China lends more than $75bn to Latin America

Chinese state banks have lent more than $75bn to Latin America since 2005, and in 2010 gave more than the World Bank, Inter-American Development Bank and US Ex-Im Bank combined, according to a report which highlights China’s growing financial heft in the region.

“On the positive side, it is clear that China is a new and growing source of finance in Latin America,” notes the independent academic report, New Banks in Town: Chinese finance in Latin America.

“That said, and contrary to much commentary on the subject, by and large Latin American nations have to pay a higher premium for loans from China.”

China has overtaken the US to become Brazil and Chile’s largest trade partner. Many US policymakers fear that Beijing is using cheap rate loans to “buy” influence among left-leaning Latin American governments that are hostile to western interests, and that Beijing uses financing to secure long term commodity supplies.

But in just one example, the China Development Bank, which accounts for the bulk of China’s Latin American lending, extended a $10bn credit to Argentina in 2010 at the London Interbank Offered Rate plus 600 basis points. In the same year, the World Bank lent Argentina $30m at Libor plus 85 basis points.

“Some on the left say China’s rising importance in Latin America is driven by an ideological desire to boost South-South ties. Others on the right say that China is buying influence with cheap money,” said Boston University’s Kevin Gallagher, one of the report’s co-authors.

But as the loans, while blessed by the party in Beijing, are executed by commercially orientated state banks, “neither view is quite true,” he said.

Loans for oil, such as a $20bn deal with Venezuela in 2010, also use market prices. Although these loans are among the most controversial, as funds can be spent largely at the borrowing government’s discretion, securing commodity supplies with long term credit and technological support is nothing new: Japan cut similar deals with China in the 1970s.

“Now the Chinese are replicating the Japanese format in Latin America. It worked for them,” said Mr Gallagher. The US and China agreed on Tuesday to begin talks on setting guidelines for export-credit financing which could bring Beijing within rules used by member countries of the Organisation for Economic Co-operation and Development.

Chinese loans to Latin America, which account for more than half Beijing’s international lending, accelerated in 2009 as China took advantage of the withering of alternative credit sources during the global financial crisis to project its influence abroad.

By 2009, Latin American loans reached $18bn, from under $1bn before 2008, and by 2010 topped $36bn. Total net credit flows to the region totalled $63bn in 2009 and $143bn in 2010, according to separate figures from the Institute of International Finance.

China proved an especially valuable alternative credit source for defaulted sovereign borrowers that cannot access international capital markets, such as Argentina and Ecuador which, ironically, are among the most vocal critics of globalisation. Critics add that China’s focus on commodities increases the “dependency” exploitation denounced by leftwing development economists four decades ago.

“But the biggest risk may be the way many Chinese assistance deals and contracts are cut – behind closed doors, and motivated exclusively by Chinese commercial interest – which can breed public and private corruption,” said Christopher Sabatini, senior director of policy at the Americas Society and Council of the Americas, a US-based political and business forum.

Indeed, China’s growing presence has started to prompt a regional backlash. Latin American manufacturers increasingly complain that their industries are being hollowed out by cheap Chinese exports. A proposed 2010 lease of 320,000 hectares in Argentina’s Rio Negro province has been also been put on hold, while Brazil has placed a ceiling on the amount of land foreign owners can buy.

(C) Financial Times By John Paul Rathbone in London and Jamil Anderlini in Beijing