Chinese banks have lent $75 billion to Latin America since 2005
Latin American nations pay higher premiums than others for loans
A growing source of finance for smaller Latin American nations has been China. Chinese state banks have lent more than $75 billion to Latin America since 2005. That's more than the World Bank, Inter-American Development Bank and US Ex-Im Bank gave in 2010 combined. According to a report entitled "New Banks in Town: Chinese finance in Latin America," this is a positive development - with a steep price tag.
China has overtaken the U.S. to become Brazil and Chile's largest trade partner. According to the Financial Times, U.S. policymakers fear that Beijing is using cheap rate loans to 'buy' influence among left-leaning Latin American governments. Beijing uses financing to secure long term commodity supplies.
In fact, China has overtaken the U.S. to become Brazil and Chile's largest trade partner. According to the Financial Times, U.S. policymakers fear that Beijing is using cheap rate loans to "buy" influence among left-leaning Latin American governments. Beijing uses financing to secure long term commodity supplies.
For example, the China Development Bank, which accounts for the bulk of China's Latin American lending, extended a $10 billion credit to Argentina in 2010 at the London Interbank Offered Rate plus 600 basis points. In the same year, the World Bank lent Argentina $30 million at Libor plus 85 basis points.
"Some on the left say China's rising importance in Latin America is driven by an ideological desire to boost South-South ties. Others on the right say that China is buying influence with cheap money," Boston University's Kevin Gallagher, one of the report's co-authors says.
While welcomed by the party in Beijing, and executed by commercially orientated state banks, "neither view is quite true," he said.
Loans for oil, such as a $20 billion deal with Venezuela in 2010, also use market prices. 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.
This is certainly 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," Gallagher says. The U.S. and China agreed this week to begin talks on setting guidelines for export-credit financing which could bring Beijing within rules used by member countries of the Organization for Economic Co-operation and Development.
Chinese loans to Latin America accelerated in 2009 as China took advantage of the dwindling of alternative credit sources during the global financial crisis to project its influence abroad.
According to separate figures from the Institute of International Finance, by 2009, Latin American loans reached $18 billion, from under $1 billion before 2008, and by 2010 topped $36 billion. Total net credit flows to the region totaled $63 billion in 2009 and $143 billion in 2010,
China proved an especially valuable alternative credit source for defaulted sovereign borrowers that cannot access international capital markets, such as Argentina and Ecuador. Ironically, both of these nations are among the most vocal critics of globalization. Critics add that China's focus on commodities increases the "dependency" exploitation denounced by leftwing development economists four decades ago.
China's growing presence has started to prompt a regional backlash as many Latin American manufacturers increasingly complain that their industries are being hollowed out by cheap Chinese exports.
© 2012, Catholic Online. Distributed by NEWS CONSORTIUM.
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Keywords: Latin America, loans, China, globalization, regional backlash
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