1. CHINA GLOBAL ANALYSIS INC
CHINA GLOBAL ANALYSIS INC.
CHILE: A SAFE HARBOR
We see Chile as the best country in Latin
America for setting up banking business. It is
characterized by strong democracy, with low
risk of political turmoils and good government
policies.
Chilean economy is very open, being the 1st
world exporter of copper. It is exposed to
external shocks but somehow resilient, and
unemployment rate is so good so far (5.8%).
Agreements have been signed between China
and Chile to establish an offshore clearing
network for Yuan. This attracts Chinese
Banks’ interests, as they can operate as
intermediares for currency swaps.
Chinese banks like CCB and Bank of China
are already present in this territory, showing
there are good opportunities to take advantage
of. The way for implementing this kind of
business has been already paved by their
experience, and could be easily exploited.
Source: Doing business 2016, World Bank
0 10 20 30 40 50 60 70 80 90
United States (Rank 7)
Mexico (Rank 38)
Chile (Rank 48)
Peru (Rank 50)
Brazil (116)
Argentina (Rank 121)
Ease of setting up a business
IN BRIEF
• Risk from shocks in international trade.
• Exposed to volatility of commodities prices,
especially copper (50% exports, 20% GDP).
• China is main trade partner,accounting for
25% exports, 21% imports.
• Strongest quality of sovereign debt in the
region – Moody’s Aa3 rating.
• Solid financial system.
• Resilient economy and politically stable.
• In 2015 China established Yuan clearing
network in Chile, first Latin America
country.
• Following currency swap agreement between
Chile and China.
Data from Euler Hermes, Moody’s

2. CHINA GLOBAL ANALYSIS INC
The Central Bank announced that in 2015 the Chilean
GDP grew by 2.1% vs. expected 3%
This lower result is because of complex external
economic situation, characterized by deterioration in
Latin America and especially by the slowdown of the
Chinese economy in the last year.
The latter has in fact greatly influenced the reduction
in the prices of raw materials on international markets,
including the price of copper, of which Chile is the first
world producer and China the main buyer.
This had a significant impact on the national mining
industry, which has significantly reduced investments,
with obvious negative consequences on tax revenues.
Trade balance has posted in 2015 a surplus of just over
4 billion US dollars, down sharply (about - 47%) from
2014 level (7.767 billion US dollars).
In first two months of 2016 the Government managed
to lower unemployment rate to the 2014 level (5.8%); it
also increased government spending by 8.4 %
compared to 2014, the deficit to 3.3% (1.6% in 2014)
and brought the public debt as high as 17.5% of GDP.
However, with respect to 2016, the Central Bank had
estimated a GDP expansion between 2% and 3%, but
later it had to revise it downwards by half a percentage
point with respect to last forecast.
5.75% 5.53%
4.31%
1.85% 2.27%
0%
1%
2%
3%
4%
5%
6%
7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2011 2012 2013 2014 2015
Real GDP growth Debt/GDP
• Population:
17,948,000.
• GDP per capita:
US $14,528.3.
• Exchange rate:
1 USD=682,226 CLP.
• CPI Inflation: on
average 4.01% during
the period 2013-2015.
• Current account
balance: -1.2% of GDP
in 2014.
• M2 Growth: 8.74% in
2014.
• Global
Competitiveness
ranking: 35 out of 140.
MACROECONOMIC
OVERVIEW

3. CHINA GLOBAL ANALYSIS INC
Chile, the first South American country to
recognize China diplomatically, 45 years ago, has
entered into a Free Trade Agreement (NAFTA) in
2005. Moreover, from 2015 it is the protagonist of
the launch of the first financial center of the yuan
in Latin America, thanks to the adoption of three
basic agreements.
With the first, the Chilean government has
received approval from Chinese regulators to
participate in the program of the Chinese Renminbi
Qualified Foreign Institutional Investors (RQFII).
Therefore Chilean banks, pension funds, insurance
companies and mutual funds may invest up to 50
billion yuan (8.1 billion dollars) on China's capital
market.
With the second, we have the opening of the
second clearing center of Renminbi in America.
With an initial investment of $ 189 million and
under the supervision of the China Construction
Bank (CCB), Chile and the Asian giant will reduce
transaction costs (credit operations, commercial
payments with foreign countries, etc.) facilitating
the conversion between the respective currencies.
Finally, the signing of the Currency Swap
agreement between the Central Bank of Chile and
People's Bank of China for 22 billion yuan (3.5
billion dollars). This will allow on one hand to
buffer dollar volatility on trade and investment
flows and, on the other hand, help the Chilean peso
and the yuan to advance in turnover of bilateral
trade.
BANKING SYSTEM
The solid banking industry in Chile today stands in opposition to the one of thirty years ago. Due to
the dramatic financial turmoil of Chile in 1982, several banks were impounded or disbanded.
Between 1980 and 1990, the South-American country reformed its financial system with a stricter
regulation and supervision. Present-day the Superintendent of Banks and Financial Institutions
(SBIF) and the Central Bank of the Country overlook the banking system: this comprehends
twenty-four banks and is largely concentrated (the biggest five control 72% of Chilean banks’
assets). This concentration is the consequence of various mergers which took place in the 90s to
enhance efficiency and profitability.
• Strategic location in
Latin America.
• High Chinese
investments for
infrastructure
construction in Chile.
• Chile is world’s major
exporter of copper
• China is world’s major
importer of copper
• To take advantage of the
natural resources of the
Country.
• To increase Chinese
exportations towards this
South-American nation.
CHINESE INTERESTS
IN CHILE

