Chinese finance in Latin America

South America

Chinese banks have outstripped the Inter-American Development Bank (IADB) and the World Bank’s lending in Latin America over the last five years, putting China in a new position of being a major creditor to the region. Although overall traditional funding sources from the US will continue to outstrip the Chinese for some time, i.e. the entire funding from all US financial institutions to Latin America. In the longer term the US looks set to be outmatched by the titans of Chinese state capitalism, just like US finance pushed out the UK institutions that dominated Latin American prior to the First World War, the Chinese look set to become the dominant player via its financial institutions such as the China Development Bank and its Import Export Bank. Long seen as the USA’s backyard, many Latin American governments have welcomed the attention from another power and the additional investment the Chinese bring.

A new Inter-American Dialogue Report – “The New Banks in Town Chinese Finance in Latin America” analyses Chinese lending practices in Latin America and the Caribbean, the report estimates that Chinese loans have totalled $75 billion since 2005 and have exceeded other policy lenders such as the World Bank, IADB and the US Export-Import bank combined. The report concluded that the China Development Bank (CDB) terms were often more strict than the World Bank, and despite the common belief that the China Ex-IM Bank does not set strict conditions with its loans. The most common pattern continues to be oil or natural resources used as collateral or part payment for the loan. Encouragingly it shows that Chinese banks are expanding environmental guidelines, to help bring them up to date with international best practices. There is also little evidence of the Chinese setting artificially low interest rates to muscle in on multilateral development banks like the World Bank or IADB’s “territory”, if anything they charge on average a higher rate of interest.

Latin American poverty has fallen to its lowest level in 20 years, how much of this is due to Chinese investment is unclear, but the large investments and increase in trade has certainly helped stimulate economic growth in the region. There is the danger as the Argentine economist Ricardo Delgado points out, that Latin America will become the bottom of the global supply chain for China and the West, unless it takes the opportunity to industrialise further and move into services and other “value added” sectors. In many ways the region faces the same danger and opportunity Africa does (although LATAM is a lot richer), that it will just supply raw materials and remain at the mercy of commodity price fluctuations.

Like in Africa, India has been following in China’s wake and trade between the regions has blossomed, reaching $25 billion in 2011, still well behind China, but an interesting sign that the sub-continent’s companies are expanding abroad.

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