New banks in town: Chinese finance in Latin America
17 April 2012, New York
“Before 2005, there wasn’t any Chinese bank lending money to Latin American countries. From 2005 to 2011, the China Development Bank (CDB), the Export-Import Bank of China (EIBC) and a few others have provided about 75 billion dollars to Latin American countries. And in 2010, the Chinese lent 37 billion dollars to the region, more than the Inter-American Development Bank (IDB) and the World Bank (WB) combined that year,” said Kevin P. Gallagher, Associate Professor of International Relations at Boston University, at a UN DESA seminar held on 13 April.
In the seminar New banks in town: Chinese finance in Latin America, the results of Prof. Gallagher’s new study have been presented. This study estimates the size, composition, and characteristics of Chinese finance in Latin America.
Prof. Gallagher coordinates the Global Development Policy Program. He opened his presentation by introducing the methodology of his research, “I am an economist, but I feel like this project is more journalism than economic analysis, as we did a lot of interviews in Beijing. Now my team has to go out and find resources”.
“The Chinese Development Bank (CDB), the Export-Import Bank of China (EIBC) and the Industrial and Commercial Bank of China (ICBC) are the major banks that we are analyzing”, said Prof. Gallagher. “Our best estimate of Chinese loan commitments to Latin America since 2005 is $75 billion. CDB made 82 percent of the loans, the EIBC and the ICBC bank contributed respectively 12 and 6 percent.”
Compared to Western loans, Chinese loans tend to focus on infrastructure and heavy industry such as energy, mining, infrastructure, transportation and housing sectors. Besides, the loans are also generally larger than Western loans — the overwhelming majority of Chinese financing packages to Latin America amounted to $1 billion or more.
Unlike the International Financial Institutions (IFI) and most of the Western banks that require organizational and/or policy-related reform in return for financing, Chinese loans do not impose policy conditions on borrowing governments, but they require equipment purchases and sometimes oil sale agreements.
“There are some misconceptions about the structure of China’s loans for oil in Latin America”, Kevin P. Gallagher said. “The common misconception is that when a contract is signed, a fixed amount of barrels of oil per day is sent to China, but it is not true. China buys oil at spot market prices and deposits a portion of the revenue in the borrower’s CDB account. Then, the CDB withdraws the money from the account for repayment.”
Kevin P. Gallagher calls this behavior the “China Hedge”. He said that interest rates might even be higher if there weren’t so many “commodity-backed” loans.
There is a big difference between Chinese banks and Western banks on environmental guidelines, Kevin P. Gallagher pointed out. “China has environmental guidelines but they are not on par with their International Financial Institutions (IFI) and Western counterparts. For example, China does not allow independent monitoring of its environmental activities nor does it provide a third party grievance mechanism — all hard-fought concessions that took years to get IFI to do.”
“Chinese finance is a new and enormous player in Latin America, at least for some nations. It does not compete but complements IFIs and US finance in the region. If Latin American countries capitalize on this new finance to provide parallel support for stabilization funds, innovation, industrialization and environmental protection, Chinese finance may bring very favorable results.” concluded Kevin P. Gallagher.