Carlos Aquino Rodriguez
In the last years China and
Latin American relations have increased very fast to the point that now China
is the second biggest trade partner of the region, a growing source of foreign
direct investment, a provider of aid and has become its biggest lender. In this
article financial cooperation between China and Latin America will be
discussed. Nowadays this is done mainly through the loans that China has been
giving to Latin America. First, a review of the present situation will be
given; Second the problems arising in this field are mentioned and also the
causes and how to overcome them; Third, how can China and Latin America could cooperate
more in the financial area will be seen; Fourth, what should be done to
encourage more Latin America capital flows to China; and last, some Conclusions
will be given.
1. State
of Financial Cooperation between China and Latin America
From the last decade China
has lent a lot of money to Latin American countries. According to the web site
of The Dialogue, from 2005 to the year 2016 China has lent to the region a
total of 141 billion dollars[1]. That
amount is more of what the World Bank and the Inter-American Development Bank
has lent to the region. The biggest recipient of these loans has been Venezuela
with 62.2 billion dollars, then Brazil with 36.8 billion dollars, Ecuador with
17.4 billion dollars and Argentina with 15.3 billion dollars. See Table 1.
Table 1: Total
loans from China to Latin American countries 2005-2016
Source: The Dialogue, China-Latin America Financial
Database
The loans has been given
through the China Development Bank and China Ex-Im Bank. The first gave 114.3
billion dollars and the Ex-Im Bank 27 billion dollars.
According to the same source,
of that amount the biggest part has gone to the energy sector, with 100 billion
dollars, infrastructure with 24.3 billion dollars, other with 14.8 billion
dollars, and mining with 2.1 billion dollars.
But several countries in the
region have problems in repaying these loans, specifically Venezuela and
Ecuador. These countries went to borrow from China because they could not
access loans from global capital markets (they were not eligible for that), and
China was willing to give them loans based more on diplomatic considerations
than economic ones. But there is a risk that both countries could incur in
default given the economic difficulties they are experiencing
2. What
are the problems, the causes and how to overcome them?
China has been lending to
the region as has been told based more on diplomatic considerations than in
economic ones. China has been called a lender of last resort for some Latin
American countries. These countries go to China because they can`t access other
sources of financing, and China does not impose many conditions on the loans.
But then perhaps to avoid problems some conditions should be attached to those
loans.
An element to consider is
that perhaps China does not have first-hand information on the financial conditions
of countries in problems. To overcome this problem China should work together
with international institutions that have expertise in the region, like the
IADB, the World Bank and even the IMF. Also there are many private credit
rating agencies, like Fitch, S&P, and Moody`s.
But it is interesting to see
that China has a rating agency, Dagong Global Credit Rating, that it seems
conduct research and rate countries according to their financial conditions. In
2014, when Argentina could not pay, or refused to comply with a US court order
to pay holdout hedge funds (related to the country`s 2001 nonpayment on debt
obligations), Argentina was declared in default. Following this, in August 1 of
that year Dagong Global Credit Rating declared Argentina in default of its debt
obligations[2].
Even so, after that the Chinese government declared its commitment to continue
giving Argentina financial support. But then, as can be seen in the Finance
database of the Dialogue mentioned before, after August 2014 no new loans from
China to Argentina has been recorded.
So China has already a kind
of way of knowing if a country can pay or not the loans, but again political
and diplomatic considerations could override those considerations.
China can also lend money
through some multilateral institutions, like the Asian and Investment
Infrastructure Bank (AIIB) to Latin America or the Inter-American Development Bank
(IADB). These kind of institutions have a screening process that evaluate the
loans given to the countries to avoid the misuse of them and the capacity of
the country to repay them. There is already one example when the Chinese
government initiated the China- LAC Cooperation Fund in the year 2015 with an
initial amount of $5 billion[3].
$2 billion are administered by the IADB in projects like education, water
conservation and energy, and the other $3 billion is administered by China
Ex-Im Bank as a private equity fund.
Another problems associated
with Chinese loans are the fact that these are more oriented to the natural
resource sectors and it is said that this will perpetuate Latin America
condition as producer and exporter of natural resources, or that the region
will become dependent of Chinese loans, etc. To overcome these problems the
region need to invest the money in others sectors, like infrastructure
(railways, seaports, airports, energy grids) and in the manufacture sector. But
then this depend on the own Latin American governments decision. China in a sense
realize this problem and that is why when Premier Li Keqiang visited Latin
America in 2015 he announced the setting up of a Fund of 30 billion dollars
with the aim to help industrialize the region[4].
