How Important is Chinese Lending to Latin America?

˙ China & Latin America

Q: Chinese lending to Latin America and the Caribbean hit an all-time high of $37 billion in 2010. But China’s lending to the region has plummeted since then, to approximately $6.8 billion in 2012, according to data recently compiled by the Inter-American Dialogue. The drop-off was attributed mainly to a decline in Chinese lending to Venezuela. How important is Chinese lending to the region today? What does the decline in funding from China mean for Venezuela and the region as a whole? What will the future hold for Chinese lending to Latin America and the Caribbean?

A: Margaret Myers, director of the China and Latin America program at the Inter-American Dialogue: “The China Development Bank and China Ex-Im Bank are unlikely to stop lending to Latin America. New loans to the region were announced in June during President Xi Jinping’s visits to Costa Rica, Mexico and Trinidad and Tobago. But in the wake of investment-related setbacks in Myanmar, Libya and now possibly Venezuela, China is working to develop better risk assessment capability, which could mean a decrease in loan amounts and more stringent loan terms. A lack of regional expertise in Beijing coupled with China’s preference for closed-door negotiations has potentially exposed China to a higher degree of risk than intended. The $44 billion in loan agreements negotiated between Chávez and China’s policy banks will very likely face some scrutiny in the coming years. China Development Bank, which is responsible for the vast majority of lending to Latin America, is increasingly working with state-run think tanks to develop profiles for projects in the region and elsewhere. Regional studies desks within state-owned enterprises are also profiling leaders and reporting on environmental issues, cultural considerations and historical tendencies in countries of interest. Some caution against investment in specific Latin American nations. Analysis conducted by Chinese oil firm CNPC warns of excessive political risk and unfavorable tax policy in Venezuela. China will remain a source of finance (though a better informed one) for certain Latin American countries, however. As growth slows in China’s domestic market, lending abroad could very well prove an increasingly attractive option for China’s powerful policy banks.”

A: Sun Hongbo, associate professor at the Institute of Latin American Studies of the Chinese Academy of Social Sciences in Beijing: “Chinese finance played an important facilitating role in China-Latin America economic ties by injecting liquidity during the recent international financial crisis. Such financing could be seen as a supporting pillar to deepen China’s bilateral economic cooperation with the region, propelled by China’s huge foreign-exchange reserves of more than $3 trillion. Obviously, Chinese lending has promoted the development of resource-based industries and infrastructure in Venezuela, Ecuador, Brazil and other countries, and has increased those countries’ trade volume with China. In comparison to transnational hot money, China’s loans to Latin America have the nature of development finance. Without a doubt, Chinese financial capacity can benefit Latin American development, but the challenge is how to utilize Chinese capital with more efficiency, effectiveness and responsibility. In view of its growth potential, Latin America holds a strategic position in Chinese banks’ ‘go-global’ initiative. Former Chinese Premier Wen Jiabao said in a speech to ECLAC last June that China’s financial cooperation mechanism needs to be innovated by creating a China-Latin American cooperation fund with a first tranche of $5 billion from Chinese financial institutions, a special infrastructure fund with $10 billion from China’s Development Bank and a $50 million special agricultural fund. China’s future lending to Latin America largely depends on multiple factors, such as Chinese macroeconomic change, an economic structural adjustment policy, new financial regulation and Chinese banks’ business plans, as well as individual financing needs of Latin American countries and their bargaining with China.”

A: Matt Ferchen, resident scholar at the Carnegie-Tsinghua Center for Global Policy in Beijing: “For some years now, Venezuela has been the most obvious outlier in China’s lending to Latin America. The Dialogue’s 2012 ‘New Banks in Town’ report clearly demonstrated that since 2005 Venezuela was the main recipient of Chinese loans, most of which were provided by the China Development Bank as part of the CDB’s loans-for-oil strategy. Such an outsized commitment by China to the region’s riskiest, if most oil-rich, country raised questions from many observers even before Hugo Chávez’s health concerns became public. The combination of Chávez’s deteriorating health beginning in 2011 and culminating in his death in March of this year, along with China’s 2012-13 leadership transition, are the likeliest causes of China’s reappraisal of, and subsequent slowdown in, the country’s loans to Venezuela in particular. Unless and until Venezuela’s political and economic meltdown, including the operations of state-run oil company PDVSA, can be arrested and placed on a healthier trajectory, it is unlikely that we will see loan commitments from CDB or other Chinese lenders of the size and scale that we saw when Chávez was still alive. As for the rest of the region, lending will likely take place on a country-by-country and case-by-case basis, and as long as there are viable projects that fit Chinese lenders and other firms’ investment criteria, there is no reason to think that significant lending won’t be forthcoming in the years ahead.”

A: Erik Bethel, managing partner at SinoLatin Capital in Shanghai: “Part of the drop in lending to Venezuela in 2012 was a function of uncertainty surrounding Venezuela’s political transition. I expect this to ramp up again driven by Venezuela’s need for financing and necessary infrastructure improvements. Insofar as the rest of the region, I also expect the lending to increase, particularly in Peru where Chinese firms are investing billions of dollars in very large mining projects such as Toromocho (owned by China Aluminum Corp.). Many analysts also expect Glencore to sell its Peruvian ‘Las Bambas’ copper project to a Chinese firm. This project will require several billion dollars in capital expenditures and Chinese lenders will be actively involved.”