China has become main banker in Latin America

The loans granted by China have changed into an instrument of foreign politics.

Ariel Noyola Rodríguez

14/03/2015

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The loans granted by China have changed into an instrument of foreign politics. At the same time these loans permit China to forge closer ties with fundamental allies and reduce the influence of financial institutions under the aegis of the United States in strategic areas.

Over the course of 2014, Chinese banks granted a total of 22.1 billion dollars in loans to Latin America, in accordance with data published by Inter-American Dialogue[1]. In light of the downturn of the world economy and the increase of geopolitical tensions, China has been obligated to strengthen their bonds with countries that possess abundant natural resources (oil, gas, metals, minerals, water, biodiversity etc.)

Although ICBC and Bank of China also participated in the granting of loans, almost all loans were granted by China Development Bank and China Ex-Im Bank. Despite the fact that loans of less than 50 million dollars were not taken into account, the reported number is an increase of more than 70% in comparison to the loans granted in 2013, which were 12.9 billion dollars in total.

From 2005 (when the data base Inter-American Dialogue started registering) to 2014, China granted loans to Latin American countries of 119 billion dollars in total[2]. The Chinese grants are higher than the total amount of loans granted by the Ex-Im Bank from the United States, the Inter-American Bank of Development (IABD) and the World Bank. This situation contributes to Washington’s weakening financial hegemony in the region[3].

From the massive grant of loans it also becomes apparent that China has developed intensive cooperation with Latin American countries. During the most recent summit of the Community of Latin American and Caribbean States (CELAC, which consists of 33 countries), Xi Jinping, the Chinese president, announced that trades between both parties are expected to reach 500 billion dollars annually by 2020. On top of that, investments will reach 250 billion dollars[4].

Furthermore, the building of strategic partnerships with some South American countries has to be highlighted. The 90% of all loans granted last year were issued to the following countries: Brazil consolidated itself as the main recipient with a loan of 8.6 billion dollars, followed by Argentina, which was granted 7 billion, Venezuela with 5.7 billion and lastly Ecuador, with 820 million dollars.

After the crisis in American IT companies, the central banks of industrialised countries stimulated the expansion of granting loans on a global scale. The surge in commodity prices that has been going on since 2002 converted Latin America into one of the favourite regions of investors looking for cost-effective places.

More than six years after the outbreak of the financial crisis of 2008 and facing extreme volatility of financial markets as a consequence of increased system vulnerability, the Chinese ended up being the favourite bankers of emergent countries as they offer loans with fewer conditions and at lower interest rates compared to American and European banks. In accordance with estimations made by Fred Hochberg, president of the Ex-Im Bank from the United States, the Chinese state banks have invested approximately 650 billion dollars all over the world during the last two years.

However, the coin also has another, more perverse, side. Everything seems to indicate that the Chinese loans in exchange for future supply of commodities are orientated at investment projects related to extraction (agriculture, mining, energy etc.) rather than the support of technological development, with which the Chinese risk deepening the exporting primary pattern of Latin American economies and multiplying the threats of dispossession at cost of the indigenous community.

On the other hand, Kevin Gallagher, the academic responsible for the data base published by Inter-American Dialogue, warns for the increasing risks for Latin American countries concerning paying off debts to the Asian juggernaut in time in an interview with Deutsche Welle[5].

In the light of the downfall of currencies in the region compared to the American dollar, as well as the persistent deflation (price plunge) in the market of commodities, importation has increased and, as a consequence, caused a decrease in the surplus balance (current account) of the economies most orientated at exportation. The cost-effectiveness of investment projects related to extraction will most likely decrease significantly during the coming months.

It is the case that if the downturn of emerging countries grabs hold of its economies, the economic South-South cooperation between China and Latin America will probably fail. In the middle of the crisis, there is a possible danger that Chinese banks may impose the same imperial coercion mechanisms on Latin America as the International Monetary Fund (IMF) used to do, in various forms.

- Ariel Noyola Rodríguez es economist graduated from the National Autonomous University of Mexico.

Twitter: @noyola_ariel.

(Translation: Thirza Toes)

[1] «China-Latin America Finance Database», Kevin P. Gallagher and Margaret Myers, Inter-American Dialogue.

[2] «China keeps credit flowing to Latin America’s fragile economies», Kevin P. Gallagher and Margaret Myers, The Financial Times, 27 February, 2015.

[3] «China Kicks World Bank To The Curb In Latin America», Kenneth Rapoza, Forbes, 26 February, 2015.

[4] «Despite US-Cuba Detente, China Forges Ahead in Latin America», Shannon Thiezzi, The Diplomat, 9 January, 2015.

[5] «Chinese loans helping Latin America amid oil price slump», Deutsche Welle, 27 February, 2015.

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