Also, as most of Chinese
loans are for the energy sector, some problems with the environment has been
recorded. To avoid this, compliance with the existing regulations should be
enforced (something that it is not easy to do, not only in the case of some
Chinese projects abut also in other countries projects).
Sometimes it seems there is
a lack of understanding between the priorities of some projects promoted by
China and the priorities of the countries that would benefit from those
projects. A case in point is the Peru-Brazil railway or the “twin ocean railway”
project proposed by China in 2015. During the visit of the newly elected Peru`s
President to China in September 2016, he did not show interest in the project
and for the moment this is tabled. For some people it seems China was more
interested in the project because it would allow to bring soybeans and raw
materials from Brazil to China cheaply, but for Peru investing in the project
would entail taking a loan from China of perhaps 25 billion dollar or more and
the benefits were not that high (at least not in the short and medium term).
Instead, Peru proposed China to invest in short distance railways between Lima
and surrounding areas.
Finally one problem, this
one for China, is the political risk of some countries defaulting on its loans,
especially in Venezuela, and then this country, for example, refusing to
acknowledge the loans. Venezuela has received around 44% of all Chinese loans
to Latin America in the period 2005-2016. The loans were given with the
conditions of being paid in oil, and now with the price of oil so low (and with
no sight of it increasing in a significant way in the near future) Venezuela is
struggling to repay those loans. The country is in dire conditions and it could
collapse and a new government (from the opposition) could arise that could
refuse to repay the loans, as China is accused of propping up the Chavez-Maduro
regime (amid allegations that part of that money has been misused and stolen by
Chavez-Maduro regime)[5].
3. How
can China and Latin America cooperate more in the financial area
As stated in the “Vision and
actions on jointly building belt and road”, the action plan of Chinese proposed
Belt and Road initiative, several measures can be taken to promote cooperation
in the financial area among countries involved in the initiative[6].
Those are mentioned specifically for the countries in the Asian region but can
be applied for Latin American ones also. These contemplate the following for
example:
-
Bilateral
currency swap and settlement between China and the region. In fact there is already
one currency swap agreement between China and Chile signed in May 2015, during
the visit of Premier Li Keqiang to Chile. By this agreement the People`s Bank
of China and Chile Central Bank signed a three year currency swap deal of 22
billion yuan ($ 3.5 billion)[7].
Also the China Construction Bank opened its branch in Santiago as an official
RMB clearing bank, the first one in South America. Besides, China and Argentina
have a similar currency swap agreement and in July this year it was extended
for another three years. The deal is for 70 billion yuan or 10.37 billion
dollars[8].
More of these kind of agreements should be encouraged for other Latin American
countries.
-
Countries
in the region should be encouraged to join the Asian Investment Infrastructure
Bank (AIIB). This multilateral financial institution has as its aim to provide
loans to finance the infrastructure needs of its members, something that the
Latin America region also need Already
several Latin American countries are applying to joint it, like Argentina,
Bolivia, Brazil, Chile, Peru and Venezuela[9]
(Brazil being a prospective founding member).
-
Latin
American governments, companies and financial institutions with good credit
rating could issue Renminbi bonds in China. Chinese institutions lack investment
opportunities and this will be a good way to diversify their investment.
-
Financial
regulation cooperation between China and Latin American countries, through
their Central Banks and their Financial Regulatory authorities should be
established. In this way a system of risk response and crisis management could
arise, even if still financial flows between China and the region is low,
compared to the one between China and Asia for example.
-
Latin
American countries should encourage the establishment of branches of Chinese
banks in the region to encourage financial competition. The same should be said
of Latin American banks being established in China.
Besides the measures above
mentioned, China should promote more the internationalization of the yuan, to
give countries in Latin America an alternative to avoid dependence on the
dollar.
Regarding Latin America, to attract
more Chinese capital to the region it could open more its financial market. As above
mentioned, in the banking sector still is not easy for Chinese banks to open
branches in several countries as they impose many restrictions on them. For
example Peru just at the end of last year allowed the opening of a representative
office of a second Chinese bank, the Bank of China[10],
after several years that the ICBC opened its branch. In several Latin American
countries there are oligopoly structures in the banking sector, so more competition
should be allowed.
Also, the stock markets are
not well developed in the region as few companies list in the Stock Exchange as
many companies are mainly family owned, and also not want to become transparent.
