China lends more than $75bn to Latin America

Original source:
http://www.ft.com/intl/cms/s/0/d9dc3d98-57ed-11e1-ae89-00144feabdc0.html#axzz1mSkPlqtE

China lends more than $75bn to Latin America
February 15, 2012
Financial Times
By John Paul Rathbone in London

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.

Additional reporting by Jamil Anderlini in Beijing
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