4. CHINA GLOBAL ANALYSIS INC
Some Chinese banks have already invested in Chile, such as China Construction Bank and Bank of
China. The two giants have established operations in the Country to convoy funds in strategic
sectors of the territory (for example mining and telecommunication) and to launch a business
network with other South-American nations.
CHILE COUNTRY & EQUITY RISK PREMIUM
Rating-based assessment
Chile stands first for its sovereign debt’s quality among other Latin American countries.
Country risk premium is only +0.93% higher than US’s, and the CDS Spread over US of
128 basis points shows a high credit quality.
Moody’s rating Country Risk
Premium
Equity Risk
Premium
Chile Aa3 0.93% 7.18%
Argentina Caa1 11.55% 17.80%
Brazil Baa3 3.39% 9.64%
Mexico A3 1.85% 8.10%
Colombia Baa2 2.93% 9.18%
Peru A3 1.85% 8.10%
Bolivia Ba3 5.55% 11.80%
Source: Damodaran, Moody’s. USA assumed as default risk-free country.
The rating reflects the strong business environment: World Bank’s Doing Business 2016
ranks Chile 48th both in 2015 and 2016. The democracy is quite stable and the economy
performs well, even being exposed to external shocks like the slowdown of Chinese
economy (25% Export) or a plunge in copper price (50% exports, 20% GDP).
Macroeconomic good policies, inflation control (4.4%), low public debt (16%) and a good
rule of law strenghten Chilean economy, keeping its country risk at low levels.
Relative Standard Deviation-based assessment
Chilean financial markets are however affected by the decline in economy growth rate,
worsened by the plummet in copper price (almost 30% in 2 years) and the Chinese
slowdown. This could make somehow difficult to get credit, increasing market’s volatility.
Annual Standard
Deviation (5 Years)
Relative Standard
Deviation
Equity Risk Premium
Chile 20.92% 2.20 13.75%
Argentina 43.63% 4.59 28.67%
Brazil 28.48% 2.99 18.72%
Mexico 18.25% 1.92 11.99%
EM Latin America 22.69% 2.39 14.91%
Emerging Markets 17.85% 1.88 11.73%
Source: MSCI Investable Market Indexes (IMI), our analysis. RSD is relative to USA volatility.

5. CHINA GLOBAL ANALYSIS INC
In fact, we find Chile’s ERP closely follows the average in Latin America Emerging
Markets (13.75% vs 14.91%). We expect a stable situation, without future shocks in the
market. This will keep Chilean ERP in line with the actual value, confirming the overall
good quality of its sovereign debt and the low risk of investing in this country.
RISK OVERVIEW
Persistent financial market stress in structurally relevant emerging markets (China and
Brazil) does not support Chilean export-based economy. The high fluctuation of markets
and the depreciation in Chilean Peso (CLP) keep high pressure on the overall system,
especially on the weaker import sector.
The predominance of mining and copper sector leaves the country exposed to external
collapses. In fact the larger part of exports (>50%) are related to copper trading. If Chile
does not accelerate its development, shifting from a natural resources-based economy to a
services-based economy, it will remain tied to the trend of commoditities in volatile
markets. But the education system remains poorly developed.
Possible widening of current account deficit could occur, due to adverse performance in
external sector. Moreover Chile is exposed to climatic and earthquake risks which could
lead the government to unexpected expenses in the future.
CHINA GLOBAL ANALYSIS INC.
THE COUNTRY RISK ASSESSMENT TEAM
Enrico Astegiano Andrea D’Oro
9 March 2016