China is gobbling up Chile’s energy sector

In recent weeks, US Chairman of the Joint Chiefs of Staff General CQ Brown and US Southern Command General Laura Richardson visited Chile, where they attended a multinational exercise and military-to-military cooperation, space and cyber cooperation, and international peacekeeping efforts. Although the visit did not make world news, it did underline Chile’s role as an important American partner in South America. However, China has quickly increased its influence in Chile, especially in the energy sector, where Chinese companies are now roughly in control two-thirds of the entire Chilean energy sector.

Such dominance in Chile’s energy sector not only increases Beijing’s economic influence over Chile; it also potentially poses a threat to Chile’s national security. Both Chilean and U.S. policymakers must act now to ensure that Chile successfully balances trade with the world’s second-largest economy while protecting its sovereignty.

For years, the Chilean energy sector was a highly competitive market, consisting of both foreign and domestic energy companies. But two disasters had a severe impact on Chile and the entire world: the 2008 global financial crisis and the COVID-19 pandemic. The 2008 recession was temporary for the United States and Europe, yet many different parts of the world, such as Chile, felt its effects decades later. In Chile, the recession caused prolonged financial instability for foreign and local energy companies, sending many into debt. Years later, with businesses still struggling, COVID-19 took a heavier toll, causing many to pull out.

As foreign competitors retreat, Chinese state-owned companies, backed by financial support from their central government, have acquired several Chilean energy companies over the past decade. This was largely due to the role of Beijing’s Belt and Road Initiative, launched in 2013. In several cases, state-owned enterprises were either the lowest or the only bidders for such projects.

In 2016 for example State Energy Investment Companya Chinese state-owned company, bought an international energy company known as Pacific Hydro for $3 billion dollars. Pacific Hydro owns, operates and manages seven different locations in Chile. Two years later, China Southern Power Grid (CSPG) purchased a 27.79 percent stake, worth approximately $1.3 billion, in Transelec, giving CSPG the largest shareholder in one of the largest Chilean energy companies. Transelec has an estimated 10,135 kilometers of transmission lines 98 percent of the Chilean population. That same year, China’s State Grid International Development (CSGID) bought all of Sempra Energy’s assets in Chile for the price of $2.23 billion. All assets were subsidiaries, including 100 percent of Chilquinta Energia, Tecnored and Eletrans. In 2020 CSGID purchased CGE’s 97.3 percent ownership share from Spain-based Naturgy for $3 billion.

In many cases, it was easier for these foreign companies to sell assets and equalize their debts than to continue trying to invest in them. For example, at a press conference after the transaction between Sempra Energy and CSGID closed in 2018, Sempra Energy CEO Jeoffrey Martin stated: “The proceeds from this transaction will be used to strengthen our balance sheet and meet the growing capital needs of our core facilities in California and Texas.” In 2020, Spain-based Naturgy came out again to clarify that they were selling their Chilean assets to focus on “countries with stable regulations and macroeconomic conditions.”

Investing in the energy sector is another way for China to create economic entanglement through infrastructure projects to support the expansion of other projects on Beijing’s agenda. Chile is an attractive location for Beijing for three main reasons: it is one of the big three (along with Argentina and Bolivia) in the Lithium Triangle, Chile has huge copper mines that China uses, and Chile is a country in the Pacific Ocean, that facilitates commodity trading. these crucial resources to China. In trade, China imports 74.1 percent of all Chilean copper exports And 72 percent of lithium exports. Combined with investments in key mining and infrastructure projects, all this increases China’s economic influence over Chile.

Some countries elsewhere in the world have suffered under Beijing’s economic coercion. In 2010, China briefly banned rare earth exports to Japan over their dispute over islets in the East China Sea. In 2020 China posted rates on a wide range of Australians products, from wine and barley to coal and timber, in retaliation for Australia’s call for the international community to conduct an independent investigation into the origins of COVID-19. And China restricted trade with Lithuania after the Baltic country announced this would happen deepen engagement with Taiwan. Given such past behavior, Chilean policymakers must ask themselves: How would China respond if there were a diplomatic disagreement with Chile?

Understandably, Chilean leaders must find a balance between strengthening economic ties with China and protecting their country’s sovereignty. But there are steps that can be taken to reduce the risk.

First, Chile should establish an interagency investment screening mechanism, such as the Committee on Foreign Investment in the United States. This will ensure that the Chilean Ministry of Defense has the opportunity to evaluate subsequent investments – from China or other countries – through a national security lens.

Second, Chile should work to diversify the number of companies in its energy sector to avoid a monopoly of China’s state-owned companies. That includes encouraging trade missions to the US, Spain and elsewhere to bring in more foreign direct investment, and leveraging existing initiatives such as the US Development Finance Corporation, the Inter-American Development Bank and the EU’s Global Gateway.

Third, Chile could work with partners like the US to create sufficient safeguards to protect the physical and digital infrastructure associated with these energy projects from unnecessary foreign manipulation.

Fourth, when conducting due diligence on a Chinese state-owned enterprise bidder, Chilean policymakers should use existing databases such as that of Florida International University. Chinese operations dashboard to understand which state-owned enterprises have a history of corruption, labor violations, environmental damage or unnecessary delays.

Most importantly, the Chilean people must vote for leaders who will resist foreign influence and protect their interests for a secure energy future.