Over the past few decades, China has become a leading global player in international trade and finance. While the United States was entangled in its financial crisis, China intensified its “go global” strategy to expand its international economic influence. In its global quest for energy, raw materials and export markets, China has increased its presence in Latin America. Most recently, China pledged to invest $250 billion in the region over the next 10 years. But why has China decided to make such a sizable commitment to Latin America at the same time growth is slowing back home? How do Chinese investment activities compare to Western approaches? And will China be able to recoup its investments in a region with a history of debt problems?
In comparison to the United States, where markets and short-term profits have often ruled the day, China focuses on the longer term. China has sought to expand its economic footprint internationally to promote the growth and stability of its own economy. For example, concerned about scarcity of food and resources, China has aimed to secure long-term access to energy and raw materials through global trade and investment. Latin America’s abundant resources and scarce capital make it an ideal target for this strategy.
How does China achieve these objectives? The Chinese Development Bank (CDB) plays a vital role, lending billions of dollars to Latin American countries in exchange for future commodity deliveries or guaranteed contracts with Chinese firms. After first venturing into extractive industries, China has expanded into the food, agricultural and construction sectors, creating a growing regional infrastructure network to secure trade routes and commodities.
China touts this expanding relationship as mutually beneficial, but it poses several risks. Much scholarly attention has been focused on the potential for Latin America to become too dependent on China.
But China also is creating vulnerabilities for itself. China employs the CDB, its largest overseas lender, as a financing tool to promote opportunities for Chinese firms and contractors abroad. Chinese loans to Latin American governments often are accompanied by fewer conditions and lack the traditional Western emphasis on fiscal rectitude. (They instead emphasize non-interference in domestic affairs, as stipulated in China’s Five Principles of Peaceful Coexistence.)
China is thus willing to make what are in essence risky bets. The Chinese Development Bank, for example, until recently did not fret much about Venezuela’s credit risk given that the country is the region’s largest oil exporter. It viewed Venezuela’s abundant oil as sufficient collateral, lending more than $50 billion (or about 22 percent of its 2007 gross domestic product) to the country since 2007 in exchange for future oil delivery.
China has made similar agreements with borrowers such as Argentina and Ecuador that have been shunned from global markets. Argentina has turned to Chinese credit to help finance its infrastructure plans and bolster its sagging currency reserves after its technical default last summer, while Ecuador has borrowed extensively from China to cover its budgetary shortfalls.
China’s behavior flies in the face of one of the key lessons Western policymakers and lenders learned from the Latin American debt crisis of the 1980s. During that crisis, banks first extended new money to borrowers in Latin America, in hopes of recovering their initial investments and avoiding further sovereign defaults that would undercut their own profitability. But their losses mounted by the decade’s end, forcing them to write off their bad loans.
China could be headed for a similar situation. For one, it has deliberately avoided imposing the types of conditions that Western governments often imposed on Latin America — particularly the requirement that Latin American countries enact fiscal austerity. This requirement was, of course, controversial. Pointing to the recent U.S. recovery, some economists have suggested that fiscal stimulus, not restraint, is better at boosting growth and ensuring that borrower countries will repay their debts.
By lending without conditions, China may simply encourage Latin American governments to spend without bounds, and thereby sow the seeds for future debt problems. And if it ultimately decides to cut financing to countries such as Venezuela, it could contribute to a default that would impede the flow of oil to China.
To date, China has opted to continue lending. For example, it pledged another $4 billion to crisis-ridden Venezuela last summer and potentially an additional $20 billion this year. Continued lending could be a positive development for “South-South cooperation” if Latin American countries used this money to promote sustainable growth and address longstanding socioeconomic inequalities. But the failure to reach such lofty goals may leave China playing a role all too familiar to the West: attempting to mitigate the politics of excess with the politics of austerity.
Stephen B. Kaplan is an assistant professor of Political Science at George Washington University. He is working on a book titled “Neoliberalism in Retreat? The China Boom in Latin America.”