Chinese financing in Latin America: From lending to governments to investing in the purchase of companies

The interest of the People's Republic of China in Latin America arises in the framework of the 'Going-Out' strategy, born from the report presented by former Chinese President Jiang Zemin at the 14th congress of the Communist Party of China in October 1992. Thus, the first Chinese investment in the region dates back to December 1 of the same year: China Shougang Group, owned by the State-Owned Assets Supervision and Administration Commission, acquired 98.4% of the shares of the mining company Hierro Perú, today called Shougang Hierro Perú S.A.A., for 118 million US dollars (USD).

In the 21st century, China has found in Latin America a region rich in natural resources as basic as wheat or soybeans and as precious as oil, gas, copper or gold; A market of 650 million people, with a combined Gross Domestic Product (GDP) worth USD 5.49 trillion, and a favorable geopolitical environment, with some socialist rulers ideologically aligned with Chinese foreign policy (the 'Bolivarian cycle') and the relative withdrawal of the region by the United States, more oriented towards the Middle East, Europe and Asia. This has been a great opportunity for the main Chinese economic initiatives: the Belt and Road Initiative (BRI), presented in 2013, and the Regional Comprehensive Economic association (RCEP), which brings together Asia-Pacific and Australia and came into force on January 1, 2022.

In 1998, former President Jiang Zemin defended the internationalization of Chinese lending by arguing that Africa, the Middle East, Central Asia and South America are vast regions at development with very large markets and abundant resources and that China should seize the opportunity to enter them. However, Chinese bank lending and credit did not reach Latin America until 2005; it began that year through the development Bank of China (CDB), the Export-Import Bank of China (EIBC) and the Industrial and Commercial Bank of China (ICBC), targeting the infrastructure, energy, mining, transportation and real estate sectors.

development Chinese financing quickly proved to be more attractive than financing from international organizations, such as the Inter-American Development Bank (IDB), the World Bank (WB) and the Export-Import Bank of the United States (EXIM), because it did not require structural, political, economic or social reforms. From 2005 to 2011, Chinese banking institutions granted cumulative financing lines of USD 83.805 billion to the region, compared to USD 66.933 billion for the IDB, USD 53.364 billion for the WB or USD 1.302 billion for EXIM.

2005-2012: First multi-million dollar financings

In 2005 and 2007, the first Chinese financing deals in Latin America were closed: USD 201 million from ICBC to Brazil's business Gerdau Açominas S.A. for the purchase of steel equipment, and USD 45 million from EIBC to the Jamaican government for the construction of the Montego Bay convention center. But it was not until the financial crisis of 2008 that the first billion-dollar contributions took place. These multi-billion dollar Chinese loans and credits are shown in the following tables, the contents of which are taken from Boston University's database on Chinese investment (Boston University, 2008). data on Chinese investments from Boston University (they do not include billionaires, as they are comparable to syndicated bank loans from entities of credit common).

In the first table (2005-2012), the CDB funds for Banco de development de Venezuela (Bandes) and Petróleos de Venezuela S.A. (PDVSA) stand out. The delicate political situation and hyperinflation in the country would call into question the viability of their amortization; however, these are financial deliveries in exchange for oil in the future. Although Venezuelan oil production has been declining, it is estimated that the government of Nicolás Maduro would have been able to cancel, by the beginning of 2023, close to 80% of the debt contracted with Beijing in the last decade and average.

From 2013 to 2019: The Belt and Road is now global

Initially, Xi Jinping's BRI initiative focused on Asia, Africa and Europe. However, the economic data reflects its expansion also to Latin America through the financing lines of both commercial banks and institutional banks ('policy banks') of China. In December 2021, 20 Latin American countries joined the Belt and Road with the signing of a memorandum of understanding with China. signature In December 2021, 20 Latin American countries joined the Belt and Road with the signing of a memorandum of understanding with China, although construction had already begun on some of the infrastructures envisaged.

