Crude Collapse Seen Boosting China’s South American Clout

The worst commodities rout in six years is opening the door for China to increase its influence in Latin America, home to the biggest oil reserves outside the Middle East.

China, with the world’s largest foreign reserves at almost $4 trillion, agreed to a combined $27.5 billion of funding and investment with Venezuela and Ecuador in separate deals announced by South American officials this week in a bid to shore up their battered finances.

As crude’s 50 percent nosedive erodes reserves and funding options of OPEC’s two Latin American members, China, the world’s largest importer of commodities from oil to soybeans, is taking the opportunity to secure more resources in exchange for credit. While details of the accords weren’t divulged, locking in more oil supply to China may reduce the amount the countries have available to sell on the open market once prices improve.

“An opportunity to boost access in South America has emerged,” Paulo Vicente, a professor of strategy at Fundacao Dom Cabral business school, said in e-mailed comments. “This is the ideal situation for the Chinese to enter as saviors.”

Venezuelan President Nicolas Maduro said yesterday he obtained $20 billion of new investment, without providing details. A day earlier, Ecuador signed loan deals with China for $7.5 billion, including a $5.3 billion credit line from the Export-Import Bank of China, according to an e-mailed statement.

Former President Hugo Chavez and his successor Maduro have turned to China amid tense relations with U.S.-funded multilateral organizations. China has lent more than $45 billion to Venezuela in the past decade, mostly in return for oil supplies, including a $4 billion loan in July.

Energy Projects

In recorded comments from Beijing broadcast on Venezuela’s state television yesterday, Maduro said that proceeds would go to “projects of the economic, energy and social kind.”

The impact of the announcement will depend on how much of the $20 billion will be a cash transfer instead of long-term contracts for Chinese goods and labor, Eurasia Group analyst Risa Grais-Targow said in an e-mailed report.

“The funds do not necessarily represent freely available cash that the government can use for imports or to make debt payments,” Grais-Targow said.

The Bloomberg Commodity index, which tracks 22 products from crude to copper, lost about 25 percent from a 2014-peak in April and is trading near the lowest since March 2009 amid faltering demand and increasing supply for raw materials. Oil has dropped by more than half since June as U.S. output surged and OPEC decided to maintain its output ceiling.

The price for Venezuela’s oil, which accounts for more than 95 percent of exports, has plunged by more than half from last year’s peak in June to $47 a barrel this month. The country, which holds the world’s largest crude reserves, is in turn importing more crude oil and products from the U.S. as maintenance and unexpected down times at its main refineries has drastically reduced domestic capacity.

Investment Pledge

Maduro is visiting China to attend the opening ceremony of the first ministerial meeting of the Forum of China and the Community of Latin American and Caribbean States, or CELAC, which opens today. The forum was proposed by Chinese President Xi Jinping during his trip to Latin America last July.

In his speech at today’s ceremony at the Great Hall of the People in downtown Beijing, Xi said the two-way trade would reach $500 billion within the next 10 years and pledged $250 billion in investment in the region over the next decade.

Ecuador will use about $1.5 billion of the Chinese credit this year to finance public-work projects, Finance Minister Fausto Herrera said in a Jan. 6 statement. President Rafael Correa, a 51-year-old former economics professor, traveled to China this week to ask for loans to help prop up public spending after the price of crude, Ecuador’s biggest export, plunged to its lowest level since April 2009.

“China has considerable currency reserves at this point that it needs to utilize and diversify,” said Margaret Myers, director of China & Latin America program at the Inter-American Dialogue. “A lot of the investment that Chinese states banks are doing right now around the world is an effort to do just that.”

China loaned Venezuela and Ecuador a combined $60 billion dollars up to the end of 2013, according to the Washington-based research organization.

The Asian nation in July also signed a three-year currency-swap agreement with Argentina in which the South American country may receive $11 billion of yuan in exchange for Argentine pesos. The country conducted its first swap on Oct. 30, receiving $814 million worth of yuan, helping Argentina to boost its reserves to $31.3 billion.

Relations Upgraded

Xi, calling Maduro “an old and good friend of the Chinese people,” said China supports Venezuela’s efforts to restructure its economy and boost manufacturing. Xi also said he hopes Venezuela will use the bilateral financing mechanisms to channel more funds to energy, mining, agriculture and industry.

Bilateral relations between the countries were upgraded to a “comprehensive strategic partnership” during Xi’s visit to Venezuela in July 2014, which Xi said began “a new chapter” in the relationship.

“It can be said that the development of China-Venezuela relations and win-win positive cooperation have been raised to a new level,” Xi said at yesterday’s meeting.

(Updates with analyst comment in 15th paragraph.)
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