A Better Deal? Chinese Finance in Latin America

February 16, 2012

by K. Gallagher and K. Koleski and A. Irwin

Lending by the Chinese Development Bank (CDB) and Export-Import Bank of China (China Ex-Im) to Latin America is larger, newer, and growing faster than its Western counterparts.  According to our research, since 2005, China has provided $75 billion in loans and credit lines to Latin American countries.  In 2010, Chinese funding exceeded the region’s combined financing from the World Bank, Inter-American Development Bank (IDB), and U.S. Export-Import Bank. In fact, China overtook the World Bank and IDB even as those banks doubled lending to the region from 2006 to 2010.

China’s emerging role as a major lender to Latin America has raised concerns regarding the competitiveness of loans from World Bank and Western export credit agencies and implications on governance and environmental initiatives. In an article for The Washington Post, journalist John Pomfret further outlined these concerns stating that “China is a master at low-ball financing, fashioning loans of billions of dollars at tiny interest rates that can stretch beyond 20 years… This has become a headache for Western competitors, especially members of the 32-nation Organization for Economic Cooperation and Development (OECD), which long ago agreed not to use financing as a competitive tool.”  Others argue that Chinese financing provides an alternative source of financing without the restrictive policy conditionalities imposed by the World Bank. Deborah Bräutigam, a professor at American University, believes that in Africa, China is filling an unmet need for energy, mining, infrastructure, transportation, and housing lending, which was all but abandoned by the World Bank decades ago.

In the midst of these debates, our report "The New Banks in Town: Chinese Finance in Latin America" released by the Inter-American Dialogue examines the volume, composition, and characteristics of Chinese lending to Latin America and the Caribbean. Our report found that lending by the CDB and China Ex-Im to the region is newer, larger, and complements lending by their Western counterparts.

Lending by Chinese banks are recent additions to the region with annual lending never exceeding $1 billion prior to 2008.  Since then, Chinese lending has skyrocketed. Over 90 percent of Chinese funding is packaged as loans of $1 billion or more in comparison to 22 percent of the World Bank’s loans.  Despite concerns about emerging competition between Chinese banks and their Western counterparts, China’s lending complements rather than competes by lending at commercial rates to different countries and sectors.

Venezuela and Ecuador received 61 percent of China’s total loans to the region, filling a gap left by sovereign debt markets. Chinese loans also concentrate in different sectors than their Western counterparts. An estimated 87 percent of Chinese loans are focused in the energy, mining, infrastructure, transportation, and housing sectors rather than the health, environment, and public administration sectors dominated by the World Bank.

Read More

Tags: finance, World Bank, China and Latin America, Export-Import Bank of China, Chinese Development Bank

Financial Unrest in Venezuela after Bank Seizures

December 4, 2009

by AQ Online

The Venezuelan government’s move to close four private banks plunged the price of the Bolivar and the country’s widely traded 2027 global bond as jittery investors pulled money out of the financial system to put it overseas.  President Hugo Chávez tried to assure investors yesterday that his ultimate aim was to strengthen and improve the country’s financial system. "The government is putting out fire ... We are fixing the problem," he said. "We will all emerge stronger."

Chávez has nationalized key components of the economy, including oil, telecommunications and power, but he had mostly kept the banking system in private hands. However, shortly after announcing he had “no problem” nationalizing banks that broke the country’s laws and failed to lend to the poor, Chávez seized four private banks and liquidated two of them.

Although the banks hold less than six percent of the country’s deposits, more than 30 percent of these holdings have some relation to the government.  The Venezuelan attorney general has barred 16 bank executives from leaving the country and their owner, Fernandez Barrueco, is now in prison facing a 10-year jail sentence.

Tags: finance, Venezuela, Hugo Chavez, banks