:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/KPRTISVTZ5BH3BLWAYKPYZHDEU.jpg "Which Latin American Countries Are the Most Indebted to China?")
Bogotá — Although the coronavirus pandemic impacted China’s financial injection in Latin America, with the reopening of the economy, the country issued at least $813 million in new loans in 2022, focusing on Brazil and Caribbean countries, according to figures from Boston University.
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“China is already the second largest provider of debt to the region, surpassing even other agencies combined. Despite the fact that in 2020 China interrupted these loans, it has been resuming them without any significant change,” Camilo Defelipe Villa, an academic, researcher and specialist in foreign policy in the Asia-Pacific region, told Bloomberg Línea.
In this sense, he anticipates a strong continuity of these indebtedness processes, which could result in a reform of the financing architecture of multilateral organizations in the face of competition from China.
“What we can expect is a competitive offer from these organizations. This is something we are going to see later on and also on that side, an effort on the part of the US, above all, which is already being seen with the hemispheric security act, to finance Latin American countries that are indebted or have debt payment problems with China. Even anticipating some Chinese loans and offering an alternative of indebtedness with the US”, Defelipe added.
This race is taking place in the midst of a geo-economic competition with the change in the rules of the game imposed by this indebtedness, and the political commitments assumed by emerging markets with the powers that grant these lines of financing.
China is becoming an increasingly important actor in the rescue of low- and middle-income countries in economic distress, with emergency loans for some $240 billion in the last few years globally within the framework of its Silk Road strategy, according to figures published by The New York Times.
Veneta Andonova, dean of the School of Management at Colombia’s Universidad de los Andes, points out that Chinese investments in Latin America and in general in indebted countries are focused on the energy, infrastructure and telecommunications sectors.
While Chinese energy loans to Latin America total nearly $90.9 billion, infrastructure loans total $26.5 billion, another $17 billion of loans and a total of $2.1 billion in loans to the mining sector, according to figures from the Inter-American Dialogue and the Center for Development Policy consulted by Bloomberg Línea.
“When Chinese companies enter these sectors they do so with a vocation to stay and to stay for the very long term, and financiers are usually more patient. Many have identified in this strategy a desire by China to build ties and political influence in different parts of the world, so this has geopolitical and not purely economic interpretations,” noted Andonova.
According to the report by Inter-American Dialogue and Boston University’s Center for Global Development Policy, most of the loans originated by the Asian giant come from the China Development Bank (CDB) and the Export-Import Bank of China (Exim Bank).
Chinese development finance institutions have played an important role in renegotiating the terms of existing agreements with the region and have expressed interest in pushing “several more, sometimes substantial, infrastructure projects, although none have been further formalized,” according to the report.
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Hernando Zuleta, professor at the School of Economics at the Universidad de los Andes, says that although China has paused direct credits to Latin America compared to previous years, it continues to grant financing to Chinese firms operating in Latin America.
“The type of contract implies that these countries pay an important part of the debt with exports. One of the implications is that trade with China increases, not always at the prices exporters would like. For emerging economies, it is always good to have fresh capital, and in the case of China, that capital has come with investment. So, on the one hand, it is good. Clearly, for certain countries there was an excess of indebtedness that is currently generating problems”, he added.
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The injection of Chinese capital
A total of $136 billion came to Latin America between 2005 and 2022 through Chinese foreign direct investment (FDI), mainly to markets such as Argentina, Brazil, Ecuador and Venezuela.
Venezuela is one of the markets in the region that has grown closer to China since 2005. In fact, Venezuela accounts for 44% of China’s development financing in the region, and was also among the first to adjust the terms of certain loans.
Inter-American Dialogue and Boston University compile a database that includes loans by China’s development finance institutions to both governments in the region and state-owned enterprises.
The largest lenders have been the CDB ($96.1 billion), Exim Bank ($27.1 billion) and another $13.3 billion.
According to the figures, the countries with the largest financial commitments to the Asian giant in Latin America and the Caribbean are:
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1. Venezuela: $60 billion (16 loans)
2. Brazil: $3 billion (14)
3. Ecuador: $18.2 billion (24)
4. Argentina: $17 billion (13)
5. Bolivia: $3.2 billion (9)
6. Jamaica: $2.1 billion (11)
7. Mexico: $1 billion (1)
8. Suriname: $773 million (6)
9. Trinidad and Tobago: $695 million (5)
10. Dominican Republic: $600 million (1)
11. Guyana: $520 million (7)
12. Costa Rica: $435 million (2)
13. Cuba: $369 million (4)
14. Barbados: $291 million (2)
15. Antigua and Barbuda: $176 million (3)
16. Bahamas: $99 million (2)
17. Granada: $66 million (1)
18. Peru: $50 million (1)
19. Dominica: $4 million (1)
What does Latin America’s indebtedness to China signify?
Indebtedness to China may be risky for these countries insofar as they may be committed to accept certain conditions such as the arrival of technological or biotechnological companies “that have the capacity to standardize techno-productive norms”, according to Camilo Defelipe Villa.
“One could think that this ‘easy credit’ granted by China could generate informal conditions such as the entry of strategic technological players with standardization capacity. This could be one of the ways of negotiating eventual debt defaults by Latin America,” he said.
He also reflected that for China it is also important to generate this flow of investment and loans to stabilize the macroeconomic environments of these Latin American economies that have been hit by high inflation and the effects of the war in Ukraine, among other factors.
“China’s interest is to enable these economies to continue to be import and export markets for Chinese products, as well as for the entry of those companies with standardization capacity. What we must pay close attention to is the experience of Venezuela, and especially Colombia, because there was a kind of disorderly relationship, a lot of debt and financing was received without having clear accounts or a payment strategy rooted in a productive transformation of the country, in an industrial base different from that of oil”, he added.
JP Morgan’s chief economist for the Southern Cone and Andean region, Diego Pereira, explained to Bloomberg Línea that the growth of China’s economy will be key for emerging economies because this has a direct bearing on commodity prices.
“China seems to be exporting manufactured goods’ deflation. Markets that have more trade with China, or well, every country in the world, surely may be benefiting from that deflation that China is exporting on the margin. The question is whether this deflation is not going to imply much lower growth in the future and this will have an impact on the prices of raw materials,” he said.
China’s gross domestic product grew by 5.5% in the first half of the year, less than expected.
In the face of the headwinds facing that country, US President Joe Biden has described China’s economic challenges as a “ticking time bomb.”
According to a Bloomberg survey of economists in July, China’s GDP could grow by 5.2% this year. The Asian giant’s economy is valued at some $18 trillion.
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