Argentina, Brazil, Capital Markets, Country, Emerging Markets, Mexico c, China - Mon April 13, 2015

China to turn off tap of easy credit to ‘errant’ LatAm states

Chinese officials in Beijing are growing increasingly unhappy with the government’s policy of offering cheap loans without conditions to troubled Latin American states that might never be able to repay them.

China faces a painful struggle to rein in its urge to lend cheap credit to friendly but troubled Latin American countries, as it prepares to set up a new global development bank that is likely to define the country’s role in the world for years to come.

Beijing has spent the past decade channeling increasingly vast amounts of capital to Latin America in the form of everything from hard currency loans to central bank currency swaps to cash-for-oil deals.

Venezuela alone has secured more than $45bn in Chinese loans since 2003, in return for oil used to fuel the mainland’s once red-hot economy. A further $10bn will be lent to Venezuela in the coming months, a precise blend of bilateral financing and funding for oilfield development projects.

et China’s largesse — the use of valuable state reserves to support creaking Latin American economies with little hope of securing repayment on soft loans — is belatedly coming under fire back at home.

Xiang Songzuo, chief economist at the state-run Agricultural Bank of China, said mainland financial experts were “complaining that the country places insufficient conditions on loans made to errant Latin American governments”.

Loans to Latin America by Chinese state banks may have jumped to $22bn in 2014, from $13bn the previous year, according to data from the IADB. But that might be where the market tops out: the Chinese government has begun properly to ponder the importance of imposing the “right conditionalities” on loans extended to regional countries, Xiang said.

Andrew Polk, senior economist at The Conference Board’s China Centre for Economics and Business in Beijing, pointed to rising irritation and anger in Beijing at the use of state money to underpin struggling but resource-rich Latin American states.

“That sentiment wouldn’t be there but for the fact that these loans, extended to debtor countries struggling in the face of falling commodity and energy prices, simply aren’t going to be repaid.

“So China is thinking ‘hang on, why are we propping up governments, why are we committing our precious financial resources to places that are unlikely ever to be able to settle their debts?’”

More cautious approach

Yet there could be a concealed blessing here — less for wheezing Latin American states like Venezuela and Argentina, than for China’s long-term aims to become, and to be treated as, a true global superpower.

China’s efforts to create a China-led development lender, the Asian Infrastructure Investment Bank (AIIB), will create a sharp and direct challenge to the country’s current way of assessing the moral hazard of lending to a foreign state.

China in recent years has become quietly aware of the value of its financial resources, and is slowly waking up to the need to husband its cash better. The AIIB, says the TCB’s Polk, will only accelerate that perception. “The point of multilaterals is to share risk, and China has taken on too much risk by lending to these Latin American countries. The country is increasingly tired of going it alone: tired of lending Venezuela $500m with no hope of getting that money back.”

He added: “Lending to politically-empowered state interests or players at home [in China] is one thing. But once you become a serious, integral part of the global financial system, it really does matter” who you lend to “as if you are lending in hard currency, you’re going to want your cash back at some point.”

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