Cash-Strapped Latin American Countries Turn to China for Credit

• by Mario Osava (rio de janeiro)
• Tuesday, April 28, 2015
• Inter Press Service

To rebuild the infrastructure destroyed by the civil war, Angola needed finance which was denied to it by the West, whereas China supplied credit and engineering expertise without imposing impossible conditions on a country that only achieved peace 27 years after winning independence in 1975, Angolan leaders declare.

On the opposite side of the Atlantic ocean, several Latin American countries in financial difficulties have recently turned to China as a sort of lender of last resort. Argentina and Venezuela, for example, lacking access to international credits, obtained large loans from Chinese banks.

For China, it makes no sense to refuse loans to countries with strong agricultural production or that possess plenty of commodities, especially oil and gas. There is no need to be concerned about their solvency if their products guarantee their loans, whatever the reasons for their difficulties.

Brazil's state oil giant Petrobras announced on Apr. 1 an injection of 3.5 billion dollars from China to relieve its finances, which have suffered from the corruption scandal that has rocked the economy, the government, large companies and several political parties in the country since 2014.

The loan from China Development Bank is helping Petrobras weather a storm that also includes gross management and planning mistakes which raised the cost of constructing two refineries, of the purchase of another plant in the U.S. city of Pasadena, Texas, and of other projects by tens of billions of dollars.

The crises faced by potential Petrobras suppliers provide opportunities for China, but are not seen as indispensable. China Development Bank previously loaned Petrobras 10 billion dollars in 2009, when the oil company appeared prosperous and had recently discovered vast reserves in the pre-salt layer off the Brazilian coast.

This loan will be repaid by a minimum of 10 years' oil supply to China.

Unequal exchange

"China's financial power tends to accentuate the trade imbalance," when countries or whole regions export virtually only commodities to China, and import Chinese manufactured goods, said Luis Afonso Lima, president of the Sociedade Brasileira de Estudos de Empresas Transnacionais e da Globalizaçao Econômica (SOBEET - Brazilian Society for the Study of Transnational Corporations and Economic Globalisation).

Iron ore and soy account for 75 percent of Brazilian exports to China, he said, while imports from China are nearly all manufactured goods.

But China "is a new trading partner with a high degree of complementarity, and a win-win situation could be created if we knew how to make the most of the opportunity," Lima said.

"Brazil must do its homework and define what it wants from China in the long term, and then negotiate, instead of merely reacting passively to Chinese demands," he said.

In his view, now is the time to make changes to that unequal exchange, because China is facing "the prospect of reducing its exports and stimulating the dynamics of internal demand, whereas in Brazil it is the reverse: the domestic market is weakening and more exports are needed."

But Lima recognises that Brazil's economic and political difficulties do not favour the definition of long term strategies and goals in negotiations with an ascendant power like China.

Booming investment

China's growing involvement in Latin America is also marked by growing investment. SOBEET identified 69 projects announced by Brazil since 2010, the vast majority in processing industries involving medium-sized amounts, that is, less than 100 million dollars.

Only three investments are over one billion dollars: in the first, the State Grid Corporation of China (SGCC) invested five billion dollars, mainly for the purchase of power transmission lines; the second is for extracting and exporting iron ore; and the third is for processing soy.

The list is not complete because of the difficulty of monitoring Chinese investments that are routed through other countries, such as European nations, and arrive at their productive destination without the nationality of origin being known, Lima complained.

China has been increasing its foreign direct investments since the turn of the 21st century, and they reached over 206.8 billion dollars in 2013, according to United Nations figures published by SOBEET.

Latin America has not been a priority destination for Chinese investments. The region has received only 4.1 percent of the total, according to the Economic Commission for Latin America and the Caribbean.

However this will change over the next 10 years. China will invest 250 billion dollars in the region over this period, President Xi Jinping announced in January in Beijing, at the first Ministerial Forum between China and the Community of Latin American and Caribbean States (CELAC).

Some projects are exceptional, like the interoceanic canal in Nicaragua which will compete with the Panama Canal and will cost an estimated 40 billion dollars, four times the GDP of Nicaragua.

A large part of the capital already invested is oil-related. State Chinese oil companies are already taking part in oil and gas extraction in Argentina, Brazil, Ecuador, Peru and Venezuela.

But the most spectacular growth in China-Latin America relations has occurred in trade, which increased 22-fold between 2000 and 2013, to reach 275 billion dollars in 2013. And it is set to double again by the end of this decade, Xi predicted.

The expansion in trade exacerbated the imbalance, but the terms of exchange improved with the boom in prices of Latin American commodities, which lasted at least until 2012.

Credit penetration

The amounts involved in Chinese loans to the region are lower than the trade figures, but also reflect the Asian giant's expansion and its priority interests in oil, minerals and agricultural produce.

Between 2005 and 2014, borrowing from China by the region totalled 119 billion dollars, according to the databank of Inter-American Dialogue, a forum for political and business leaders of the Americas that includes former presidents of several countries.

Of this total, nearly half – 56.3 billion dollars – was loaned to Venezuela, which possesses the world's largest oil reserves. Next in order of importance are Brazil and Argentina, which are big exporters of soy and received 22 billion and 19 billion dollars, respectively.

Mexico, the second largest Latin American economy, is in sixth place in terms of loans from Chinese state banks, with 2.4 billion dollars, less than one-quarter of the amount borrowed by Ecuador (10.8 billion dollars) and less even than the credit extended to The Bahamas (2.9 billion dollars).

Edited by Estrella Gutiérrez/Translated by Valerie Dee

© Inter Press Service (2015) — All Rights ReservedOriginal source: Inter Press Service

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