Relaciones Peru China

China and Peru relations after 41 years of diplomatic links and three years of a FTA
Carlos Aquino Rodríguez*

On November 2nd, 2012 Peru and China celebrated forty one years of modern diplomatic relations. On March 1st, 2013 it was the third anniversary since the Free Trade Area, FTA, agreement between the two countries entered into effect. Much has been achieved in those years. China became in 2011 the biggest trade partner of Peru, over the United States, which was the traditional dominant partner, and given present perspectives that position will continue in the future.

As China economy is the second largest in the world and continues growing at high rates, its need for raw materials from Peru will continue, but Peru expectations is that ever more affluent consumers in China will also buy value added goods from Peru.

Peru has a longer history of relations with China. In this paper first, a look to those old relations is given; second, there is a review of the present state of economic relations; third, the perspectives of those relations with the FTA in force are outlined; fourth, some features of Chinese culture influence in Peru are outlined; and last some conclusions are given.

1. Peru and China old relationship

The first contact between these countries began in 1849, when Chinese immigrants began coming to Peru. From that year up to 1872 around 100, 000 Chinese came to Peru, mostly from the southern part, in present day Guangdong province. At that time Peru needed labor force to work mainly in the sugar cane and cotton plantations along its coast line. There was scarcity of labor because the laborers working there until that time, mainly black people brought before as slaves by the Spaniards from the XVI century, were given freedom in 1845 (abolition of slavery)  and most of them left the fields for the cities.

Peru became the first country in Latin America to receive Chinese immigration in a large scale. China has been opened by force by England in 1840 after the Opium War and some of its people began leaving the country.

But Chinese immigration to Peru came to a sudden halt for an incident in one of the ships carrying them to Peru. In 1872 the Peruvian ship “Maria Luz”, during a stop in the port of Yokohama, Japan, suffered the desertion of one Chinese on board. He escaped throwing himself into the sea, where he was rescued by the crew of a British warship in the port. He complained of mistreatment in the Peruvian ship. In fact, in the long journey from China to Peru, conditions of the travel were so harsh that sometimes more than one third of the human cargo died in the way.

After the British captain of the warship complained to Japanese authorities, they ordered the Peruvian ship and the laborers to return to China. After that the Qing Imperial Government forbade Chinese immigration to Peru.

Because of this incident China and Peru began negotiations to have official contacts, and in 1874 diplomatic links were established.

From 1990s onward again more Chinese have immigrated to Peru. Peru now is home to the largest Chinese community in Latin America.

Peru became in 1874 the first Latin American country to establish diplomatic relations with China. After a hiatus, on November 2th 1971 diplomatic relations between both countries were established again.

During the 1990s economic relations began to increase. In 1993 the amount of Peruvian exports to China was only of 140 million dollars, but in 2003 they reached 676 million dollars. In the same period imports from China increased from 90 million dollars to 646 million dollars. See table 1.

Peru became in 1998 a member of the Asia Pacific Economic Cooperation forum, APEC, joining China and other Asian economies in this important organization and making possible closer relations between the two countries. In 2009 a FTA agreement was signed between them and entered into effect the following year. In 2011 China became the largest trade partner of Peru. Exports to China reached 6, 961 million dollars and imports were 6, 321 million dollars that year. In the year 2012 trade with China keep increasing (even if Peru exports to the world did not increase) and exports to that country amounted to 7, 692 million dollars with imports valued at 7, 795 million dollars.

1. State of economic relations

As we have seen, trade, and in general economic relations between Peru and China increased during the last two decades. The reasons for this were the following: First, after Peru suffered a long period of economic stagnation and political instability, in 1990 the new government introduced economic reforms that opened the economy to foreign trade and investment, and at the same time political stability was attained. So the economy began to grow again. See Graphic 1. Second, China need for raw materials began to increase in that period and so Peruvian exports to China, that are, most of them, even now in more than 95%, raw materials, mainly minerals. And also Chinese investment in Peru began. In the 1990s a process of selling state owned companies to foreign investors began and the first to be sold was the mining company exploiting iron ore, Hierro Peru, which was bought by Shougang Corporation of China (one of the first biggest purchases of a foreign company by a Chinese firm outside Asia). Third, the same decade of the 1990s the Peruvian government began putting emphasis in the establishment and strengthening of relations with Asian countries, and as a result in 1998 Peru became a member of the Asia Pacific Economic Cooperation forum, APEC; and Forth, Peru signed in the year 2009 a FTA agreement with China that came into effect in March 1st 2010.

