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The size of Brazil's and China's neighbors' debt – and what that means

by ace

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ICBC, China's Industrial and Commercial Bank, is the world's largest asset bank and a major lender to Latin American countries. (Photo: Getty Images)

In recent decades, China has exported record amounts of capital to the rest of the world. Its direct loans and trade credits rose from almost zero in 1998 to more than $ 1.6 trillion in 2018, or 2 percent of world GDP. But unlike in most countries, these capital flows are not private, from banks or private investors. They are nationals, ie state-controlled companies or financial institutions.

The difference is important because, unlike private investors, the Chinese state not only seeks profitability when lending money, but also political influence. Its main investment arms are China Development Bank and Export-Import Bank of China, through which the Asian giant has become a major banker in Latin America.

Taken together, the five Latin American countries that have contracted most debt with public entities in China owe the Asian country more than $ 133 billion. To put the figure in perspective: this is more than Ecuador's GDP (Gross Domestic Product). Just over half of this total ($ 67.2 billion) was loaned to Venezuela, which is now the most indebted country with China on the continent.

Much of this money went to mixed companies, formed by Chinese companies with Venezuelan state oil company PDVSA, as a way of channeling foreign participation in Venezuelan oil exploration.

"(China) lends money because it has it. In July 2016, the country had the largest foreign exchange reserves in the world: $ 3.21 trillion," said journalist Daniel Méndez, who thoroughly investigated the issue. and published his findings in the Spanish book 136: El Plan de China en América Latina. "Most of this money comes from juicy trade surpluses (profit from the difference between how much the country exported and how much it imported) that the Asian giant has accumulated in recent years, especially with the US," he adds.

But what does China hope to achieve from its investments in Latin America, including Brazil? Experts agree that official lending always has a strategic element behind it. Beijing, for its part, argues that these deals benefit all parties, while governments in the region have sought to get closer to the world's second largest economy – in a recent meeting with Chinese President Xi Jinping, Brazilian Jair Bolsonaro said China, which Already the largest trading partner in Brazil, it is "increasingly part of the future of Brazil".

Distinct Objectives

In Latin America, experts explain that Beijing's geopolitical goals include securing supplies of resources and raw materials, and opening new markets for its own goods. An example of this is investments in the infrastructure sector aimed at improving trade in the Pacific Ocean, which would make transportation cheaper for Chinese companies.

But there are also numerous contracts signed for joint export of oil and minerals across the continent. "Certainly this flow of money (to Latin America) is part of China's internationalization strategy and to expand its footprint in global trade, finance or even militarily," Christoph Trebesch, analyst at Kiel Research Center, tells BBC News. Institute for the World Economy, based in Germany.

Venezuela embodies one of the most typical forms of lending to China: natural resources. In the case of Caracas, for example, China allows a portion of the credit to be repaid directly by selling oil at market-determined prices. "These are the so-called loans-for-oil. For China, they serve to secure the supply of natural resources and somehow guarantee repayment in the event of an economic crisis (from the debtor country)," Méndez tells BBC World News.

This same formula has been used in many other international agreements.
According to records from the Washington-based Inter-American Dialogue study center, China Development Bank in September 2018 allocated about $ 5 billion for investments in the Venezuelan oil sector. Behind Venezuela, Brazil is the second largest debtor to China, with loans of $ 28.9 billion, followed by Ecuador ($ 18.4 billion), Argentina ($ 16.9 billion) and Bolivia ( $ 2.5 billion). For the last three countries, the credits are usually linked to Chinese exports or the construction of infrastructure works by Chinese companies.

"China lends you the money, in return for you to buy materials from Chinese companies (machinery, satellites, trains, telecom teams) or certain infrastructure works to be done by Chinese companies (roads, tunnels, railway lines, power stations, nuclear power plants ", points out Méndez. Although Venezuela is the largest debtor, the Inter-American Dialogue says that another Latin American country is currently standing out in its relationship with China.

"Taking into account exclusively the number of individual projects being developed in the region, Bolivia stands out as the main destination for Chinese investors," says the study center. "Since 2013, Chinese companies have entered more than 20 highway and bridge projects in Bolivia." There are, for example, trade agreements to exploit lithium, which is used in car and cell phone batteries. China's large capital flows to Latin America have important implications for debt sustainability in recipient countries, Kiel Institute analysts explain.

In a report, they point out that "Chinese loan flows between 2008 and 2015 are similar to the lending cycle of the 1970s, which did not end well, as commodity prices, export earnings and growth collapsed in many of the indebted countries. "

But concerns are not limited to the sustainability of countries' accounts – they also cover social, environmental and government issues. "Chinese investments in the region are not risk-free," Marsh said, citing the construction of a hydroelectric dam in Santa Cruz, Argentina, which began its environmental impact assessment and was eventually held by the country's Supreme Court. By contrast, there are voices arguing that Chinese credit has helped to get many projects off the ground and that the overall balance is positive.

"It is a fact that some (Chinese companies) have made mistakes, (…) but they are learning and their operations are improving. It is not fair to ignore the positive side of all this," said Shoujun Cui, director of the Latin American Studies Center. from Renmin University, China, in a report from the South China Morning Post. One of China's advantages as an investor, Cui and other experts told the newspaper, is that Beijing "does not interfere with domestic politics or try to control the local economy."

"China, by not imposing political revenues on its trade and financial agreements, offers its Latin American partners a political space to advance their own economic and political revenues," agrees Alexander Main, director of the Center for Economic and Policy Investigations. Washington. According to this assessment, Chinese collaboration would be less "aggressive" than US collaboration.

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