China is throwing its weight - and money - around in Latin America. It plans to spend $250 billion in the region over the next decade - but this cash comes with strings attached and could do more harm than good.
Xi Jinping has high hopes to expand China's influence in Latin America. At the Forum of China and the Community of Latin American and Caribbean States (CELAC) in Beijing in early January, the Chinese President announced his country would invest $250 billion in Latin America over the next decade.
If Xi has his way, annual trade between the two regions will almost double by 2025, from today's $280 billion to around $500 billion.
Since 2010, China has been the second-largest exporter to Latin America, behind the United States but ahead of the European Union. In addition, China is a major buyer for many countries in Latin America: For Colombia and Argentina, about 8 percent of exports go to China. For Brazil and Uruguay, that's 15 percent. And China is the top export market for Chile, accounting for 25 percent of export volume.
Commodities for gadgets
These trade relations follow a similar pattern to those Latin America cultivates with Western industrialized countries. The region provides oil, copper, soybeans and meat and receives finished goods and technology. As long as the commodity market was booming, the region received more and more cars, computers and machines from China in exchange for its products.
But now after the fiesta, the hangover: Global demand for commodities has fallen, taking prices with it. Oil, copper and soybeans cost only half what they did a few years ago.
To pay its debts, Venezuela now has to send twice as much oil to China as it did a year ago. In Argentina, the effects are being felt most of all in agriculture, one of the country's last productive sectors; the country is one of the biggest exporters of soy. And the falling commodity proces are a further setback for Brazil's stuttering economy.
Magdalena Forster of Deutsche Bank Research advises countries to diversify economically: "Chile is a good example of how countries can minimize the 'resource curse': Over the years, Chile has actively diversified, expanding its trading partners through many bilateral free trade agreements and has promoted alternative export products with higher value added, such as salmon and wine." The establishment of a thriving services sector was also important," she said.
But even in Chile, the largest copper exporter in the world, economic growth is likely to remain slow just because of the price decline. Some experts even a planned educational reform at risk due to lack of funding. Forster said Chile has prepared for this: "Chile has sovereign wealth funds into which surplus earnings from commodities are paid that can serve as a buffer for lean times."
Investment in commodities
The trade in commodities is not the only sign of how strongly relations between Latin America and China are driven by raw materials. About 6 percent of the total foreign investment in the region comes from China: Since 2010, it has invested about 10 billion dollars there annually. According to Deutsche Bank Research, 90 percent of these investments were involved with the exploitation of raw materials. And China's demand for Latin American exports is far from satisfied.
In April 2014, for example, three Chinese companies took over one of the largest copper mines in the world in Peru for about $6 billion. And the Chinese state food company COFCO recently bought Nidera and Noble, two of the world's most important grain merchants and market leaders in South America.
Loans for infrastructure
In addition, bilateral loans are becoming increasingly important. In Cuba, China is financing a new port. In Argentina, it's behind the modernization of a railway line and the construction of two hydroelectric power plants. Brazil's Vale, one of the three largest mining company in the world, received a loan to buy ships and equipment. There's also talk of a rail link between Brazil and Peru through the Andes. In Nicaragua, a Chinese group is financing the construction of a new Atlantic-Pacific canal.
"The database of the Inter-American Dialogue shows that Chinese loans accounted for 55 percent of approved loans for infrastructure in Latin America from 2005 to 2013," Forster said.
Often the loans have comparatively low interest rates - even for countries such as Argentina that are unable to borrow on international capital markets. But there's a catch: "Often loan commitments are subject to conditions that ensure that Chinese services or equipment are used for the projects," Forster said. This reduces the risk for Chinese creditors, especially in unstable countries.
Friends in need
China has been gaining even greater influence by lending money to Latin American governments to allow them to cover these budget deficits. Last year, Argentina received a yuan credit line worth $11 billion to alleviate an acute shortage of foreign currency in the country. China also came to the aid of Ecuador and Venezuela and promised new loans of $7.5 and $20 billion.
Inter-American Dialogue, a think tank, says Latin America borrowed about $98 billion from China between 2005 and 2013. This alone equals 60 percent of multilateral lending by the World Bank and Inter-American Development Bank over the same period, according to Deutsche Bank Research. The largest Chinese loans went to Venezuela (50 billion), Argentina (14 billion), Brazil (13 billion) and Ecuador (10 billion).
Of course, China's interest in the matter isn't philanthropic, helping Latin American countries develop. That's something the region's governments need to take into their own hands by promoting economic models that draw on people and their knowledge rather than on raw material exports. The risk is otherwise great that the continent will slide from one state of dependency into the next.