Nathan Williams assesses the uncertain future of Chinese investment in Latin America.
Puerto Cabello, Venezuela. The time is 0430. Monstrous ships sit in port, loading up on Venezuela's lifeline: crude oil. By the end of the day, these massive tankers will have exported 2 million barrels of Venezuela's black gold, 600,000 of which are destined for the People's Republic of China. The sale of oil from Venezuela to China, however, represents much more than another transaction: it epitomizes Venezuela's desperate attempt to buy more time for a failing economic system. However, before analyzing China's role in Venezuela's economic future, one must first understand Venezuela's economy in comparison to other Chinese investments.
Over the past decade, China has increased its financial presence in Latin America, going as far as initiating a project to construct in Nicaragua an alternate to the Panama Canal. However, Venezuela is unique in that, unlike China's investments in other developing economies, Chinese involvement in Venezuela does not promise profit. The recent decline of commodity prices in Latin America has hurt Venezuela's already unstable economy. In addition, no country in the Western Hemisphere has been hit harder by the declining price of crude oil than Venezuela. The oil industry accounts for roughly 95 percent of the country's export earnings as well as an unhealthy 25 percent of Venezuela's GDP. As a result, when the price of crude oil plummeted to prices as low as $50 per barrel in early January, the already weak Venezuelan economy was dealt a massive blow, propelling the country towards economic disaster. In response, Venezuela's leaders turned to their one powerful ally: China.
As the future of Venezuela's economy continues to spiral downwards into chaos, its leaders have relied heavily upon China's financial support and mercy to stave off complete collapse. Until now, China has extended over $50 billion dollars in loans to Venezuela, permitting the Venezuelan government to repay the loans through guaranteed deliveries of oil. Of the 600,000 barrels of oil the Venezuelan government exports to China daily, over half are exported in order to repay loans to various Chinese banks, not to generate new revenue. However, as mentioned earlier, the global drop in oil prices has gravely damaged the Venezuelan economy and thereby the country's ability to repay loans; unfortunately for Venezuela, China has other partnerships to uphold as well.
Venezuela hasn't been the only victim of the global decline in oil prices; the near collapse of the Russian economy has led Chinese banks to lend over $30 billion to Russian oil companies in order to prevent a complete Russian economic collapse. Furthermore, China loaned billions of dollars to Argentina, second only to Venezuela in terms of money borrowed from China in Latin America. However, despite past financial leniency with Venezuela, Beijing feels reluctant to lend large sums of money to economically weak states, especially when dealing with so many foreign projects at once.
Ever since last July, General Secretary Xi Jinping has yet to sign any official deals with the Venezuelan government pertaining to the repayment of loans. As a result, most foreign policy experts doubt China will attempt to become economically close with - let alone continue to lend to - Venezuela in the near future. This is not to say that China will simply leave Venezuela to deal with its economic woes alone. However, rather than simply loaning money, Chinese banks may instead provide funds for developmental projects in hopes of generating profit. In early January the Chinese Development Bank and Bank of China agreed to invest $20 billion in the Venezuelan economy over the next decade. Nevertheless, the specific nature of the investment, such as what projects the Chinese Development Bank plans to invest in, remains a mystery.
To some, China's new Venezuelan investment plan may seem illogical. Venezuela's weak economy and poor governance have led many analysts to dismiss China's new investment campaign as propaganda, arguing that Chinese leaders are unwilling to admit the failure of China's investment in Venezuela. More importantly, most experts believe Chinese money cannot save the Venezuelan economy; foreign money only addresses a symptom - not the root cause - of Venezuela's weak economy. If Venezuela is to make a full economic recovery, its government must change the way it does business.
According to Harvard Professor of Government Steve Levitsky, a specialist in Latin-American politics, Venezuela's economy is in need of "drastic reform" if it is to overcome decades of poor economic decisions. In order to move forward, Maduro's administration must dramatically reduce subsidies, make cuts to popular government programs, and invest in economic sectors other than energy. Unfortunately for Maduro, regardless of how his government is to phrase such austerity measures, "It'll be the equivalent of ripping off an economic Band-Aid and damage his support among the lower classes."
At the end of the day, most bankers want to increase revenue, not spread a particular ideology. Chinese bankers are no different; poor investments appeal to no one, regardless of political beliefs. Nevertheless, in the event that China's government decides to increase its support of Maduro's government, such a decision would not end Venezuela's economic troubles. If anything, increased Chinese support may come to hurt Venezuela in the long run, encouraging Maduro and future Venezuelan leaders to look abroad for help rather than implement the painful economic reforms needed to turn their country around. If Venezuela's economy is to truly recover, change must come from within its borders.
Nathan Williams is a freshman at Harvard University. Contact him at email@example.com.
This article also appears in China Hands.