Beijing needs to manage investment risk in Venezuela

Source:Global Times Published: 2017/8/8 22:03:40

Illustration: Peter C. Espina/GT

A controversial election in Venezuela voted in 545 members of a new constituent assembly on Sunday, which will have the power to rewrite the country's 1999 constitution. The vote has escalated turmoil in the South American nation.

Venezuela's opposition boycotted the election, claiming that the new constituent assembly would turn the country into a full-fledged dictatorship. Over the past several months, violent protests against the Venezuelan government caused at least 115 deaths and nearly 2,000 injuries. Opinion polls showed that more than 70 percent of the country was opposed to the vote. Among Latin American countries, Bolivia and Nicaragua congratulated Venezuela for the election, while Mexico, Peru and Argentina, among others, criticized the vote. Meanwhile, people queued up to buy food and other basic goods at supermarkets in Caracas, capital of Venezuela, due to concerns over a shortage of food, medicine and other basic goods as well as a business shutdown amid the turmoil. The central bank's excessive money printing has exacerbated the country's inflation woes. Inflation is forecast to jump to 1,000 percent this year, according to media reports.

Apparently, Venezuela's economic turmoil is changing into social unrest and political turbulence. And it is noteworthy that the South American country's upheaval may impact China considerably.

For a long time, Venezuela has been a hot investment destination in South America for Chinese firms. The country's economy and social unrest exposes China's commercial interests to huge risks. If a civil war really breaks out in Venezuela, then those Chinese business interests will be gone.

How big is China's economic risk in Venezuela? What are the Chinese institutions that have made heavy investments in the country?

According to our calculations, since 2007, China's State banks have offered 17 batches of loans worth $65 billion in total to Venezuela in terms of oil refining, gold mining, logistics, trade and railways projects, with a large number of private loans flowing into the country at the same time. In November 2016, China National Petroleum Corp and Venezuela's state oil company PDVSA signed a $2.2 billion worth deal to boost oil output at their joint ventures in the South American country. A CNN report said in September 2016 that China had stopped offering new loans to Venezuela, which still owed China about $20 billion at that time.

China's State-owned policy banks have already been deeply engaged in Venezuela. From 2008 to 2015, the China Development Bank (CDB) offered nearly $37 billion in loans to Venezuela, making it the country's biggest creditor. However, in the face of the increasing risks from Venezuela's economic trouble in recent years, the CDB has granted a grace period on Venezuela's loans, relaxed the loan terms, and agreed to take less oil than the loan agreements required. With global investors fleeing amid high inflation and social unrest, Venezuela has become increasingly dependent on the CDB.

China's adherence to its commitments to Venezuela is at the cost of great risk, to not only its industrial investment but also financial institutions.

Many of China's investment in South America are facing similar risks.

China has invested heavily in several South American countries by providing huge levels of financing and expending a lot of diplomatic energy, but these countries had successively encountered economic crisis, regime changes and social turbulence, thus putting China's commercial and diplomatic interests at risk. In this sense, South America, one of the pillars for China's overseas investment strategy, is being trapped in the political and economic mire caused by its internal turmoil.

Although the political and security situation in Latin America is not as good as it in developed countries, it is impossible for China to pull out. Latin America should not be seen as the frontier of China's influence. Managing investment risk in the region is homework that must be done.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.

Posted in: INSIDER'S EYE

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