By John Paul Rathbone in London
Chinese state banks have lent upwards of $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 underlines China?s growing influence in the fast-growing 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 already overtaken the US to become Brazil and Chile?s largest trade partner. Furthermore, 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 low-priced 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 Americais 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.
Furthermore, 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.
On Tuesday, the US and China agreed to begin talks on setting guidelines for export-credit financing which could bring Beijing within rules used by OECD member countries.
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 less than $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.
Additional reporting by Jamil Anderlini in Beijing
? The Financial Times Limited 2012