China seems willing to lend to nations with weak credit ratings. Latin America is building interesting models, receiving money and promising to pay with resources later. THE rise of China has changed every region. But it has reinforced patterns, too. China’s demand for commodities has entrenched Latin America’s position as a supplier of raw materials. The country consumes oil from Venezuela and Ecuador, copper from Chile, soya beans from Argentina, and iron ore from Brazil—with which it signed a corn-import deal on April 8th.
Chinese lending to the region also is willing to barter for yet to be extracted natural resources. Data are patchy, but according to new figures from the China-Latin America Finance Database, a joint effort between the Inter-American Dialogue, a think-tank, and Boston University, China committed almost $100 billion to Latin America between 2005 and 2013.
The biggest dollops by far have come from the China Development Bank (CDB). These sums are meaningful. Chinese lenders committed some $15 billion last year; the World Bank a smaller $5,2 billion in fiscal year 2013; foreign commercial banks lent an estimated $17 billion.
More than half of China’s lending to Latin America has been swallowed by Venezuela, which pays much of the loan back from the proceeds of long-term oil sales to China.
Ecuador has struck similar deals, as has Petrobras, Brazil’s state-controlled oil firm, which negotiated a $10 billion credit line from CDB in 2009.
Such loan-for-oil arrangements work well for the Chinese, and not simply because they help secure long-term energy supplies.
They also reduce the risk of lending to countries with poor credit ratings like Venezuela and Argentina.
It is no surprise that Chinese money is welcome in places where western financial markets are wary.
Ecuador, which defaulted on its debts in 2008, has used Chinese loans both to finance parts of its budget and to re-establish a record of repayment in advance of trying to tap bond markets again.
But Chinese credit has its attractions in other economies, too. It often makes sense for countries to diversify sources of lending. Loans can open the door to direct investment.
And as Kevin Gallagher of Boston University points out, the Chinese banks operate in largely different sectors to the multi-laterals.
Of the money China has lent in the region since 2005, 85 percent has gone to infrastructure, energy and mining. Borrowers may have to spend a proportion of their loan on Chinese goods in return; some observers worry about the laxer environmental standards of Chinese banks. But the main thing is that money is available. Expect the loan figures to rise. — Economist.
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