China’s multi-million dollar loans to Latin American governments have stalled. No new state-to-state loans have been granted in the past two years. According to experts, however, China has instead favored commercial loans for its companies’ projects in the region.
Since 2005, China’s political banks have been lending to countries in Latin America and the Caribbean, with the top three recipients being Brazil, Ecuador and Venezuela, often on terms guaranteeing Beijing access to those countries’ natural resources. The region borrowed $138 billion from the China Development Bank and the Export-Import Bank (Exim) of China, split into 117 loans throughout the region.
The trend accelerated with the global financial crisis of 2008, which reduced financial options for emerging markets. Countries like Argentina, Ecuador and Venezuela were deeply in debt to Western institutions and turned to Beijing.
China’s loans to governments in Latin America and the Caribbean peaked at $34.5 billion in 2010; however, the funding came with strings attached. According to Stephen Kaplan’s book, Globalization of patient capital: the political economy of Chinese finance in America, these conditions included the obligation for the borrowing countries to repay part of their loans with oil; buying Chinese products such as machinery; or to allow Chinese companies access to sectors such as telecommunications and energy.
More recently, Chinese banks have focused on financing Chinese companies operating in the region, according to a March report by the Inter-American Dialogue and the Center for Global Development at Boston University.
Twenty years ago, Chinese companies “had no connection with the region. They didn’t know anyone. They did not understand operating environments [or] investment environments,” said Margaret Myers, one of the report’s authors and director of the Asia and Latin America program at the Inter-American Dialogue in Washington. So the earlier strategy of conditional loans to countries “was kind of a natural way to help Chinese companies get established.”
Now, Myers told VOA, Chinese companies “have the network in place, okay, so they don’t need that assistance anymore. They can make their own deals. They can find their own opportunities, and now, they just need the funding in place to be able to do all of that, so it’s a very different mechanism.
China’s political banks have stopped offering new loans to Latin American governments in 2020. Instead, China’s new financial approach to the region focuses on private finance initiatives in the energy, mining and infrastructure. In 2020 and 2021, China’s state-owned commercial banks, including the Industrial and Commercial Bank of China, provided 12 loans in Argentina, Brazil, Colombia, Mexico and Peru. These loans are dedicated to projects with a Chinese component such as a Chinese company working in partnership with a local company.
While the earlier lending strategy enabled Chinese companies to gain a foothold in Latin American and Caribbean markets, borrowing governments fell into deep debt. In his book, Kaplan argues that loans were made without regard to countries’ ability to repay, which may have encouraged them “to spend beyond their means, catalyzing future debt problems”.
Chinese loans “unfavorable” for Ecuador
Ecuador owes nearly $5 billion to China, equal to 11% of its total external debt. Forty-two percent of this debt is expected to be repaid with oil by 2024.
When Ecuadorian President Guillermo Lasso visited China in February, he raised the possibility of decoupling debt from oil and extending the repayment term.
Mauricio Pozo, Ecuador’s finance minister in 2020 and 2021, said Chinese loan terms were very “disadvantageous” due to short loan terms and high interest rates. Ecuador’s state-owned oil company Petroecuador said it loses money for every barrel of oil exported to China.
Petroecuador is currently renegotiating with the oil and gas company PetroChina to change the formula that calculates the price of oil and to extend the terms of the contracts in order to be able to sell part of the oil on the open market.
Following Lasso’s meeting with Chinese President Xi Jinping, Chinese state news agency Xinhua reported that Xi hoped that “Ecuador will continue to provide a fair and convenient business environment for Chinese companies to invest. and operate in Ecuador”.
VOA sent multiple requests to Chinese embassies in Ecuador, Venezuela and Washington for this story but received no response.
Myers said China’s curb on lending to regional governments may have been driven in part by concerns about those governments’ ability to repay their debts.
“China faced this problem before the pandemic, and during the pandemic it became even more of a challenge,” she said. “We have seen China’s efforts to restructure the terms of some of the debt tranches in Venezuela and also in Ecuador.”
Jorge Heine, a member of the China Global Initiative at Boston University’s Global Development Policy Center, told VOA that China “got its fingers burned” with Venezuela, where the government “continues to owe 19 billion dollars to China…and payment is uncertain”.
Venezuela’s oil production saw a decline from 2015 to 2021. China had granted grace periods on principal payments while Venezuela was paying interest on debt.
Heine suggested another reason China shifted its lending in Latin America from governments to businesses was so that Beijing could “focus more on [domestic] development and internal investment in the years to come.
Heine added that Chinese companies no longer depend on conditional loans to secure construction contracts. Now they are able to compete openly for contracts in countries whose governments have not borrowed from China, such as Chile, Colombia, Mexico or Peru.
“Chinese companies have realized that in order to participate in projects in Latin America, they must be able to win them in open tenders, open competitions, because otherwise they will not have access to the projects,” Heine told VOA.
Even with changes in recent lending strategies, analysts expect China to continue its relationship with Latin America, selling more products to the region and gaining access to new sources of oil.