Why China is lending $5 billion to struggling Venezuela

Why China is lending $5 billion to struggling Venezuela

The cash, to be invested in oil, will deliver dubious benefits to both parties


The Economist
September 2, 2015

SITTING in front of a blown-up Chinese watercolour portrait of Hugo Chávez, President Nicolás Maduro announced a new $5 billion loan from China in his weekly television programme, which aired on September 1st. In the two-hour show (“In contact with Maduro”, “En contacto con Maduro”), he briefly announced that the deal had been signed, before panning to footage of marching Chinese soldiers and a clip of himself playing drums with Chinese dignitaries.

The deal has not been confirmed by Chinese authorities, but has been reported in the Chinese press. It probably originated from a 2007 agreement with Hugo Chávez which allows Venezuela to borrow from China in tranches of $5 billion in return for oil. It is hard to see any economic advantage to China from the deal. Growth in China’s oil imports has been slowing down. Imported oil is increasingly stored in emergency reserves rather than being consumed. World markets are awash in the stuff. Mr Maduro himself has been urging Venezuela’s OPEC partners to reduce production in order to stop the price slump.

If the deal has any upside for China, it is for the companies which may receive Venezuelan contracts as a condition of the deal, as is usual for its development finance projects. If they are unprofitable—as many oil investments are nowdays—the developing-country government will be on the line, not the Chinese companies. Thus the China Development Bank can lend money to stimulate domestic companies without anyone in China taking the risk.

This model, however, looks unsuitable for Venezuela, which is teetering on the brink of default. Yu Yongding, a professor at the Chinese Academy of Social Sciences, has criticised the Chinese government’s model of lending to risky governments. Venezuela could be where the model gets its first real test. China has already sunk $56.3bn in loans into the flailing Venezuelan economy since 2007, and about $20bn is outstanding. A loan tied to oil-field investments will not necessarily help Venezuelan government coffers, since the state needs short-term cash to pay for salaries, social security, and imports, rather than long-run investments in upgraded oil rigs.

Since the loan will be repaid in oil, it did not need to be ratified by the Venezuelan parliament (as it will not officially count as debt). Theoretically, that also means the government does not have to account for the way it is spent to its citizens, although China will be expecting it to be invested in oil. China will be first in line for repayment, before other creditors.

“China wants to cut back exposure, but now has an addicted borrower on its hands,” explains Ricardo Hausmann, professor of economics at Harvard University and an ex-minister of planning in Venezuela. Indeed, it is difficult to refuse friends when they are in one’s living room; the Venezuelan president is in Beijing for tomorrow’s grand military parade, alongside a collection of developing-world leaders. Mr Maduro has also been cuddling up to Vladimir Putin, also present at the parade, in his efforts to avoid financial collapse. The exercise of soft power in Venezuela may be the real justification for Chinese (and potentially Russian) lending. The surprising thing, perhaps, is that Venezuela remains a geopolitical prize worth competing for.



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http://www.economist.com/news/business-and-finance/21663169-cash-be-invested-oil-will-deliver-dubious-benefits-both-parties-why-china-loaning-5?fsrc=scn/tw/te/bl/ed/financialdiplomacy

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