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INSIGHT-Chinese investors sour on Brazil, and projects melt away

By Brian Winter and Caroline Stauffer

SAO PAULO (Reuters) - For Chinese investors, Brazil is no longer the promised land.

After making a big push into the South American giant in search of raw materials such as iron ore, as well as a promising market for their consumer goods, Chinese executives have grown frustrated with stagnant economic growth, heavy costs and what they see as a political and popular backlash against their presence.

As a result, Chinese investment is falling, and as much as two-thirds of the roughly $70 billion in projects announced since 2007 is either on hold or has been canceled, according to recent studies and interviews with Chinese and Brazilian officials.

The unexpected decline, which investors and analysts say has little hope of reversing itself anytime soon, will deprive Brazil's struggling economy of what once seemed like a sure-fire source of growth for years to come.

"The ardor for investment in Brazil is fading. Operating in Brazil is a huge challenge," said Zhang Dongxiang, chief executive of the Brazilian unit of Bank of China Ltd <601988.SS>, one of China's four largest state-owned commercial banks.

In a rare interview in his Sao Paulo office that included some of the sharpest criticism of Brazil by any Chinese business leader to date, Zhang complained of growing hostility from the Brazilian public as well as "protectionist" policies passed by President Dilma Rousseff's left-leaning government.

"Public opinion sometimes seems to be against foreign investment ... as if it makes local industry less competitive," he said. "There are some antiquated ideas."

While some Chinese companies are succeeding in Brazil, he said, "many are having doubts."

BIG ANNOUNCEMENTS, SMALLER RESULTS

The shrinking investment flows between two of the world's biggest emerging markets raises questions about the strength of the so-called "south-south" capital movement, and comes as China undergoes a broad shift away from investment-focused policies and toward a more consumer-based economy.

To be sure, Chinese investment in Brazil remains well above what it was last decade. Companies such as CNOOC Ltd <0883.HK> and China National Petroleum Corp, which last week bought rights to drill for oil in Brazil's huge Libra offshore area, continue to see opportunities in Brazil.

Others with an eye on expansion include China Construction Bank Corp <0939.HK> <601939.SS>, which reached an agreement this week to buy 72 percent of Brazil's mid-sized lender Banco Industrial e Comercial SA for 1.62 billion reais ($726 million).

Also, China remains Brazil's largest trading partner, thanks to demand for its commodities, and exports have been steady.

But the euphoria of three or four years ago, when politicians hoped Chinese investment would fundamentally reshape Brazil's trade flows and generate billions of dollars' worth of badly needed new infrastructure, has clearly faded.

And while investors from all over the world have become less bullish on Brazil in recent years, evidence suggests the rise and fall in Chinese interest has been particularly abrupt.

The outcome is especially disappointing for Brazil's farming sector, which until recently saw China as its most likely savior for a dilapidated network of roads, railways and ports that make it very challenging to export crops.

"I don't know of a single Chinese infrastructure project that has gotten off the drawing board," said Edeon Vaz, who monitors logistics for Aprosoja, the country's largest cooperative of soybean growers.

HARDLY AN ASIAN TIGER

The recent Chinese experience in Brazil seems to be one of high expectations, followed by second thoughts.

After years of sending trade missions to Brazil but mostly keeping their wallets closed, Chinese companies abruptly announced a flurry of billion-dollar bets in 2010. That was the year Brazil's economy grew a torrid 7.5 percent, and seemed to have entered a new era of Asian tiger-style growth.

The investments went beyond the extraction of commodities, traditionally China's focus in Latin America.

Companies such as automaker Anhui Jianghuai Automobile Co <600418.SS>, otherwise known as JAC Motors, and telecoms supplier Huawei Technologies Co Ltd announced big investments focused on selling to Brazil's rapidly growing middle class.

Most analysts agree that the sudden spurt, which was led by state-owned companies, was part of a strategic decision by Beijing to diversify its consumer markets abroad following the 2008-09 financial crisis and the ensuing stagnation in the United States and much of Europe.

Since then, though, little has gone right.

Brazil's economy cooled sharply, growing just 0.9 percent last year, and its consumers are burdened with debt. Meanwhile, the government has taken several steps that have made many Chinese investors feel unwelcome.

