPI was not as high as expected in certain sectors (with the notable exception of the energy sector), there is perhaps an opportunity to align Brazilian PPI projects with the Chinese Belt and Road Initiative and expand cooperation as a result. Following the bilateral meetings in October and November 2019, the Chinese delegation announced that they were looking forward to reviewing the PPI opportunities in more detail and potentially participating in the tenders.
As an example, in November 2019 there was a much anticipated oil and gas tender under the PPI. The Brazilian government had big expectations concerning this tender though it was seen as a relative failure as Western multinationals did not participate. The Brazilian state-owned Petrobras participated and managed to attract Chinese operators as partners, albeit in minority positions. That was a positive sign in terms of Brazil-China cooperation, and we hope to see expansion of Chinese investment in other sectors such as regional and urban infrastructure, as well as technology, including 5G. On the latter, of course, we have the US on the other side who will be making comments and will be very interested to see what form Chinese interest takes.
A further positive development we are seeing is Chinese private companies and institutional investors entering or exploring the market, exploring the opportunities and trying to understand risks. We were expecting that to happen more intensively in 2019, but the prevailing uncertainty slowed it down. This trend should pick up in 2020, particularly in energy and infrastructure, with private entities taking a minority position, and in other sectors such as telecoms and technology.
This is particularly important in light of the changing nature of financing in Brazil. First, the local development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), has been focusing on project structuring and becoming less active when it came to issuing loans. Second, we continue to see the development of infrastructure debentures and alternative debt instruments to finance projects in Brazil. Both of these trends mean we should see a greater diversification of financing, including through enhanced collaboration between Brazilian and Chinese banks and the involvement of multilateral regional banks, including regional development banks such as the New Development Bank (NDB) – the ‘BRICS bank’ – which recently opened a regional office in São Paulo. We will watch this closely because if it develops properly the conditions will be right for more projects and M&A involving Chinese parties.
Has the increase in trade and investment led to a rise in disputes between Chinese and Brazilian parties?
It is notable that when it comes to arbitration we are seeing a more positive alignment between Chinese and international parties than is commonly acknowledged. That being said, we don’t see often Chinese-seated arbitrations involving Brazilian parties. In addition to ‘neutral’ seats in Europe or in the US, we notice a trend of international clients, including Chinese clients, feeling more comfortable arbitrating in Brazil, which has been rightly perceived as an arbitration-friendly jurisdiction. The fact that the ICC court opened a case management office in São Paulo in 2017 and launched a new set of hearing facilities in 2018 both reflects and tends to reinforce this trend.
In fact, there is a good reason for international clients to arbitrate in Brazil. If the arbitration is seated in Brazil it counts as a domestic arbitration for the purpose of enforcement in Brazil. This allows the foreign party to enforce the arbitral award directly against the Brazilian party in a Brazilian court, bypassing a potentially lengthy recognition process through Brazil’s superior court of justice (Superior Tribunal de Justiça – STJ). Chinese parties are well advised to consider these issues as part of their risk assessment and investment decision processes when negotiating with Brazilian entities.
How does Veirano position itself to help clients capitalise on Chinese/Brazilian cross-border opportunities?
Veirano’s commitment to servicing Chinese and Brazilian bi-lateral trade is underscored by the fact that we have decided in 2019 to adopt a Chinese name (未来, reading “Wèi lái” and meaning “Future”). As far as we are aware, this is the first time a full-service law firm in Brazil has adopted a Chinese name. It helps provide a standardised form of the name of our firm for Chinese parties, ensuring consistency of branding. Most important, it signifies that we are a fixed presence in the Chinese market.
We already have significant experience of working with Chinese partners. Our founding partner, Ronaldo Veirano, has been attentive to the Asian market for at least 20 years. Our partner Pedro Freitas is director of the Brazil-China Business Council (CEBC), of which Veirano is a founding member. Our senior counsel Evandro Carvalho, head of the Centre of Brazil-China Studies of the FGV University (Fundação Getúlio Vargas) in Rio de Janeiro, is esteemed among Brazilians and Chinese parties alike as one of the leading sinologists in Brazil today.
Founded in 1972, Veirano has been a leading firm in energy, infrastructure, telecommunications and other regulated sectors for decades. When it comes to handling transactions in regulated sectors we have a savvy, project-oriented frame of mind. We know the main players in these sectors through our participation in trade organisations. As such, we are not just legal experts but market experts who understand sector-specific drivers and how they interact with the legal risks.