In cases such as the tiny South Pacific islands of Tonga, China is lending enormous sums to countries few expect will be able to repay.
What has surely given the Chinese banks courage is the trillions of dollars in reserves the country holds in US Treasury bonds, investments that pay almost nothing in interest. Making that money work harder for a return overseas has become nothing less than a national priority, part of China’s trumpeted “going out” strategy.
China’s economy is the second largest after the US, and many of the deals stipulate repayment in oil and natural gas, locking in the commodities China will need to sustain its growth for decades to come.
In 2009 and 2010 alone, the China Development Bank extended US$65 billion in such loans to energy companies and government entities from Ecuador to Russia and Turkmenistan, according to a report by Erica Downs, a China expert at the Brookings Institution, a US think tank.
“If you’re lending tens of billions of dollars to a borrower ... you want to make sure that loan is secured against something,” Downs said. “In the case of Venezuela, it’s the most valuable thing they can offer. It’s just one way to ensure they get paid.”
In dozens of cases, the Chinese have also demanded that their own companies build the infrastructure that will help governments extract and ship the commodities used to pay back the loans.
In Argentina, that means agreements to bring in Chinese companies to revamp the country’s decrepit railways, which would speed up shipments of soy to Chinese consumers.
“The money goes from one account in the China Development Bank into the hands of small and medium-sized businesses in China,” Gallagher said, while noting the majority involve big state companies.
The Chinese also hold a valuable trump card: They are betting that Chavez and other financial pariahs will not dare alienate their last source of affordable money by defaulting on Chinese loans or seizing Chinese assets.
“The Chinese have the upper hand,” Downs said. “The China Development Bank sees this country that’s thumbed their nose at the IMF, and if they borrowed from the IMF and had to be subjected to IMF conditionality, the regime would fall.”
Perhaps with that in mind, more than 30 Chinese consultants toured Venezuela and handed Chavez a thick binder with recommendations on everything from exchange-rate reform to agriculture.
While cameras clicked, Chavez held up the book, thanked his Chinese benefactors and pledged to study the prescriptions. Unlike IMF loans, though, the Chinese recommendations were not a requirement and Chavez has shown no sign of curbing public spending.
The investments and loans have contributed to a substantial shift in commerce toward China.
Venezuela, for example, saw its trade with the US drop from 26 percent of its GDP in 2006 to 18 percent in 2011, according to an analysis of IMF databases. Meanwhile, Chinese trade grew from virtually nothing in 2001 to nearly 6 percent a decade later, much of it in the form of oil to repay loans.
However, the money does not necessarily save countries from their own bad financial bets.
Zimbabwe, which has received generous Chinese financing, saw inflation peak at 79.6 billion percent a month in November 2008.