In those years, multi-billion dollar financings were concentrated in Ecuador, Mexico, Brazil, Brazil, Argentina and, especially, Venezuela, aimed at extraction and infrastructure related to mining and natural resources. However, in 2019, Chinese financing in the region slowed to USD 1.9 billion.

From 2020 to the present: From public to private financing

In 2020, China stopped financing Latin America through its policy banks, after having granted more than USD 138 billion since 2005. Although in 2021 there was again financing through this channel, it was a small amount, increased in 2022 (USD 201 million and USD 804 million, respectively), which still reflects a strategic shift.

The main reason for this change is the nationalization of Chinese loans earmarked for development and modernization of the country's technology, energy and manufacturing industries, critical to China's economic well-being and severely damaged by the COVID-19 crisis. Also, the disruption or slowdown of supply chains, as well as the drop in global commodity prices during the pandemic, jeopardized the full repayment of oil-backed loans. advisor However, the solvency ratio of Latin America's debtor countries had already begun to be questioned earlier by Tian Yunhai, the current senior manager of CDB, the policy bank that has granted the most multi-million dollar loans, for at the 2018 Macau International Infrastructure Investment and Construction Summit in Macau he confessed that CDB has had problems meeting the demands and expectations of Chinese and Latin American companies, associating such problems to the fiscal deficit and high indebtedness of the countries in the region, whose capacity to take on new loans is insufficient.

However, this does not mean that China has ceased its economic or financial interest in Latin America, but rather that it has changed its financing strategy: in the last three years, China has stopped direct public financing from its institutional banks to Latin American governments and state-owned enterprises, but has intensified financing, both from institutional and commercial banks, to Chinese or local companies already operating in the region that wish to expand and develop their projects in energy, mining and infrastructure. There has also been coordination with regional banks or private equity funds.

On the one hand, institutional banks are still timidly active in direct financing to companies in the region related to Chinese economic interests. In 2019, CDB participated in a syndicated loan providing USD 418 million of the USD 652 million granted to Autopistas Urabá, a Colombian business owned 60% by China Harbour Engineering Company, and intended to finance a highway project in Colombia; EIBC, through CLAI Fund, financed the Chinese Three Gorges Corp part of the acquisition of 83.6% of the largest electricity distributor in Peru, Luz del Sur S.A.A., from the American SempraEnergyfor USD 3.6 billion. In 2020, CDB granted a USD 100 million loan to Telecom Argentina, partner strategic of Huawei in Latin America, to acquire telecommunications equipment.

In this change of gear, CDB and EIBC have also made large capital injections in investment and private equity funds of Chinese origin: China-LAC Industrial Cooperation Investment Fund (CLAI Fund), managed by CDB and China State Administration of Foreign Exchange, has a capital of USD 30 billion for primary investment in energy, mining, infrastructure and financial cooperation in Latin America; and CLAC Fund, managed by EIBC, has a capital of USD 10 billion, aimed at investment in energy, agriculture, technological innovation, infrastructure and telecommunications. For example, in 2020, CLAI Fund financed the Chinese consortium formed by Tongling Nonferrous Metals Group and China Railway Construction Corporation for the development of the gold and copper mine in Mirador through its local subsidiary Ecuacorriente, S.A. with an investment of USD 1.4 billion. Thus, China's institutional banks maintain their economic activity in the region using companies or funds as financial vehicles instead of directly financing Latin American administrations or public companies as they did in 2005-2019.

On the other hand, Chinese commercial banks (notably ICBC and Bank of China) are more active, but with much smaller financings, in prominent transactions. In 2019, ICBC and Agricultural Bank of China participated in a syndicated loan, together with Industrial Bank of Korea, valued at USD 120 million to InfraPartners Management LLP aimed at financing the acquisition of 37% of Chilean gas business GNL Mejillones. In 2020, ICBC provided a USD 70 million loan to State Grid International Development to finance part of its USD 2.23 billion acquisition of business Chilquinta Energía from US-based Sempra Energy; China Construction Bank provided a USD 16.6 million loan to Brazilian power utility Eneva to increase its immediate liquidity. In 2021, ICBC and Bank of China participated in a USD 1 billion syndicated loan granted to the Peruvian business Minera Altamina, S.A. for the development of its mining operations; ICBC participated in another USD 45 million syndicated loan for the refinancing of the Argentine business Compañía General de Combustibles S.A. business In 2022, ICBC granted a loan of USD 56 million to Argentina's largest cement company, Loma Negra CIASA, through its subsidiary in Dubai, following a loan of USD 13.1 million in 2020.