Graphic 1: Peru Gross Domestic Product growth, 1992-2012 (annual growth average)

Source: Peru National Statistics Institute http://www.inei.gob.pe/perucifrasHTM/inf-eco/cuadro.asp?cod=3842&name=pr01&ext=gif

China is important for Peruvian economic growth. As we will see below our exports have increased to China more than to any country in the last 20 years, price of the primary goods that Peru sells are high because of China strong demand, and also cheap manufactured goods from China have helped improve the living standards of many Peruvians, especially of poor people.

Peru’s Minister of Economy Mr. Luis Castilla said on October 2011 that he “prays every day” for China economy to continue growing at high rates because that way Peru will benefit from that. If China economy reduces its pace of growth there will be less demand for Peru raw materials, prices, of specially minerals, will decrease, exports will decrease and the country will be greatly affected. Peru is now more dependent of foreign demand. In 1993 exports represented only 12% of Peru GDP, in the year 2010 it was 23%. In the year 2012 Peru exports to China represented around 17% of the total, and several products, like minerals, are exported mainly to China.

1. Trade:

Actually China is the biggest market for Peruvian exports. China buys most of the iron ore, copper, zinc, fishmeal, lead, tin, that Peru sells abroad. And China is the second source of imports, after the U.S. and most of the textiles and garments imported by Peru came from China as are also toys, footwear, electrical appliances and most of the consumer goods, and increasingly cars. See Table 1.

Table 1: Peru main trade partners in the last three years, in million dollars

Source: Peru’s Customs Office:

http://www.aduanet.gob.pe/aduanas/informae/BalContiZonaPais_01122012.htm

Table 2:  Exports from Peru to mains partners in Asia members of APEC (in million dollars) (FOB)

Source: Peru’s Customs Office:

http://www.aduanet.gob.pe/aduanas/informae/BalContiZonaPais_01122011.htm

As we see in Table 2, Peru exports have increased a lot since the country began its economic reforms and opened the country to foreign trade and investment.  From 1993 to 2012 exports leaped from 3.3 billion dollars to 45.2 billion dollars, nearly 14 times more. But exports to China in the same period increased from 140 million dollars to 7.69 billion dollars, around 55 times.

Table 3: Main products exported to China, 2012

Source: Peru’s Customs Office:

http://www.aduanet.gob.pe/aduanas/informae/XPaisPartMensual_01122012.htm

Peru buys a lot of Chinese goods because China sells cheap manufactured goods thanks to its cheap labor force. Products that Peru bought before from Japan, and after that from South Korea (and also from Taiwan), like electrical appliances and cars, are now being sourced from China.

In fact Japan companies and South Korean companies moved their factories to China and from that place their export to the whole world and to Peru. But in the last year’s Chinese companies are selling more in the Peruvian market. Imports from China have increased more than from any other country. As we see in Table 4, Peru in 1993 bought Chinese goods for 90 million dollars, but last year 2012 it bought nearly 7.8 billion dollars, around 87 times more. Peru total imports in those years increased from 4 billion dollars to nearly 40 billion dollars, an increase of only 10 times.

Table 4: Peru imports from main partners in Asia members of APEC (on million dollars) (CIF)

Source: Peru’s Customs Office:

http://www.aduanet.gob.pe/aduanas/informae/BalContiZonaPais_01122011.htm

Table 5: Main products imported from China, 2012

Source: Peru’s Customs Office:

http://www.aduanet.gob.pe/aduanas/informae/MPaisPartMensual_01122012.htm

That fact, of China being a big market for Peruvian exports, and a big source of cheap goods were the reasons behind the idea for of achieving a FTA with China and this will be seen in detail below.

1. Investment:

Foreign direct investment (FDI) to Peru began to increase from the year 1990. At the end of that year the stock of FDI was only 1.2 billion dollars and at the end of year 2012 the stock of FDI was 22.6 billion dollars.

But according to statistics by the Central Bank of Peru, that takes into account not only new addition of capital but the reinvestment done by the companies, the total stock of FDI in Peru at the end of 2012 was 63.4 billion dollars. See Graphic 2

Graphic 2: Stock of FDI in Peru, million dollars

Source: http://www.proinversion.gob.pe/0/0/modulos/JER/PlantillaStandardsinHijos.aspx?ARE=0&PFL=0&JER=1537

China investment in Peru was nil up to 1992. That year, Shougang Corporation (首钢集团) bought the state company Hierro Peru that exploits iron. It was the first big sale of a Peruvian state company after the government began in 1990 a process of economic reforms and opening of the economy to foreign investment.

