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China's Turn to Gouge Latin America

Mac Margolis writes about Latin America for Bloomberg View. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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To many in Latin America, the Caribbean and Latin America Community summit in Beijing earlier this month was the dawn of a new world order.

Chinese President Xi Jinping's big-money nod to the region -- $500 billion in trade and $250 billion in investment by 2025 -- fueled hopes for a long-awaited Beijing consensus, with China upstaging the U. S. in its own backyard.

The hopeful might be in for a disappointment. The bullish talk comes just as China's economy slows and Latin America's commodities prices tumble. Now China is less eager to spray its reserves around and more reticent of deadbeats.

Venezuelan President Nicolas Maduro went to China casting for a lifeline for the sinking "Bolivarian" revolution. He landed a $20 billion investment pledge from the Chinese but, apparently, no new cash. "Infrastructure financing is fine, but Venezuela is facing a short-term currency and credit crisis," said Barbara Kotschwar, of the Peterson Institute for International Economics. "If Venezuela can't pay its bondholders, Mr. Maduro is looking at default."

With the price of its oil down 56 percent since June, Venezuela will have to pump double the crude to pay off its outstanding China debts, nearly $50 billion since 2007.

Ecuadorean President Rafael Correa also arrived in Beijing in need. Although his economy is in far better shape than Venezuela's, falling oil revenues and a spiking U.S. dollar (Ecuador's dollarized its economy in 2000) forced Correa to slash his budget by $1.4 billion on the eve of the parley and slap stiff tariffs on imports from Colombia and Peru, nearly starting a trade war. Correa left the summit celebrating $7.5 billion in fresh financing, and even deeper in hock to China, which already owns 30 percent  of its foreign debt.

Jorge Guajardo, Mexico's former ambassador to China, told me this bodes ill for the region. "The enthusiasm over China has no base in reality," said Guajardo, a consultant with McLarty Associates. "The Chinese throw out big numbers but seldom deliver. Their financing comes with conditions that countries seldom like and usually displaces local suppliers. I told them, 'We've been colonized before.'"

Not long ago, all the talk in the Americas was over how cheap Chinese goods were killing native industry. "Do you want an original or a 'xing-ling?'" my mechanic in Rio de Janeiro asked, using the local slight for cut-rate, made-in-China parts, when my car needed repairs.

Yet most emerging markets were grateful for China's appetite for their oil, minerals and grain, and they liked the lowball financing proffered with few questions asked. Indeed, until now China's banks have earned a reputation for rushing in where Western lenders dare not tread.

Frozen out of credit markets since the moratorium of 2001, Argentina gladly took $11 billion from the Chinese to pay off bondholders last year. Ecuador did the same after its own default in 2008. Before that, China took equity stakes in Peruvian mines even when Shining Path guerrillas controlled much of the countryside.

China, however, is not in the business of indulgences. Kevin P. Gallagher, of Boston University, found that China's state banks often charged Latin American borrowers higher interest rates than official Western lenders -- a practice that earned China's Export-Import Bank the moniker of "the development bank that gives no aid."

With each loan, China tightens its grip on suppliers. Ecuador and Venezuela each send half their oil to the Chinese. Venezuela exports more than 500,000 barrels a day, much of it to repay loans. Latin America's total debt to China has soared to $100 billion since 2005. Half of that is for developing infrastructure -- which will help whisk even more Latin oil, ore and grain to … guess which country.

Latin Americans would be better off seeing China as another engine in the world economy, "not our new best friend," said Luiz Augusto de Castro Neves, Brazil's former ambassador to China."Even if we wanted China to supplant the United States -- and we don't -- China isn't interested. They're interested in business."

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mac Margolis at mmargolis14@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net