The growth of private financing has consequently led to an exponential increase in mergers and acquisitions (M&A) led by Chinese companies in the region with the opening of 'leveraged finance': in 2020, the value of Chinese M&A deals in Latin America amounted to USD 7.7 billion, more than those carried out by the United States and the European Union combined, highlighting, in particular, the purchase of the largest Chilean electricity business , Compañía General de Electricidad, S.A., by China's State Grid International Development, usually financed by ICBC, from Spain's Naturgy, for USD 3 billion. In 2021, the aggregate value of these deals approached USD 6 billion. However, this phenomenon is also due to the fact that Western investors are leaving the region, selling their assets, while Chinese capital is willing to take high risks in exchange for long-term economic benefits deadline.

In conclusion, China's new financial 'dual circulation' strategy, which is concentrating public financing from its institutional banks on boosting the country's economic self-sufficiency while promoting private financing from its commercial banks or, rather, their participation in syndicated loans with other international credit institutions of recognized solvency, possibly to mitigate and diversify the financial risk assumed in previous years. As Western companies continue to exit the fragile Latin American market, Chinese companies supported by their commercial banks and domestic funds will continue to pursue opportunities in energy, mining and infrastructure in particular.

Future: The 'debt trap' and China's real estate crisis

Private financing in Latin America is expected to continue, which will further strengthen trade relations between China and the region, whose value grew from USD 12 billion to USD 315 billion in the period 2000-2020, and could exceed USD 700 billion by 2035. Among the most recent negotiations is the plan for ICBC and Bank of China to be part of the syndicated loan to be granted in favor of China Electric Power Equipment and Technology Co, which plans to invest USD 1.1 billion to build and operate the project upgrade of the network Nacional 500 kV in the Buenos Aires Metropolitan Area, as well as the syndicated loan to be granted to China National Nuclear Corporation, which plans to build the Atucha III nuclear power plant in the province of Buenos Aires, with an expected investment of USD 8 billion. However, it is highly unlikely that the funds granted by Chinese commercial banks will reach the volume of those granted by their institutional peers, as there is not the same willingness to assume an excessively high credit risk.

On the other hand, given China's creditor attitude during the pandemic, which granted grace periods, debt standstills and credit restructurings to Ecuador, Argentina and Venezuela (representing 45% of Latin America's total debt to Chinese institutional banks), a status known as 'debt trap', whereby Beijing can take over a country's assets as a way to collect on defaulted debt, is ruled out.

Moreover, due to the high indebtedness and continuous value of raw materials that guarantee the amortization of credits and loans, it is not convenient for China to demand immediate payments on first demand for 'default'. Today, the Asian giant sees Latin America as a region in development and great economic projection, the last link of the BRI and the possible extension of RCEP, therefore, it does not seek to drain its resources, suffocate their economies or harm their credit viability. A peculiar status , however, has been created in Suriname, 17% of whose public debt is owed to China; unlike other creditors, Beijing has not yet shown any willingness to restructure.

In any case, it is crucial, not only for the Latin American economy but also for the world economy, to closely follow the evolution of the current real estate crisis in China, a sector that occupies 30% of its GDP, whose collapse would cause a contagion effect in the global financial market: the risk rating agency Standard & Poor's estimates that Chinese banks could lose USD 356 billion due to defaults, since real estate loans represent about 20% of the loans of the Chinese banking system. However, a status similar to the 2008 subprime crisis that devastated world financial markets is a long way off, as in China, the government has a 'free hand' to intervene in the banking system or order Chinese banks to stop foreign financing in order to attend or rescue the domestic market.