In China, Venezuela Default Talk Is Front-Page News

  • People’s Daily article makes case for maintaining aid
  • Barclays, Exotix doubt China will increase financial backing

Whether crisis-ridden Venezuela will default is a question increasingly on the minds of bond traders. It’s now also one that is getting front-page treatment from China, one of the Latin American country’s biggest financial backers.

On June 11, the People’s Daily -- the mouthpiece paper of China’s Communist Party -- published an article in its overseas edition with the headline “Will Venezuela Default?” After considering its willingness and ability to pay, the author concludes the answer is no and chalks up all the talk about default to media speculation. The article also makes the case for China, whose $3.2 trillion of foreign reserves are the world’s largest, to maintain its support to Venezuela.

“From a long-term perspective, it makes emotional and rational sense for the Chinese side to provide aid within our capacity for partners stuck in economic difficulty like Venezuela,” the article said.

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Yet despite its apparent willingness to back Venezuela, Barclays Plc and Exotix Partners LLP are part of a growing group of market watchers that are skeptical that China is truly prepared to increase financing. Over the past decade, China has lent Venezuela about $50 billion, much of it intended to be repaid with oil supplies. But with Venezuela’s economy in tatters and political tensions rising, the country is struggling mightily to stay current on its debt.

“China does not seem willing to increase exposure to Venezuela in the current conditions of political and economic uncertainty,” said Alejandro Arreaza, an analyst at Barclays. “I’d be very surprised if they increase the debt.”

He estimates Venezuela owes about $20 billion to China.

China’s Foreign Ministry didn’t reply to a Bloomberg request for comment on the People’s Daily article and the country’s financial commitment to Venezuela. 

Last month, China Foreign Ministry spokesman Hong Lei said the country agreed to explore ways to make the financing cooperation with Venezuela “more flexible” as oil prices plunge. On Wednesday, the Foreign Ministry said the two countries have enjoyed "real benefits" from cooperation.

Oil, Economy

Back when China’s appetite for oil and commodities seemed endless, the Asian nation bolstered its influence in Latin America through funding deals with a number of countries. Venezuela sits on the world’s biggest oil reserves.

Venezuela didn’t reply to a request for comment on financing from China. Vice President for Economic Policy Miguel Perez Abad had said in a May interview that China wants to keep supporting Venezuela, and a renewal of a $5 billion loan was likely to be completed in about 60 days.

The International Monetary Fund predicts Venezuela’s economy will shrink 8 percent in 2016, while its inflation rate will reach about 480 percent. The country depends on oil for 95 percent of its export revenue. 

And with Venezuelans fed up with worsening shortages of everything from basic medicine to toilet paper, a push to oust President Nicolas Maduro is gaining traction and threatening to heighten political infighting.

Not surprisingly, Venezuela’s debt is the most expensive to insure against non-payment in the world, based on credit-default swaps.

“Even if China is less willing to provide money, I think publicly they will still try to send supportive messages,” said Stuart Culverhouse, an analyst at London-based Exotix. “Venezuela sees China as very important, and as a key source of financing, and I think the reverse is perhaps not so true as it was. The perception is that China’s willingness to continue providing financing is becoming more limited, or tested.”

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