As oil prices fall, Latin America and China get cozier

Bilateral trade between China and Latin America has grown 20-fold over the past decade, and China has made more than $100 billion in loans in the region.

As plummeting oil prices are battering Latin American economies, the region's leaders are gathering this week in the one country that many see as a lifeline: China.

On Thursday, at least 22 foreign ministers, three presidents and one prime minister will be in Beijing for the first ministerial meeting of China and the Community of Latin American and Caribbean States (CELAC), which includes every country in the Americas except the United States and Canada.

Bilateral trade between China and the region has grown 20-fold over the last decade, and China has made more than $100 billion in loans to the hemisphere's nations and companies, according to the Inter-American Dialogue. In 2010, China's $37 billion in funding was more than the World Bank, Inter-American Development Bank and US Export-Import Bank combined.

Among those attending the event will be Costa Rican President Luis Guillermo Solís, Ecuadorean President Rafael Correa, Bahamian Prime Minister Perry Christie, and China's biggest debtor in the region, Venezuelan President Nicolás Maduro. 

For President Maduro, who traveled to Beijing on Monday, the stakes are high as he tries to pull the Andean nation out of a recession that features food shortages and the world's highest inflation rate.

China has pumped more than $50 billion into Venezuela since 2007, even as other lenders steered clear of the country's political and economic turmoil. But as Venezuela's ability to repay its debts is being undermined by plummeting crude prices, which hit five-year lows this week, some wonder how much further China will go to keep the socialist economy afloat.

"Of course Maduro will be asking for more money," said Evan Ellis, a professor of Latin American studies at the US Army War College in Washington, DC. "The question is what conditions will be asked and if China will be willing to put down more good money after bad."

So far, China has made that gamble, allowing Caracas to reduce crude shipments and charge preferential prices for the oil that it uses to repay its debts. Despite the current economic crisis, Venezuela is sitting on the world's largest oil reserves, and Beijing needs that crude to fuel its growth.

"Though China's ties with Venezuela are based on economic interests rather than geopolitical goals, any change in government would put their existing arrangements and now sizable outstanding debt at risk," New York-based Eurasia Group said in a statement, noting that Venezuela's unpaid debt to Beijing is near $20 billion. "Moreover, China is playing a longer-term game in Venezuela, and its oil companies want to maintain a foothold in the country, given the size of its reserves and the potential for substantial output increases in the future."

In the short term, Venezuela needs China to renew a $4 billion line of credit that expires in February, said Jessica Grisanti, a senior economist with the Caracas-based Ecoanalítica analysis firm.

"We believe that that line of credit will be renewed," she said. "Where we have our doubts is if China will offer any more than that."

Venezuela will need much more if it wants to avoid further budget cuts and slashing popular subsidies ahead of congressional elections later this year. Ecoanalítica estimates that flagging oil revenues will cost the country between $11 billion and $20 billion in 2015.

Maduro needs good news from the Beijing trip. Venezuela's inflation is running at 64 percent, the highest in the world by some accounts. And falling crude prices, in a country where 96 percent of all export dollars come from the oil and gas industry, have hammered the budget. The Central Bank last week confirmed that the economy shrank 2.3 percent in the third quarter of 2014, the third-straight quarter the economy has contracted.

Maduro blames the troubles on an "economic war" waged by the opposition and the United States and has said that reforms are in the works. On Tuesday, officials said that much-anticipated changes to the exchange-rate system would be announced once Maduro returns home next week. Most analysts are expecting a devaluation of the bolívar that would give the administration some breathing room but also sap the population's purchasing power – likely driving down Maduro's already dismal approval ratings of 22 percent.

Eliminating the country's three-tiered exchange rate system and restrictions on the private sector need to be at the core of any reforms, said Jose Guerra, economic adviser for the MUD coalition of opposition parties.

"This government has destroyed industry and now it's desperately going to China with hat in hand looking for help," he said in a statement. "The country is being mortgaged once again with this trip."

Venezuela's not alone. Ecuador, which alienated the markets by defaulting on its debt in 2008, has become increasingly reliant on China. Since 2009, the country has loaned Ecuador $9.9 billion, according to Inter-American Dialogue figures. China now represents about 30 percent of Ecuador's total external debt and the South American nation sends about half of its oil exports to China as payment, by some accounts.

On Monday, as President Correa traveled to Beijing, the government announced it was slashing the 2015 budget by 4 percent, or $1.4 billion, in response to falling crude prices. Even so, state-run El Telégrafo newspaper reported Tuesday that a $5 billion line of credit with the Export-Import Bank of China is in the works.

Ironically, the economic slowdown in China is likely to increase its investments in Latin America. Beijing is sitting on more than $4 trillion in foreign reserves, and Chinese banks have incentives to look abroad, Ellis said.

"China has no lack of cash to invest if it decides to do so from a policy standpoint," he said. "On the commercial side, as performing loans and good-looking projects in China soften, you are going to see an accelerated push to find better performing loans abroad."

During his visit to the region in June, President Xi Jinping proposed that trade between the two sides should reach $500 billion in the next decade and that China's direct investment to Latin America should reach $250 billion.

China's growing footprint in the hemisphere has raised alarms in Washington. But the country's interest in Latin America has more to do with domestic concerns than politics, said Constantino Urcuyo, a professor of government and public policy at the University of Costa Rica.

Most of China's investment in the region is in oil fields, mining operations and transportation projects -- commodities that China needs and the means to get them out of Latin America.

"The apocalyptic vision that some have, of the Chinese trying to overcome US hegemony in the region -- I just don't buy it," he said. "What I think China sees in the region is a source of raw material and a market for its products."

That being said, China's support of the CELAC is classic "big power politics," he said. By backing the group – which sees itself as an alternative to the US dominated Organization of American States – China gets to play a regional role on the cheap.

"This is about power projection," he said. "China is reaffirming its global presence in the region."