Besides this, in some of these countries their Stock Exchange are very small and
the daily amount transactions are very small. In Peru for example, a country
with a GDP of around 200 billion dollars and 31 million people, where its stock
exchange was established more than 150 years ago, on October 26, 2017, the
daily amount negotiated was of only 48.9 million of Soles (around 15.1 million
dollars) and of the more than 270 companies that are listed, only less than 40
have their share negotiated on a daily basis.[11]
4. What
should be done to encourage more Latin America capital flows to China?
China should open more its
financial market. China is still closed in several aspects and the government
has controls regarding the inflow and outflow of capital in the country[12].
It is know that China is
working to have the RMB as an international currency that perhaps can compete
with the dollar, but for this to happen it needs to do several things (as
stated in the Report of Brookings cited in note 10): First, it has to make its currency
easily tradable in global financial markets; second it has to ease restrictions
on inflows and outflows; third, the exchange rate has to be more flexible (in
this regard the Chinese government is doing already a lot); fourth, it has to
develop the financial market to make it more broad, deep and liquid for investors
by giving them access to financial assets in RMB.
China has to offer more settlement
of trade transaction with RMB, allow issuance of RMB domestic bonds, to offer
some banks the possibility of offering offshore RMB accounts, also of becoming offshore
RMB clearing centers. By doing these measures China will encourage the RMB to become
part of international reserve portfolio of Central Banks.
In summary, Latin American
capital could flow to China when this country offer more access to its stock
and bond markets, when money is easy to move in and out of the country, and
when its exchange rate become more freely traded.
5. Conclusions
China loans to Latin American countries are very
important, and those will surely increase in the future, given the necessities
of the region for that, and China own needs for bigger involvement in the
region.
To avoid some problems arising from the loans, of
countries being unable to repay them, a system of credit rating should be
implemented, although this could be overcome by political and diplomatic
considerations. Also, loans should be more oriented to the infrastructure and
manufacture sectors to change the economic structure of the region dependent in
natural resources.
Financial cooperation should be promoted by
encouraging more countries in the region to have currency swap agreements with
China, make them to join the AIIB, to issue Reminbi bonds in China, and to be
able to have the Chinese currency as an alternative to the dollar by encouraging
the internationalization of it. Latin America should also open more its
financial markets to allow Chinese capital to establish its banks for example
or to participate in its capital markets of share and bonds.
Finally, China should open more its financial market
to encourage Latin American governments and companies to also participate in
the Chinese market.
27 de octubre del 2017
[2] The Dialogue: “Will Default Dampen
China-Argentine Ties?”: https://www.thedialogue.org/blogs/2014/09/will-default-dampen-china-argentina-ties/
[3] China-CELAC Forum: Introduction
of the China-LAC Cooperation Fund: http://www.chinacelacforum.org/eng/ltdt_1/t1269475.htm
[4] China Daily: “Li pledges $ 30
b industrial fund for Latin America”: http://www.chinadaily.com.cn/world/2015livistsa/2015-05/20/content_20767745.htm
[5] Foreign Policy: “Venezuela`s Road
to Disaster is Littered with Chinese Cash”:
http://foreignpolicy.com/2017/06/06/venezuelas-road-to-disaster-is-littered-with-chinese-cash/
[6] Xinhua Net: “Full text: Vision
and actions on jointly building Belt and Road” http://news.xinhuanet.com/english/china/2015-03/28/c_134105858_3.htm
[7] China Daily: “China, Chile
ink multi-billion-USD currency swap deal”
http://www.chinadaily.com.cn/world/2015livistsa/2015-05/26/content_20816109.htm
[8] CNBC: “China c. bank extends
currency swap agreement with Argentine”
https://www.cnbc.com/2017/07/18/reuters-america-china-c-bank-extends-currency-swap-agreement-with-argentina.html
[9] According to the web site of the
AIIB: https://www.aiib.org/en/about-aiib/governance/members-of-bank/index.html
[10] El
Comercio: “Bank of China ingresa al Peru para ampliar negocios bilaterales”: https://elcomercio.pe/economia/negocios/bank-of-china-ingresa-peru-ampliar-negocios-bilaterales-154613
[12] Brookings: Testimony: China`s
economy and financial markets: Reforms and risks” by Eswar Prasad: https://www.brookings.edu/testimonies/chinas-economy-and-financial-markets-reforms-and-risks/
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