China interest in securing sources of raw material was the reason behind its decision to buy the Peruvian company. It was one of the first biggest investments by a Chinese state company of a foreign asset. Shougang paid around 120 million dollars for that. The mine that Shougang bought is the only one that produces iron ore in Peru.

During the 1990s, after that big investment there was no other from China, but from the last decade China investment again became active in Peru. As Table 6 shows, now China ranks as the 10th biggest source of foreign investment in Peru. At the end of 2012 its stock of China investment was 796.48 million dollars according to Proinversion, the Peruvian government agency that records foreign investment.

Table 6: Stock of FDI in Peru by country of origin, million dollars

Source: http://www.proinversion.gob.pe/0/0/modulos/JER/PlantillaStandardsinHijos.aspx?ARE=0&PFL=0&JER=1537

China investment is located mainly in the mining sector, but figures above do not show the real magnitude of its investment in Peru. In the last years Chinese companies have announced and are carrying out big investment. For example currently Chinalco Aluminiun Corp. is investing 3.5 billion dollars in a copper mine called Toromocho, in the central part of Peru. Another big investment is in the project Pampa de Pongo, of the Nanjinzhao Group Co. Ltd. for 3.28 billion dollars that will produce iron.

According to statistics by the Ministry of Energy and Mines of Peru, by January 2013 there is an amount of 54.68 billion dollars of investment mostly being currently carried on the mining sector, of which investment from China accounts for 22.35% of the total, or 12.21 billion dollars, the biggest one. See Graphic 3. China will become the largest investor in the mining sector in Peru some years from now on.

Graphic 3: Approved investment (and currently carried on) in the mining sector, by country, in million dollars

Source: “Cartera Estimada de Proyectos Mineros” Updated January 2013, Ministry of Energy and Mines http://www.minem.gob.pe/minem/archivos/file/Mineria/INVERSION/2012/CEP%20SETIEMBRE%202012.pdf

Lately also Chinese investment in the fishing sector is active. The reason is that China is the main buyer of Peruvian fishmeal. On March 13 this year China Fishery Group Limited (CFGL) bought 9.9% of shares, valued at 54.8 million dollars, of Copeinca, one of the biggest Peruvian companies in the sector. Already CFGL is a big player in the fishmeal sector in Peru and has been buying other Peruvian companies. Peru share in world export of fishmeal is around 41% and China in the main world importer of that product with a share of 41% of the total.

But some Chinese investment has run into trouble, especially and notoriously Shougang Corporation. Since it began operations, every year, and sometimes two or three times per year, they have had trouble with its labor union that had gone on strikes very often.

Shougang is accused of low pay to its workers and of denying them proper working conditions. Also it had some trouble with the community where it is located. These facts called the attention of even the President of Peru Ollanta Humala, who in the year 2011 meeting of Chinese businessman in Latin-American held in November in Peru stated in his opening speech that while Chinese investment is welcomed “foreign companies must respect laws of the countries they operate and should treat well their workers”

Chinese company exploiting petroleum in the north part of Peru, South American Petroleum Exploration Tech (SAPET) Development Peru Inc., has been accused of not doing enough to avoid contamination in its operation, and Zijin Mining Group has also encountered opposition from an agricultural community in its planned operation for copper called Rio Blanco in the north of Peru. This last operation involves an investment of 1.5 billion dollars.

Anyway, several others Chinese companies are involved in projects, like China National Petroleum Corporation (CNPC) in association with a foreign company, and, as stated before, Chinalco (Aluminiun Corp of China), is doing the biggest investment by a Chinese company in its project called Toromocho, of around 3.5 billion dollars. Jinzhao Mining Peru, part of Group Zibo Hongda Mining Ltd., will invest 3.28 billion dollars in its project of iron ore at Pampa de Pongo.

1. Economic Cooperation:

In the last years China has given some money as economic cooperation to Peru and lately scholarships to Peruvian students to learn Chinese language. Also it has established several Confucius Institutes with Peruvian Universities to foment Chinese culture and language.

The Industrial and Commercial Bank of China (ICBC) established an office in Lima in the year 2012 with a capital of 50 million dollars to lend companies in Peru who want to buy goods from China.

Additionally, it could be mentioned that China became in 2009 a member of the InterAmerican Development Bank, IDB, and in that condition is lending money to development projects in the region.

