Loans from China to Latin America dry up, as region's governments take pandemic hit

MIAMI – It seemed like a match made in financial heaven.

In 2010, China, its economy and the state-owned corporations looking to expand globally turned their eyes to Latin America, a region lacking capital but rich in natural resources that the Asian giant lacked. The result: record loans of $ 35 billion this year.

Fast forward a decade, and the once-hot relationship is beginning to mature, suggesting China is wary of its one-time partner who does nothing wrong.

For the first time in 15 years, China’s two largest political banks – the China Development Bank (CDB) and the Export-Import Bank of China – failed to extend new loans to the region in 2020, covering a multi-year slump due to Latin American banks’ worsening economic slump.

The data comes from a new reportt through the Inter-American Dialogue, a think tank in Washington, and Boston University’s Global Development Policy Center, both of which have been following China’s yuan diplomacy in Washington’s backyard for years.

China’s growing economic and diplomatic influence in the region has worried US policy makers who have been unable to counter its rise. The task now lies with the Biden government, which has warned that the Chinese footprint poses a national security threat in the region. With China ousting the US as the main trading partner of several South American nations, catching up will not be an easy task.

Meanwhile, the U.S. could have fallen even further behind during the pandemic when China donated more than $ 215 million in supplies – from surgical gloves to thermal imaging technology – to allies in the region. For comparison: the US agency for international development and the State Department has provided 153 million US dollars. China also conducted clinical trials or plans to manufacture vaccines in five countries – Argentina, Brazil, Chile, Mexico, and Peru.

Venezuelan workers unload humanitarian aid from China at Simon Bolivar International Airport in La Guaira, Venezuela on March 30, 2020.Matias Delacroix / AP file

“Without a doubt, part of the region’s COVID response has a Chinese face,” said Rebecca Ray, an economist at Boston University and one of the authors of the new report. “It’s a missed opportunity for the US, but since American manufacturing hit rock bottom in the 1990s, there’s really been no way to hold its own.” We buy many of the same medical supplies that China makes to Latin America in China. “

While the pandemic has opened the door to much welcomed Chinese aid, it has also made it difficult for governments to pay their bills to Beijing. A deep 7.4% recession in Latin America and the Caribbean last year wiped out nearly a decade of growth, according to the International Monetary Fund.

With the bruised borrowers, China has taken a hit. Last year, Ecuador negotiated to postpone oil-serviced debt payments by nearly $ 900 million for one year. Venezuela – by far the largest borrower in the region – is believed to have received a similar grace period.

“Given the unprecedented challenges facing the region, it is unlikely that China will lend any further for the time being,” said Margaret Myers, Asia-Latin America program director at the dialogue. “Instead, it has to deal with its own problematic portfolio.”

The slowdown in lending to Latin America reflects a broader global withdrawal as China turns inward to step up its own recovery efforts amid the pandemic. The ruling Communist Party has loaned billions of dollars to build ports, railways, and other infrastructure across Asia to Africa, Europe, and Latin America to expand China’s access to markets and resources.

However, Beijing has become more cautious after some borrowers struggled to repay loans. Officials say they will look more closely at projects and funding.

The China Development Bank and the Ministry of Foreign Affairs did not answer questions about the reasons for the decline in Chinese loans to Latin America.

Although lending has dried up, Chinese purchases of soybeans, iron ore and other commodities from Latin America remained robust at an estimated $ 136 billion. That is despite a sharp increase in purchases in China a promise by the Trump administration to end a debilitating trade war.

Chinese state-owned energy companies have also aggressively bought power plants from outgoing Western investors at fire sale prices. Overall, Chinese mergers and acquisitions rose to $ 7 billion in 2020, almost double the activity in 2019, according to the study.

Among the deals: The sale of Peru’s largest electricity company by Sempra Energy of San Diego, California, to China Three Gorges Corp. Another $ 5 billion deal that China’s State Grid Corp. Gaining control of a large utility company in Chile was announced last year but is not included in the data as it has not yet been finalized.

For the region’s heads of state and government, Chinese loans for large ticket infrastructure projects are difficult to resist. Interest rates are low and unlike World Bank and IMF loans, there are fewer conditions and approval is faster, so leaders can advertise their successes well in advance of the next elections.

Even Colombia – Washington’s strongest regional ally and a country that failed to live up to China’s requests – has recently stepped on the scene. Last year, a consortium including China Harbor Engineering Company laid the foundation stone for the capital Bogota’s first subway, a $ 3.9 billion project. No American firms made offers for the project that did not directly benefit from Chinese loans.

US officials have tried to push back, suggesting that US foreign aid has been long and more transparent.

“Beijing’s aid to the region is generally aimed at advancing the economic or political interests of the People’s Republic of China,” the Foreign Ministry’s Western Hemisphere Office said in a statement.

In January, at the end of the Trump administration, the United States’ International Development Finance Corporation signed an unprecedented agreement with Ecuador to finance infrastructure projects worth up to $ 2.8 billion.

However, the DFC’s total funding – $ 60 billion – pales in comparison to the $ 1 trillion China earmarked for its Belt and Road initiative to expand influence around the world.

The US loan package to Ecuador was significant as the government would also have to privatize oil and infrastructure assets and ban Chinese technology.

“That would definitely limit China’s influence,” Myers said. “But does it really help Ecuador in the long run to burden future generations with more debt and to promote the use of fossil fuels? If not, it could backfire against the US. “

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