Some measures, such as a tax increase on foreign-made cars in 2011 that led JAC Motors to threaten to suspend construction of a new factory in Brazil, were part of a broad protectionist drive that targeted all countries equally.

But others, including a 2010 law that restricted land purchases by foreigners, were the specific result of worries that the Chinese were snapping up too many of Brazil's natural resources, legislators said at the time.

In private, Brazilian government officials express concerns that China is primarily interested in securing raw materials in a way that barely benefits Brazilians, while also flooding the country with low-cost manufactured goods.

Meanwhile, trade data shows that just three commodities - iron ore, oil and soy - and their derivatives - still account for 80 percent of Brazil's exports to China.

That has angered officials in Rousseff's government who had hoped that Brazilian manufacturers like aircraft maker Embraer SA would have made greater inroads by now. Chinese officials have countered that Brazilian industry needs to become more competitive to sell in China.

Derek Scissors, an expert on Chinese outward investment at the American Enterprise Institute, a Washington think tank, said the sudden spurt in investment, followed by a backlash and then a withdrawal, was "absolutely classic Chinese behavior" that also occurred in sub-Saharan Africa in recent years.

"What happens," Scissors said, "is you start getting people saying 'Wait a minute, we are running a huge trade deficit with China. They are investing $20 billion and grabbing up all our resources. Are we a colony?'"

XENOPHOBIA

It's not just the government that has lashed out in Brazil.

Unions and industry groups regularly target China. At an international textiles fair in Sao Paulo last week, hundreds of protesters gathered to denounce what they called unfair Chinese trade practices.

Hundreds also demonstrated against foreign involvement in last week's Libra oil sale, which saw European and Chinese companies successfully bid for the right to drill in Brazil's biggest-ever oil field. The protests prompted Rousseff to warn against "xenophobia" that could scare away foreign capital.

Chinese companies have noticed. For various reasons, many investments announced to huge fanfare in recent years now seem to be up in the air.

Reuters followed up on several of those projects, including a $5 billion railroad line in western Brazil that Chinese companies declared interest in building in 2011. The line has not yet secured financing from Chinese development banks and may be taken up by South Korean or European investors, said Francisco Vuolo, logistics secretary for Mato Grosso state.

The Chongqing Grain Group Corp's plan to build a $2 billion soy processing complex in Bahia state, announced in March 2011, has so far yielded just 15 percent of the planned investment, officials there say.

"The Chinese delay a lot in doing things," said Josalto Alves, a spokesman for Bahia's agriculture department. "They're very set on negotiating." Attempts to reach Chongqing executives were unsuccessful.

Huawei, the telecoms supplier, recently moved its regional headquarters from Brazil to Argentina. A Huawei spokesman said the move occurred because Brazil's market is "growing mature."

All told, of the Chinese investments announced between 2007 and mid-2012, only a third of them as measured by value were finished or in the process of being implemented, according to a study published in June by the China-Brazil Business Council, a Rio de Janeiro-based group.

The remainder - worth some $44 billion - were "still under negotiation or being evaluated," the CBBC said.

SALAD DAYS MAY BE OVER

Other countries have not turned on Brazil in the same fashion. Despite the economic struggles, foreign direct investment has remained relatively steady since 2010, with strong flows from the United States, Japan and others.

Scissors said Brazil remains a relatively attractive market for the Chinese. But, he said, Beijing seems to have shifted its priorities once again - focusing its investments on the United States and Canada, in particular, since late 2011.

"You aren't going to have another rush (in Brazil) for another few years at least," he said.

That jibes with the view of Zhang, the CEO of Bank of China in Brazil.

He said his bank, whose clients include Chinese companies operating here as well as big Brazilian concerns such as Petroleo Brasileiro SA , seeks to increase its capital by some $100 million in coming months. He called that a "good stimulus" for future growth in Brazil.

Yet, when asked if investment would recover in the next five years, Zhang was guarded.

"It depends on policies from the government," he said, tapping his desk for emphasis. "Brazil is at a crossroads. Will it grow, or will it cool down?"

(Editing by Todd Benson, Kieran Murray and Ken Wills)

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