The governments of China and Brazil last week signed a Memorandum of Understanding (MoU), which establishes a framework for setting up and operating the Brazil-China Cooperation Fund for Increasing Productive Capacity.

This MoU is the result of bilateral negotiations that followed President Michel Temer’s visit to China at the beginning of September. China and Brazil are the biggest developing countries in the East and West hemispheres. Since 2009, China has been Brazil's largest trading partner, with trade amounting to USD 80 billion in 2014 and over USD 66 billion last year.

The Brazil-China Cooperation Fund will be capitalised in a value of up to USD 20 billion, USD 15 billion from China and USD 5 billion from Brazil. These funds will be allocated to projects approved by the steering committee and investments may take the form of debt or equity. The aim is to have the fund running normally by the end of the year.

Brazil has strict ‘local content’ regulations governing the proportion of goods and services that must be produced domestically and tight labour laws. However, the Brazilian economy has been struggling with the recent fall in commodity prices and disruption caused by the giant “Lava Jato” corruption scandal. At the same time, it needs to invest heavily in infrastructure, to improve competitiveness and return to growth. Therefore, the fund will be allocated mainly to projects considered a priority in the infrastructure sectors and to projects promoting industrial cooperation between the two countries.

Dyogo Oliveira, the Brazilian Minister of Planning, Development and Management advised that priority will given to projects listed in the recently announced Investment Partnerships Program (PPI). Projects in energy, logistics, advanced technology, agriculture, agro-industry, agricultural storage, mineral resources, manufacturing and digital services may all qualify for support from the fund. The activities must be mutually beneficial for both countries.

The Brazilian minister explained that “The projects will be rolled out in Brazil, and the USD 20 billion will come from various sources, as the projects get approved. There may be resources from FI-FGTS, BNDES and from the private sector. We are talking about a resource coordination mechanism to make the projects viable".

In China, the resources will emanate from the Latin American Industrial Cooperation Investment Fund (Claifund). The Chinese minister stated that “Implementing the fund is something unprecedented in Latin America and probably in other continents. The fund should be reason for celebration and shows real foreign interest in the country”.

Resources from the Cooperation Fund may only be accessed by Brazilian or Chinese companies. However, their allocation will not be conditioned upon the acquisition of equipment or materials from the other country. The fund may, however, leverage the participation of Chinese companies in upcoming infrastructure concession rounds in Brazil. Chinese companies have already been very active in recent tenders for transmission lines and have rapidly grown their portfolio of Brazilian electricity assets, with acquisitions in generation and distribution as well. With this new source of funding, and the political support implicit in this initiative, that activity is expected to continue in the near future and may be extended to other sectors.