Will Default Dampen China-Argentina Ties?

˙ Asia & Latin America

Following a prolonged legal tussle between Argentina and foreign creditors from the country’s 2001 nonpayment on debt obligations, the Fernández administration’s refusal to comply with a US court order to pay holdout hedge funds has once again landed Argentina in default. The change has had little impact on global markets, thanks largely to Argentina’s relative financial isolation. But default could alter trade and capital flows with China, a major economic partner. What do Argentina’s latest economic woes mean for bilateral ties?

Keeping a close eye on Argentina

On August 1, Chinese rating agency Dagong Global Credit Rating declared Argentina in default of its debt obligations, throwing into jeopardy financing agreements between Argentina’s government and China Development Bank (CDB), the Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC). The more than 4.7 billion dollars that Chinese creditors have promised Argentina for the completion of two hydroelectric dams in Patagonia is conditional. It requires Argentina to service all debts to foreign creditors and remain in good standing with the International Monetary Fund and World Bank.

While statements by Argentina’s government vehemently deny that the country’s financial situation will impact financial agreements with China, Economy Minister Axel Kicillof and Planning Minister Julio De Vido were reportedly dispatched to Beijing to discuss loan agreements for the hydroelectric project and similar cooperative efforts between the two countries. Other ongoing projects include the construction of the Belgrano-Cargas railway system and support for Argentina’s nuclear program. Officials in the Ministry of Economy also worry that an US “vulture funds” could halt Chinese credit to Argentina, as reported by Argentine paper La Nación.

Chinese reactions to Argentina’s debt controversy are mixed. China Securities Journal advised firms and financial institutions to counter and prevent further risks in the wake of the default, while new rating indices in China give Argentina low marks among Latin American economies.

For now, though, Chinese investors seem undeterred.  CEO Mo Wenhe and other high-level representatives of China Harbor Engineering Company recently met with top government officials in Buenos Aires to discuss the possibility of new projects. And in early September, China’s government reaffirmed its commitment to provide financing and construction of Argentina’s Atucha III nuclear plant.

Argentina’s soy exports have also been the subject of media speculation in China. Rising speculation against the Argentine peso, which has intensified since the country’s default despite an official devaluation in January, has driven many of the country’s soy producers to withhold this year’s crop, keeping some 9.7 billion dollars’ worth of agricultural goods off the market. Argentina’s soy sales have fallen 38 percent year-on-year, prompting discussion of potential supply shortages and price increases in China.

The effects of soy hoarding on trading prices and quantities are likely to be minimal and temporary. Argentina contributes a relatively small share of China’s total soy supply – its exports of the crop to China in 2013 totaled 3.7 billion dollars compared with 13.3 billion dollars in sales from the United States and 18.1 billion dollars from Brazil. Output from Argentina will also be buoyed by this year’s record soy harvest.

Not fair-weather friends

China’s engagement with Argentina has grown more difficult in recent years, and the default is unlikely to reverse an established pattern of delays and disappointments in the bilateral relationship. Trade disputes and allegations of corruption have repeatedly set back planned Chinese investments in the South American republic. None of the 19 new accords signed during President Xi’s visit to Buenos Aires this summer, when he and Argentine counterpart Cristina Fernández de Kirchner announced a new “comprehensive strategic partnership,” presented a major new initiative for the bilateral agenda. Nor did Argentina secure new investments in its oil and gas sector.

But Beijing seems unlikely to distance itself from Buenos Aires. The Chinese government has taken a supportive line in response to the Casa Rosada’s dispute with holdout hedge funds, downplaying speculation over China’s loans to Argentina in official media outlets and publicly reiterating its support for the Fernández administration. Central bank presidents Juan Carlos Fábrega and Zhou Xiaochuan agreed in early September to activate a credit swap agreement that could supply Argentina’s foreign reserves up to a billion dollars’ worth of Chinese currency. China also backed a UN resolution, opposed by the United States, that would establish a legal framework for sovereign debt restructuring.

While Chinese banks and firms in Latin America have indicated a growing awareness of political and business risk, China continues to engage some of the region’s riskier investment destinations. Beijing has redoubled its stake in Venezuela in an apparent bid to preserve stability in the country. China’s response to the recent default suggests a similar approach in Argentina. If this is the case, then Argentina’s tête-à-tête with China is far from over – and additional support from Beijing could be forthcoming amidst ongoing disputes with creditors.

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