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Latin America Gets Raw Deal In Economic Relationship With China

China's investments and loans in Latin America ensure the flow of raw matericals to China and products back to the American continent. The lender has the long view in this formula.

Aboard a Chinese navy ship in the port of Buenos Aires
Aboard a Chinese navy ship in the port of Buenos Aires
Julio Sevares

-Analysis-

BUENOS AIRESArgentina's recent loans and investment deals with China are one more sign that China's financial tentacles are spreading across the world. For Argentina, like other Latin American neighbors, the costs and benefits of such deals with the Asian superpower can at best be described as asymmetrical.

These agreements are far from exceptional and represent a part of China's financial expansion worldwide. In recent weeks, several European countries said they would like to be part of China's new Asia Infrastructure Investment Bank, which upset the United States. In Latin America, China's economic presence has often come in the form of state-to-state agreements, most recently in January with the Community of Latin American and Caribbean States, whereby China agreed to finance a five-year investment plan worth at least $250 billion.

Chinese trade and investment in Latin America (as in Africa and Asia) are firmly tied to its strategic goal of assuring food, raw materials and fuel supplies for its hungry economy. Its imports of such products have boomed since early this century. Latin America in turn imports industrial goods (it has a trade deficit), and Chinese investment in and loans to local companies are really aimed at suppliers of raw materials to China, or buyers of Chinese products.

So while Latin America is enjoying the enormous benefits of China being an avid buyer, wealthy investor and lender, the dynamic being created is of trading raw material for manufactured goods or for investment in infrastructure that assures the desired outflow of commodities and materials.

It's not China that should be held responsible for this lopsided relationship, but instead the Latin American governments that fail to use resources to develop an industrialization program, to negotiate transfer of technologies or to demand that Chinese capital be partnered with local companies. That is what the Asian "tiger" economies did when they grew, and what the Chinese do today.

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China's Donghai Bridge. Photo: Jklamo

The Chinese credit surge began after it undertook financial reforms in 1995, which boosted lending abroad. The aim of the reforms was to modernize and expand Chinese credit flow in local and foreign markets, improve financing for Chinese companies and for their investment abroad, as well as a way to promote the RMB as a hard global currency. (China's strategy includes agreements to have regional central banks accept payment in RMB.)

A study coordinated by Boston University's Kevin Gallagher illustrates the exponential rise in Chinese regional credit, from a minimal $1 billion in 2007 to $37 billion in 2010. That was a peak year when Chinese credit capacity exceeded that of the World Bank and International Development Bank, which together totaled $20 billion in 2013.

Loans come mostly from state banks such as the Construction Development Bank, which finances housing and infrastructure projects, or commercial banks that are partly state-owned like the China Import-Export Bank, or the Industrial and Commercial Bank of China (ICBC), now one of the world's largest. The state's stake in these banks is crucial as debt to the banks becomes, above all, a political problem with the Asian superpower.

Most Chinese lending between 2008 and 2012 went to transport, communications and other infrastructure (30%), then mining and energy (24%). Half the loans were to Venezuela, where China is financing oil-sector projects in exchange for oil, and 12% each were to Brazil and Argentina.

Besides lending more, the big Chinese banks launched an expansion strategy in Latin America based on opening offices and partnering with local banks — or simply buying them — to boost financing for Chinese companies and their local partners, and firms and governments buying from China. In Argentina, ICBC recently bought Standard Bank's local operator for $600 million.

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