1. FTA agreement between Peru and China

The FTA agreement was initially opposed by some companies in Peru that were afraid of competing with China. In the agreement sensible sectors to China competition in Peru like textiles, garments, footwear were exempted from the lowering or elimination of tariffs, but the complaints are of unfair competition by Chinese firms, which are accused of dumping or of selling products being subsidized by their government.

Several Chinese products have suffered the imposition of antidumping duties in Peru. One of the most interesting is the case of Chinese shoes, which had antidumping duties imposed on them in the year 2000 and in November 2011this was extended for 5 more years. The reason for the extension was that, even if Chinese shoes have been the subject of antidumping duties, their market share continued to rise until dominating it completely. We see in Graphic 4 that the numbers of pairs of Chinese shoes imported went from 208 thousands pairs in the year 2000 to 5.8 million in 2010. Its share in the market of imported shoes went from 25% to 94% of the total, totally dominating it. This information is provided by INDECOPI, the Peruvian office dealing with protecting consumers and ensuring fair competition in the market.

On May 4, 2012 also INDECOPI decided to continue applying for three more years antidumping duties to zippers imported from China.

Graphic 4: Number of pairs of imported Chinese shoes with plastic upper part and its share in the market of imported shoes (in thousands –right hand-, and in %)

Source: Quarterly Dumping and Subsidies Bulletin of Indecopi, december 2011, pag 5: http://www.indecopi.gob.pe/repositorioaps/0/5/bol/boletin_dumping_y_subsidios/Dic11CFD.pdf

By the end of December 2011, China is the country which has the major number of products with antidumping duties imposed on them, as show in Graphic 5.

Graphic 5: Number of antidumping duties, by country of origin, as of December 31th, 2011

Source: Quarterly Dumping and Subsidies Bulletin of  Indecopi, december 2011, pag 22: http://www.indecopi.gob.pe/repositorioaps/0/5/bol/boletin_dumping_y_subsidios/Dic11CFD.pdf

Now, according to the latest information provided by INDECOPI, the Peruvian office dealing with protecting consumers and ensuring fair competition in the market, by December 31, 2012, the following products from China have antidumping duties: several kinds of footwear (up to the year 2016), a kind of stainless steel flatware (up to the year 2016), several kinds of zippers (up to the year 2015), several kinds of poplin fabric type (up to the year 2015), several kinds of cotton fabric and mixtures with polyester (up to the year 2014), a kind of cotton denim fabrics (up to the year 2015), several kinds of plain weave fabrics (subject to examination), several kinds of sandals (up to the year 2014).

In summary, at present, March 2013, 57% of antidumping duties imposed by Peru are to Chinese products. There are 8 duties imposed to China, two to United States, one to Pakistan, one to Vietnam, one to India, one to Spain and another one to Italy.

The FTA has a chapter that would allow to known the real price of Chinese goods in their country, one of the complaints of Peruvian producers. This chapter, Customs Procedures and Trade Facilitation, is seen as a tool to know if there is dumping and subsidies .

But the idea of having a FTA with China from Peru viewpoint was to have access to the vast Chinese market for products other than raw materials. Especially Peru is exporting many agro industrial goods, textiles and garments of special fibers, like cotton and from the Andean camelids such as alpaca and the vicuna that sell successfully in U.S. and European markets. The hope is that these products could be sold in the Chinese market.

The FTA has also a chapter to protect investment in both sides. Peru expects more Chinese investment, not only to exploit raw materials, but also to produce manufactured goods for the internal market that is growing, and also to produce in Peru and from it to export to countries whom Peru has FTA agreements. Peru has achieved FTA agreements with major markets like the U.S., European Community, Canada, most of Latin American countries, Japan and South Korea. Also it should be mentioned that Peru is in negotiating in the Trans Pacific Partnership agreement, TPP that will form a large free trade area among them. This agreement involves a total of 11 countries: Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam. Japan is going to apply to join this agreement too.

One interesting development is that Peru has formed with Chile, Colombia and Mexico the “Alianza del Pacifico” or Pacific Alliance, of 4 Latin American countries with borders in the Pacific Ocean and they will have a free trade area among them. These are the countries which are growing more in the last years, have more economic relationship with Asia countries, some of them have FTA agreement with several Asian countries, and as a group will become a very attractive market.

As a group this four countries will form a market of 200 million people, will become the ninth largest economy in the world, represents 35% of regional GDP, one third of its territorial size, more than 50% of its exports, and receive most of the FDI in the region.

