Not so “sweetheart deals” from China in Latin America

Kevin P. Gallagher

Never letting data get in the way of a good story, pundits and policy-makers alike have clamored that Chinese development banks are engaged in “low-ball” finance that is out-competing Western finance in Latin America.  Not so simple, not so fast, according to findings in a new study that I co-authored titled “The New Banks in Town: Chinese Finance in Latin America.”

Frustrated by the lack of transparency exhibited by Chinese banks – notably the Chinese Development Bank (CDB) and the Export-Import Bank of China – we embarked on an effort to create a database of Chinese financing to Latin American governments from 2005 to the present.

Digging through SEC filings, government web pages, the press on both sides of the Pacific and beyond, we estimate that between 2005 and 2011 these banks provided upwards of $75bn in loan commitments to Latin American governments.  The Chinese committed $37bn to the region in 2010 alone, more than the World Bank, Inter-American Development Bank, and the United States Export-Import bank combined.

The majority of the loans went to Argentina, Brazil, Ecuador, and Venezuela and the lion’s share of them were for energy, mining, oil, and infrastructure projects.

We also unearthed many of the terms of these deals and were surprised to find that they are not so sweet as we’ve been led to believe.  Yet the “oil-backed” loans that have also received clamor are not as harsh as we’d been led to believe.

The majority of the loans to Latin America are from the CDB, and the CDB actually charges higher interest rates than their Western counterparts.  This is why Deborah Brautigam refers to the CDB as the “development bank that doesn’t give aid.”  A $10bn 2009 line of credit to Brazil was at LIBOR +280 basis points whereas a line from the World Bank to Brazil was LIBOR +55.  A 2010 line to Argentina for a rail system will also be $10bnand was LIBOR +600, whereas recent World Bank loans to Argentina loans were LIBOR +85.

What has also been controversial are the “oil sale agreements” that often go alongside the loan contracts. Indeed, $46bn of the $75bn in loan commitments we found were “commodity backed loans”.  The misconception is that Brazil, Ecuador, and Venezuela (the nations that have such agreements) have to send barrels of oil to China at an agreed upon price before the recent price spikes and thus China is making out like a bandit.  Not so, we found that China buys a pre-specified number of barrels of oil per day and pays spot prices on day of shipment.  The Chinese then deposit a portion of the revenue into the borrowers CDB account and then withdraws the funds from that account for loan repayment.

Not as harsh as we thought.  Indeed, the Chinese claim that such side deals are a hedge against default and therefore allow them to offer an even lower interest rate than they otherwise would have.

So the costs and benefits of Chinese finance are not as one-sided as some make them out to be.  The Chinese are certainly a new and different source of finance for many countries in Latin America, but you have to pay a premium for them.  That premium isn’t so high if  you are Ecuador or Argentina and sovereign debt markets have been closed since default.

This piece was originally published in the Financial Times.

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