How does China’s investment approach compare to that of Western lenders? And will China be able to recoup its investments in a region with a history of debt?
China’s approach: ‘patient capital’
My research shows that, unlike the approach taken by Western investors, Chinese lending often takes the form of patient capital. By emphasizing nonintervention in sovereign affairs and refraining from imposing conditions like fiscal austerity or transparency, as Western governments do, China promises its financing horizon will not be influenced by such short-term policy targets. That helps regions have the flexibility to spend during economic downturns.
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China’s patient capital also tends to align better with debtors’ long-term development goals, allowing countries to incrementally correct policy errors without the threat of abrupt financial destabilization. Chinese state-to-state financing packages are clearly aimed at boosting exports and commerce, often featuring guaranteed contracts for Chinese contractors or machinery suppliers. But they also tend to promote infrastructure and foreign direct investment as key drivers of longer-term growth.
This patient capital strategy could promote Latin American development, avoiding the region’s volatile cycles of boom and bust. However, there’s a potential moral hazard. By lending without conditions, China may encourage governments to spend without bounds, sowing the seeds for future debt problems.
The global financial crisis gave Chinese lenders an opportunity
How did China achieve such a high level of financial integration in Latin America, and what are the policy implications of its Western expansion? As the United States has retreated from its lead role in globalization — first because of the 2008 financial crisis, and now under President Trump’s leadership — China has become a major global economic player. China’s 2001 entry into the World Trade Organization enabled it to invest in trade with Latin America; China is now the top trade partner for Brazil, Chile and Peru. After the 2008 crisis curtailed U.S. demand, China began using investing overseas to create new opportunities for trade.
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China, as the world’s largest saver, has rapidly expanded its cross-border lending since the crisis, more than doubling its overseas banking presence, as you can see in the figure. Today China’s global lending continues to increase at a blistering pace of $100 billion annually, putting the country on the brink of becoming one of the top five countries for international bank lending. Since 2013, much of this lending has been channeled through the Belt and Road Initiative (BRI). Its original goal was to invest more than $1 trillion — or 9 percent of China’s GDP — in infrastructure across more than 60 neighboring Asian, European and African countries. Aiming to spur global growth and development, and ultimately demand for Chinese goods and services, the initiative has now been expanded to Latin America.
Why is China making such a hefty commitment to Latin America?
China invests in both trade and geopolitical influence — pushing free trade and multilateralism, as the U.S. once did
Some U.S. policymakers, influencers, and pundits fear that China is investing in Latin America not for commercial reasons but to buy geopolitical influence, pushing the United States aside. For example, Trump’s national security strategy claims China is attempting to “challenge American power” by seeking “to pull the region into its orbit through state-led investment and loans.” Similarly, a recent National Endowment for Democracy report suggests the China-CELAC forum, which excludes the United States and Canada, is a “convenient policy framework to introduce and promote its soft power agenda.”
Are they right, or are they missing some nuances?
Despite long-standing U.S. concerns about unfair trade competition, China’s approach is clearly built on multilateralism, free trade, and globalization — values that previous Republican and Democratic administrations shared. Shoring up regional public goods like infrastructure may end up benefiting U.S. firms, making trade and investment easier. While China may be interested in geopolitical influence, it most certainly also has many commercial objectives in the region, including promoting new export markets, alleviating its domestic overcapacity and helping its companies globalize their operations by gaining cheap assets, market share, and key marketing, distribution, and engineering capabilities.
But investing in soft power has had its down sides. It’s true that Latin American governments have flocked to Chinese capital, eager to address long-standing infrastructure deficits. But many Latin Americans have criticized China for its extensive promotion of Chinese firms, labor, and machinery within state-to-state investment contracts, and its lack of local governance standards, including inadequate environment and labor protections.
But critics of Chinese investment in Latin Americas have failed to notice an important concern: not its current boom in investment, but a sudden bust. A boom may help the region develop; a bust could lead to another regional debt crisis. So will China lend prudently and foster its promised development, or instead lend too ambitiously and foment a bubble?
How will China balance its investment risks?
At times China has mispriced investment risk, and the country has lent defensively to absorb its bad investments. For example, China’s extended its loans to Venezuela for more than a decade during periods of volatility — first through the global financial crisis and then through the 2014 commodity downturn. But of course, Venezuela’s situation is deteriorating rather than improving. The country is struggling to repay its outstanding Chinese debts (totaling about $17 billion to $20 billion) amid its historic crisis and dwindling state-oil production. In response, China has reportedly loosened the terms on some of Venezuela’s outstanding loans, allowing the country to pay interest only and defer its principle payments, and also the underlying collateral, removing minimum oil shipment quantities and extending repayment deadlines.
China has enough foreign reserves to absorb such losses, even beyond Latin American borders from Sri Lanka to Indonesia. How can it avoid such moral hazard problems and ensure successful investments in the future? China’s success in reaching its growth targets domestically during its miracle years revealed its ability to prosperously manage local investment projects. Can it also foster good governance internationally?
Rather than imposing policy conditions, China increasingly tempers its state-to-state credit risks by diversifying its investments to include market-based instruments. For example, China has created private equity funds (e.g., China-LAC Cooperation Fund, China-Latin America Infrastructure Fund) that are investing in manufacturing, energy, logistics and even technology. It’s also participating in public private partnerships (PPP) and varying its project financing partners to include Chinese commercial banks, multilateral institutions (e.g. World Bank, Inter-American Development Bank) and local development banks.
In other words, China is experimenting with market-based solutions, and moving incrementally in its international economic efforts, much as it did during its domestic development. Its approach to global economic affairs appears to be more pragmatic than ideological — and may be more likely to defend than upend the liberal economic order.
Stephen B. Kaplan is a current fellow in the Latin American Program at the Wilson Center and an associate professor of political science and international affairs at George Washington University. He is the author of the book, “Globalization and Austerity Politics in Latin America” (Cambridge University Press, 2013), and is working on his second book with Cambridge University Press, examining the comparative governance implications of China’s economic expansion into the Western hemisphere.