When Cristina Fernández de Kirchner flew back to Argentina from Beijing earlier this year, she carried with her a bag full of co-operation agreements and fresh financing.
The controversial South American leader had succeeded in attracting Chinese support in key areas, from nuclear plants to shale gas. China has pledged $5bn to help build hydro-electric plants and another $2.5bn to modernise railways as part of a $21bn package and a series of 15 co-operation agreements. China may also be able to lay its hands on other infrastructure works without competing with any foreign competitors.
The Chinese central bank also extended its crucially important and friendly hand in signing an $11bn swap deal to prop up Argentina’s dwindling international reserves. This means that the troubled South American country will probably be able to muddle through and avoid a balance of payment crisis before the next presidential election in October.
This is part of the big Chinese push in Latin America — a relatively late initiative in the region (even compared to other Asian countries such as Japan or South Korea). President Xi Jinping, who toured the region last year, said in January that China intends to invest $250bn in Latin America and the Caribbean. Premier Li Keqiang has scheduled a visit to Brazil, Colombia, Peru and Chile in May.
So far, China has invested $110bn in Latin America during the past decade, including a bank acquisition in Brazil. Chinese loans that have been committed to Latin American countries between 2005 and 2014 now amount to $119bn. (The latest deal with Argentina comes on top of that.)
Diverse advance
China’s advance in Latin America has been more diversified than it has been in Africa, although it has also brought its share of
controversies. Not only the scale of Chinese financing looks impressive (it is now greater than the World Bank, the Inter-American Development Bank and the US Export-Import Bank taken together) but the geographical distribution of its credit is also very different compared to the multilaterals’ institution portfolios.
“The Chinese are not only providing more finance than these other three institutions but, with the exception of Brazil, these seldom collide with financing for the other countries,” says Kevin Gallagher, co-director of the Global Economic Governance Initiative and the Global Development Policy Programme at Boston University. “It is complementary; it is truly additional finance.”
Almost half of the $119bn committed to Latin America has been directed to Venezuela, while Brazil, Argentina and Ecuador take most of the rest (in that order). The Bahamas have also been pledged more credit lines than Mexico and Peru ($2.9bn in three infrastructure projects). Colombian and Uruguay feature at the bottom of the list (see table).
Gallagher points out that the Chinese are helping to fill the gap in infrastructure financing (Latin America needs to invest the equivalent of 6.2% of GDP in infrastructure, according to the Economic Commission of Latin America and the Caribbean, Eclac, but it is nowhere near that) and in sovereign debt financing, as many of the beneficiaries have been effectively cut off from the international capital markets.
“Around 90% of Chinese finance in Latin America goes to countries with trouble raising money on the international capital markets, such as Ecuador, Venezuela, Argentina and Brazil. Of course, Brazil has quite a positive credit rating but there has been some trouble raising money recently,” he says.
Chinese banks have mainly invested in Brazil to support the financing of Chinese projects there. In late 2013, The China Construction Bank acquired a majority stake in BicBanco, a middle-market institution. “They have a very clear strategy. They want to have a portfolio of middle to large corporates. It may become a platform to grow from São Paulo to Latin America,” says Luis Miguel Santacreu, a bank analyst at Austin Rating.
Sovereign twist
As in some parts of Africa, the Chinese are more willing to go into countries where the conventional international financial markets have less of a foothold, says Otaviano Canuto, a senior World Bank consultant on Brics (Brazil, Russia, India, China, South Africa). “Having countries outside the financial market [and in need of financing] creates opportunities from the Chinese perspective. It applies to Venezuela and Ecuador. They feel more comfortable to operate in what was, from the standpoint of the international capital markets, a very risky environment,” he says.
But it is not just the pariah nations that have been attracted to Chinese cash. “What is really fascinating is the case of Ecuador, because [China] financing is now equivalent to 10% of its GDP,” says Gallagher. “Unlike Venezuela, Ecuador has actually been building power plants and expanding oil production with the money and paying China back.”
Late last year, Moody’s decided to upgrade Ecuador’s sovereign rating to B3 (from Caa1). “They looked at the books and upgraded Ecuador’s credit rating, noting that its relationship with China allowed Ecuador to go to the international market. That is a very interesting twist to the sovereign debt picture,” says Gallagher.
Earlier this year, Ecuador secured another $7.5bn deal from China, including a $5.3bn credit line from the Export-Import Bank of China.
“Latin Americans have the opportunity to put their money where their mouths are. Show the world that you can take money that does not have [policy] conditions and put it to productive use without corruption, and that will create jobs... It is a great opportunity to prove that they can use the money [properly]. Ecuador has been pretty good at that. [Meanwhile] it is not all that clear that Argentina is putting all this finance to productive use,” says Gallagher.
Indeed, Argentina remains in a difficult economic and financial situation. “The pressure is really on Latin American governments, especially like Argentina. Argentina told the world they did not like the way the IMF helped countries out of a crisis... What does China do? They give you money and you build infrastructure. But you have to do the work...” he says.
Mercosur threat
Nevertheless, to many Latin America outsiders, the latest China move in Argentina is a worrying development. Argentina has now granted a series of trade and investment preferences to its Asian partner without any previous consent from its Mercosur regional partners.
“It is of much help to Argentina to manage their short term troubles. It is a springboard for them to elevate their investment in infrastructure but also to explore their shale gas reserves in Vaca Muerta,” says Canuto. But there may be a greater geopolitical impact, especially in southern America. It also means a challenge to the status quo after years of Mercosur paralysis.
“I think it reflects a reality of a world that is changing so dramatically out there... This bilateral relationship between Argentina and China is a harbinger of what is coming. The same may happen in the case of Brazil when it negotiates agreements with the US or the European Union,” says Canuto.
“Any framework like Mercosur will not be able to remain the same. This highlights even further how Mercosur cannot be taken as a straightjacket anymore [ i.e. the relations between individual countries of Mercosur and the rest of the world should be submitted to some sort of mutual review]. This is going to be harder and harder.”
Warning sign for Brazil
In Brazil, some industrialists and analysts have been angered by the latest China deal in Argentina. They feel that Brazil will not be competitive enough and will continue losing market share in overall exports to Latin America. “This is a warning sign,” says Lia Valls, a researcher from the Getulio Vargas Foundation in Rio de Janeiro. The greatest threat, she says, is that China is looking to expand its activities in the construction industry as they did in Africa.
Sergio Amaral, president of the Brazil-China Business Council and a former trade minister, has a more balanced view but he has also expressed some unease. “It is positive for both sides,” he says. “Brazil thinks it is positive to help Argentina with some financing which may boost Argentina’s economic growth. But there is also some concern in Brazil that these agreements may extend some advantages and market access that would be detrimental to the already existing Mercosur agreements. It would not be fair that Argentina grants greater concessions to the Chinese than to its Mercosur partners.”
Nevertheless, Canuto says he is not surprised by the scale of the China-Argentina deal. “When you monitor the unfolding changes in the global economy more closely, you would be expecting that. Only those dreamers, old-fashioned ultra-regionalist thinkers, were caught by surprise.”
Further positive developments, he says, are possible, including Chinese support for a joint infrastructure railroad between Brazil and Peru, which would connect the Atlantic and Pacific coasts. “Traditionally, advanced economies would have helped regional integration projects like this,” says Canuto. “[Now] the Chinese can also do it.”
Nevertheless, the end of the commodity supercycle and the transition in China may lead to a whole new approach, says David Rees from Capital Economics in London. “It seems that the days of handing over large amounts of money with no conditions are over. Large sums were handed to the Chavez government in Venezuela and there is nothing to show for the investment,” he says.