China continues to cut back Latin America loans

. Apr 13, 2020
Wai Tan, Shanghai, China Wai Tan, Shanghai, China. Photo: Li Yang/Shutterstock

For the fourth consecutive year, China’s two main banks tasked with financing overseas development have rolled back loans to Latin America, according to new research from Boston University and think-tank The Inter-American Dialogue. The China Development Bank (CBD) and the Import-Export Bank of China (China Exim) lent USD 1.1 billion to the region in 2019, the lowest amount for a single year in the last decade, down from USD 2.1 billion in 2018.

Instead of lending directly to Latin American governments, Chinese banks are investing in energy and infrastructure projects by way of funds or financing Chinese state-owned companies bidding for projects, the report said.

As the so-called “commodities super-cycle” ended in 2015, the oil-for-loans agreements extended to countries such as Ecuador and Venezuela — the recipient of 45 percent of the USD 142 billion lent to the region since 2007 — are also in decline.

“China is no longer acting as a financial lifeline for the region’s more fragile economies,” said the report.

The Dominican Republic (USD 600 million), Suriname (USD 200 million) and Trinidad and Tobago (USD 104 million) each received one loan from a Chinese policy bank in 2019. Of the top four borrowers Venezuela, Brazil, Ecuador, and Argentina, only the latter was the recipient of one of the four deals struck last year — a USD 236-million loan to buy railway cars.

Spreading the wealth

Though the latest figures suggest Chinese state-backed lending to support development in the region is cooling, they more accurately reflect one way in which it has begun to change — even before the global spread of Covid-19 created a bleak economic outlook for 2020.

Rather than relying on CDB and China Exim to develop the hard infrastructure and conventional energy projects that have been the primary focus until now, new actors and investment vehicles are emerging.

“An increasingly wide range of other Chinese-backed financial institutions and platforms are actively engaging the region,” the report said.

These include co-financing initiatives with regional Latin American development banks and loans from China’s major commercial banks, which Boston University and The Inter-American Dialogue’s finance database have yet to track.

Commercial lenders include the Industrial and Commercial Bank of China (ICBC), which is backing Argentina’s controversial Santa Cruz dam projects.

Regional funds have also emerged, such as the China-LAC Industrial Cooperation Investment (CLAI) Fund, China-LAC Cooperation (CLAC) Fund, and Special Loan Program for China-Latin America Infrastructure, focusing mainly on Brazil.

The downward trend in policy bank lending is accompanied by an upward tick in Chinese outward foreign direct investment (OFDI) — companies expanding into new countries with greenfield investments or mergers and acquisitions.

Last year, Chinese companies invested USD 12.8 billion in Latin America, up 16.5 percent from 2018, according to new data released by the China-Latin America Academic Network (Red ALC-China). China was the source of 7.5 percent of total FDI in Latin America in 2019.

All this, despite 2019 being a year typified by investor wariness, largely resulting from the uncertain consequences of the China-U.S. trade war.

Other major deals

Publicly-owned Chinese enterprises accounted for 86 percent of Latin American OFDI in 2019. The Three Gorges (CTG) corporation and the State Grid — both of which operate in the electricity sector — have dominated the field in recent years.

Most major deals involved acquiring other foreign companies’ operations or forming new consortia with regional partners. In 2019, CTG gobbled up U.S.-based Sempra Energy’s shares of Peruvian projects, including its 84 percent stake in electricity distribution firm Luz del Sur, the year’s biggest transaction.

In February, Xinjiang TBEA Group Company — a consortium of Chinese firms — put up USD 2.3 billion for 49 percent of a joint venture with Bolivian state-run lithium company Yacimientos de Lítio Boliviano (YLB). The partnership will see the development of the metal used in the manufacturing of electric vehicles.

Upon signing the deal, the now-ousted Bolivian President Evo Morales said: “Why China? There’s a guaranteed market in China for battery production,” Reuters reported. However, political uncertainty following Mr. Morales’ ouster has cast doubt on such contracts.

Despite the higher total, Chinese foreign direct investment in Latin America was concentrated in fewer transactions last year — just 19 compared to 56 in 2018 — and there was a higher share of mergers and acquisitions than new projects compared to previous years.

One drawback of new Chinese investments’ capital intensiveness is that they generate fewer jobs locally, which has been both a cause for celebration and source of tension as positions tend to be low-skilled.

“In the last decade, Chinese outbound foreign direct investment in Latin America has unleashed a series of debates on its impact from social, environmental and economic perspectives,” Red ALC-China’s report noted.

This article was originally published by Dialogo Chino and was republished with permission.

Robert Soutar

Robert Soutar is the Managing Editor of Diálogo Chino.

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