Venezuela’s Road to Disaster Is Littered With Chinese Cash

Venezuela’s Road to Disaster Is Littered With Chinese Cash, by Christopher Balding.

Venezuela’s ruinous state has more to do with China than one might think — specifically, with Chinese President Xi Jinping’s plan for expanding China’s global influence through financial diplomacy. …

Within a few years of Chávez assuming power in 1999, China, seeing in the new leader an ideological ally, began increasing lending to Venezuela. …

The driving motivation of Chinese investment and lending since 2000 has been an obsession with opening up new export markets and securing access to natural resources. …

China lent at exorbitant rates to Venezuela. Now, China refuses to renegotiate those debts, even as the South American country’s economy and oil industry crater. …

To guarantee repayment, Beijing insisted on being repaid in oil. With most lending agreed to when oil hovered at more than $100 a barrel, as it did for most of 2007-2014, it seemed a good deal for both sides. However, when oil dropped to close to $30 a barrel in January 2016, this caused Venezuela’s price tag for serving its debt to explode. To repay Beijing today, Venezuela must now ship two barrels of oil for every one it originally agreed to. …

Venezuela collapsed thanks to a malevolent dictatorship pushing disastrous economic policies aided by a benefactor willing to extend near bottomless credit. This same toxic mix is present throughout many of the countries receiving large amounts of Chinese lending under the [Belt and Road Initiative (BRI)]. Worried about stagnating economies, autocrats around the world see an opportunity to drive growth by borrowing from China to fund white elephant projects regardless of the long-term consequences. …

Beijing likes to cite the Marshall Plan when talking about the BRI, but its deals are far more shrewd and self-serving. The BRI scheme isn’t offering concessionary lending or international aid but market-based lending rates with high-interest loans. The borrower countries then have to use Chinese firms, inputs, and workers to build out their railways and ports. China is making the loans not out of a long-sighted vision of a better global order, as its boosters like to claim, but from a calculation of the financial incentives it needs to keep its own over-indebted firms afloat and their workers working. …

There’s no surer way for China to lose goodwill worldwide than to provide large amounts of ruinous lending that pushes developing countries to financial ruin. Sri Lanka has seen widespread protests and riots over Chinese debt. Meanwhile, Beijing has been leaning on the Venezuelan opposition not to default on the existing debts. All this is already having reputational costs for China. Having witnessed the consequences of Beijing’s lending in Venezuela, Sri Lanka, and Pakistan, other potential borrowers seem to have cooled on the possibility of borrowing from Beijing — or at least to be more discerning of the risks.

hat-tip Stephen Harper