Publish in Perspectives - Wednesday, March 18, 2015
The China Development Bank Tower in Shanghai. CDB is one of the primary Chinese lenders to Latin America. (Photo: Baycrest)
China as a major financing source is positive for Latin America, experts say.
China's state-owned banks increased their investment in Latin America by 71 percent last year, lending a total of $22 billion in 2014 and $119 billion over the past 10 years, according to figures released recently by the Inter-American Dialogue and the Global Economic Governance Initiative at Boston University. Chinese financing, which is primarily concentrated in the extractive and infrastructure sectors, exceeds total loans from the World Bank and the Inter-American Development Bank and is concentrated mainly in countries that have difficulty accessing other sources of finance, researchers found. Will Chinese lending to the region continue at such levels over the next year or two, and how will China's relationship with Latin America most likely evolve in the mid-term? How much have Latin American countries benefited from the financing, and are there any drawbacks of the lending that countries should be wary of? What is the political impact of Chinese financing in Latin America, and how could that change as China's economy cools?
Jorge Heine, Chile's ambassador to the People's Republic of China: China's increased bank lending to Latin America must be set within a broader context. Although not quite there yet, China will soon be exporting more capital than it imports. The sheer size of Chinese GDP, now at over $10 trillion (around 16 percent of world product), means there is much capital looking for investment opportunities abroad. As the volume of this capital grows, we should expect it to go beyond the extractive sector and countries with difficulties in accessing financing, thus 'normalizing' its flows to other sectors and activities. In the case of South America, whose regional integration has been hampered by long distances and huge geographical barriers, both physical and digital infrastructure projects loom large as opportunities for Chinese companies and Chinese lending. This is especially true of multinational projects in the spirit of the First Ministerial China-CELAC Forum held January in Beijing, which committed to doubling Chinese investment stock in the region to $250 billion by 2025. The drawbacks, if any, of extant Chinese loans to Latin American countries so far are not apparent to me. Growing Sino-LAC trade and investment flows over the past decade-and-a-half are the natural outcome of the increased Chinese weight in the world economy and of Latin America's more diversified links with the latter.
Magdalena Forster, Latin America analyst at Deutsche Bank Research: China is a relatively new but important funding source for Latin American countries. New commitments made over the years have varied greatly, from a record $37 billion in 2010 to only around a tenth of that two years later, according to the China-Latin America Finance database. Still, we think that Chinese engagement is here to stay in Latin America. A variety of motives drive Chinese lending, including intensifying diplomacy, diversifying resource supply and putting ample liquidity to profitable use. A slowdown in economic growth in China should therefore not materially impact the country's lending decisions in Latin America. For Latin American countries overall, the development of China as a major financing source is positive. Chinese assistance means a diversification of funding sources, especially in countries with limited access to foreign funding, and it helps develop notoriously deficient infrastructure and extractive projects in the region. Loans do not come without strings attached, however. Some of the mostly non-disclosed lending contracts stipulate the repayment of loans with future oil shipments to China, employed in loan contracts with Venezuela and Ecuador. In times of low oil prices, the countries might now have to commit a larger share of their oil exports to pay back interest and amortizations of their Chinese loans.
R. Evan Ellis, research professor of Latin American Studies at the U.S. Army War College Strategic Studies Institute: Chinese financing in Latin America and the Caribbean will continue to expand, with an emphasis on enabling construction projects and purchases tied to Chinese companies and goods. The focus of agreements reached will continue to favor the ALBA regimes, Argentina and the Caribbean because of their need for non-Western financing and corresponding willingness to bend competitive public procurement rules to reach state-to-state deals with favored partners such as China. Within this group, the distribution will change, with Chinese institutions seeking more guarantees in negotiating Venezuelan deals as that nation's Bolivarian Socialist regime continues to implode. Ecuador, which has made relatively good use of Chinese funds for hydroelectric and other infrastructure projects and which just received $7.5 billion in new PRC financing, will probably continue to deepen its relationship. Bolivia, with multi-billion dollar highway, dam and mining projects of interest to the Chinese, and Nicaragua, with the trans-oceanic canal project, remain wild cards. The countries which have received least, but benefitted most, from Chinese loans are those with strong institutions, access to capital and transparent, well-defined public procurement procedures. In nations like Brazil, PRC financing has been provided on market terms, with Chinese companies using substantial numbers of local workers and subcontractors and generally following environmental and other regulations. By contrast, in Venezuela, Suriname and Guyana, opaque deals between Chinese business executives and local elites have raised questions of corruption and produced deals unfavorable to the host nation. As the PRC economy cools, Chinese businessmen will not withdraw from Latin America, but will more aggressively seek loan-backed work there, as opportunities to make profit in the PRC dry up.
Sun Hongbo, associate professor at the Institute of Latin American Studies of the Chinese Academy of Social Sciences in Beijing: The spillover of China's globalized economy into Latin America has gone far beyond trade ties to deepen financial cooperation, which demonstrates the high sophistication of the China-Latin America economic relationship. Particularly in light of the global business cycle, the bust of commodity prices and China's structural reform, the increasing bilateral financial deals have been regarded as the new engine to explore economic cooperation potential between both sides. It is also mutually beneficial to take advantage of Chinese financing to make up for the capital accumulation deficit in Latin America. Chinese financing is now playing an important supportive role by injecting liquidity for large projects linked to natural resource industries and infrastructure in South America. The institutional arrangements of those financial deals include a variety of mechanism designs, such as concessional and commercial loans, joint funds, industry and agriculture funds, currency swaps and consortium financing, among others. The China-Latin American financial linkage also continues to build the financial service network at the bilateral, regional and international level, driven by the 'Go Global Strategy' of Chinese financial institutions. Although China's financial engagement in the region is a sophisticated process of high political economy, Chinese financial institutions have extended their commercial activities based on market principles and the profitability of deals rather than their ideological preference. Obviously, strong political willingness and feasible projects are preconditions to reach any financial deal, which could generate mutual economic benefits. Considering the commercial risks, Chinese banks have been concerned with the responsibility, sustainability and effectiveness of loan use.