How China's Relations With Peru Explain its Approach to Diplomacy

Eager to invest in the South American country, Chinese companies have struggled to overcome environmental protests led by indigenous groups.

Peru's President Ollanta Humala (L) shakes hands with Chinese Premier Li Keqiang at Great Hall of the People in Beijing. (Minoru Iwasaki/Reuters)

On weekday mornings in small towns high in the mountains of Peru, large trucks owned by Chinese mining companies rumble down the narrow streets. Their presence in Peru is, in a way, a surprise; vociferous and sometimes violent activists have occasionally rebuffed Chinese resource-extraction projects in the country. Many local residents are concerned about negative environmental consequences and worried that they won’t reap any real benefits from the projects. Nevertheless the investment continues: In 2010, the Chinese mining companies Minmetals, Chinalco, Shougang and Zijing Mining Group announced plans to invest more than $7 billion in Peruvian mining projects by 2017. And as each mineral-laden ship chugs out of the harbor in Lima to cross the Pacific, China further solidifies its status as an important strategic partner for Peru.

The two countries are separated by more than 10,000 miles, but China has a long history with Peru. In the mid-1800s, more than 100,000 Chinese laborers braved months-long journeys to move to the South American country in order to work as indentured servants, and today, a sizable portion of Peru’s residents trace part of their ancestry back to China. Peru is currently home to the largest ethnic Chinese population in Latin America, and over the last two centuries the Asian country’s immigrants have influenced Peru’s culture, cuisine, and community life.

As the Peruvian government has pushed forward with pro-export economic policies and China has sought to tap into Peru’s natural resource wealth, the relationship between the two countries has grown. When Lima started privatizing mining companies in the early 1990s, Shougang was one of the first companies to invest in the market, and the two countries signed a bilateral free trade pact in 2009. The relationship shows no sign of abating. After an April 2013 meeting with Chinese President Xi Jinping, Peru’s President Ollanta Humala said, “For us, China is today a major trading partner and we believe that, as the events are developing, Peru may be the primary center of Chinese investment in Latin America.” Xi Jinping was no less effusive, saying that upcoming meetings between the two leaders “will give a major boost to the strategic partnership between China and Peru.”

However, slowing Chinese manufacturing activity, combined with rising discontent among Peruvian indigenous groups, may threaten the China-Peru investment boom. Lima recently announced that the country’s economy grew at 5 percent in May, well below Peru’s average rate of growth over the last decade, a drop caused by cooling mineral exports to China, which is experiencing a slowdown of its own.  Between April and June 2013, China’s year-on-year GDP growth dipped to 7.5 percent, down from 7.7 percent for the period between January and Marc, and in July, China’s manufacturing growth rate fell to an 11 month low due to weak export demand from the U.S. and Europe. The economy is expected to cool further by the year’s end, a trend that will have a ripple effect on Peru.

In addition to problems caused by the economic slowdown, a new phenomenon is now testing the China-Peru relationship: anti-mining projects led by rural residents and indigenous groups.

Alana Tummino, a Latin America researcher from the Americas Society, told me that “Many of Peru’s mines are located in poor areas often close to indigenous communities, and the number of social conflicts in Peru has risen drastically in the past few years involving mining concessions and investment.”

Slowing growth in Peru could force the government to reduce the budget for social spending and pressure President Humala to pay more attention to the protesters’ demands.  In 2011, Lima created a new law adhering to the International Labor Organization’s Convention 169, a legally binding international statue that gives indigenous communities a voice in approving extractive projects that affect their communities. And this May, after several years of heated demonstrations against mining projects, Peru’s government passed a new “Prior Consultation” law that gives certain indigenous groups the right to a non-binding vote of approval on any project that affects their communities. More symbolically President Humala also attended a ceremony in an isolated Amazon town where 33 people died in protests in 2009. Nevertheless, protests by indigenous groups still present a serious, disruptive risk to mining projects.

Chinese companies in Peru continue to feel the pressure from the protests. The Aluminum Corporation of China (Chinalco) has faced bitter opposition to a project in the Morococha district of Peru that entails relocating and housing 5,000 residents. And in January 2013 Lumina Copper, another Chinese company, put a $2.5 billion project in Peru’s Cajamarca region on hold after facing ongoing protests and fervent opposition from local community groups.

Is general anti-Chinese sentiment the issue? Keith Slack, the Global Program Manager of the NGO Oxfam’s Americas Extractive Industries program, doesn’t think so. “There isn’t specific hostility to Chinese companies per se. Communities in Chinese company project areas in some cases might not even be aware that a project is Chinese-owned,” he said. Indeed, protests against the mining interests of other countries—such as Canada—have even turned violent in recent years.

Although Peru’s government is still fully committed to supporting mining investment projects, the threat of protests might still deter or even derail some initiatives. Nevertheless, many foreign investors remain positive about Peru’s prospects. Unlike Venezuela, which has fallen out of favor with Beijing due to its recent history of electoral uncertainty and poor macroeconomic management, Chinese investors still view Peru as a well-managed economy.

The dynamic of China’s relationship with Peru—Beijing’s need of raw materials and Lima’s desire to boost exports—provide a framework for how China approaches ties with Latin America as a whole. As China’s diplomatic and economic clout grows in Latin America, Chinese business leaders are learning to tailor their approach based on the political dynamics and conditions in each town where they operate—a separate approach than one that China has taken with other parts of the world.

Hongxiang Huang, a media analyst and founder of the Dialogue for Chinese Investment in Africa and South America said, “you need to examine country by country, but generally I would say the regulation system in Africa is worse than in Latin America, with heavier corruption, so Chinese companies there are more likely to take advantage of loopholes. African countries are more desperate for Chinese investment.” In Africa, foreign companies can sometimes negotiate unilaterally with national leaders, but in Latin America, managers at Chinese companies have been forced to venture into the give-and-take dynamics of local politics. “They try to donate money to local government for schools, hospitals and public facilities but communication with local people is still their weakness,” Huang explained. In particular, managers at Chinese companies in Latin America are reluctant to form relationships and engage in dialogue with non-governmental organizations, activist groups, and local non-Chinese media.

Although Chinese companies continue to invest in new projects in Peru, the risk of inflaming political instability, expressed through protests, remains.

“In order to prevent miscommunication Chinese companies need to communicate, negotiate and coordinate with the people whose lives are going to be affected,” Mariana Costa, a Lima-based business development consultant, said.