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These four countries as said are going to have a free trade area for goods among them, but also investment will flow freely, as also people (no visa is required now), and are joining their stock exchange markets in the Mercado Integrado Latinoamericano, MILA (Latin America Integrated Market). There is going to be also exchange program for students among them (each country is giving scholarship to students from the other three countries).

The FTA with China is also good for Peru as it allows obtaining cheaper Chinese goods for Peruvians consumers and also machinery and equipment for its industries.

1. Chinese culture influence

Chinese immigrants influence in Peru is well known in several subjects and for example one strong is in food. In Peru Chinese restaurants are called CHIFA. This word is said to be a degeneration of the Chinese word “chifan” (吃饭). In Peru we eat a lot of “chaofan”( 炒饭, ) and here it is called “chaufa” or “arroz chaufa”, “arroz” meaning rice in Spanish.  But in Peru chaofan is different of the fried rice or chaofan eaten in China because Peruvian Chinese restaurants or CHIFA put everything in it, not only fried egg, but several kind of vegetables and chicken, and even other kinds of meat. There are books that describe the influence of Chinese food in Peruvian cuisine, like the use of the soy sauce, in Peru called “siyau” (豉油), or the use of the wok (镬); the versatile round-bottomedcooking vesseloriginating in the Canton region of China. As we see some Chinese words are pronounced the Cantonese pronunciation because most of the Chinese immigrants who came to Peru in the 19^th century came from that region, or Guangzhou (广州). A well know book on Chinese food in Peru or CHIFA is the one by Mariella Balbi, a journalist, called “Los chifas en el Peru –Historia y recetas-” (“The CHIFA in Peru – History and receipts-“) published in 1999.

Another consequence of the Chinese presence in Peru is that rice is the main staple food in Peru. Peruvians eat rice at least twice per day, at lunch and dinner. It is the only country in South America doing this.

Humberto Rodriguez Pastor published many works on Chinese immigration, like the one titled “Hijos del Celeste Imperio en el Perú (1850 – 1900). Migración, agricultura, mentalidad y explotación” (Instituto de Apoyo Agrario, 1989); (2da edición: SUR, 2001). Also he published “Herederos del Dragón” (Fondo Editorial del Congreso del Perú) in the year 2000.

Fernando de Trazegnies Granda published in 1994 a two volumen book “En el país de las colinas de arena: reflexiones sobre la inmigración china en el Perú del S. XIX desde la perspectiva del derecho” by the Pontificia Universidad Católica del Perú. There is a translation into Chinese of this book.

There are Confucius Institutes created in the past years with support of the Chinese government. At present there are four, two in Lima, the capital, one in the north and other in the south of Peru. In Lima one is located in the “Pontificia Universidad Catolica del Peru”, and the other is in the “Ricardo Palma University”. These institutes mainly teach Chinese language but also organize events to promote China culture.

Now we see a little about political relations between Peru and China, especially about visits at the highest levels. In April 2001 Alberto Fujimori became the first Peruvian President to visit China and he went to China a total of 4 times during his ten year government. In October 1995 Li Peng, China Prime Minister at that time, did a state visit to Peru, becoming the first Chinese chief of state to visit Peru.

In June 2005 Alejandro Toledo, President of Peru pay a state visit to China.

In the year 2008 when Peru was host to APEC Leaders Meeting, President Hu Jintao visited Peru. In April this year 2013 President of Peru Ollanta Humala will visit China on a state visit.

Besides these visits, Peru and China Leaders have met several times during the APEC Leaders Meetings in several countries.

Finally, the Peruvian government has begun giving scholarship for studying in China. CONCYTEC, the official institution for science and technology is offering financing for studies of Master, Doctor Course, special training and Chinese language in Chinese Universities.

1. Conclusions

As have been seen China is an important economic partner of Peru. It is its biggest market for its exports, and an important source of investment. These two roles will increase in the future as China need for raw materials will increase and because its companies are looking to control the source of these raw materials (this is a China state policy and nearly all or all of its companies doing these investments are state companies).

China economic growth at high rates is also important for Peru, to the point as it was stated, that Peru Minister of Economy and Finance “prays every day” for this to continue. Also, Peru has big expectations on increasing exports to the Chinese markets thanks to the FTA, but this will depend on creating goods suitable for their consumers.

*Professor at San Marcos National University, Lima, Peru. Specialist in Asian Economies. Peru’s Official Translator of the Japanese language. Master and Doctor course at Kobe University, Japan. Visiting Professor at Asian Universities. Chairman FEALAC Vision Group

Mail: carloskobe2005@yahoo.com