Why Latin America should not squander the China boom

January 28th, 2015 in In the News

From  BBC

By Kevin P Gallagher

January 27, 2015

Aside from the Chinese who helped build the Panama Canal, and the Maoist rebels of Peru who called themselves the Shining Path, Chinas presence and influence in Latin America was unremarkable until the turn of the 21st Century.

After 2001, when it joined the world economy through the World Trade Organisation (WTO), China quickly began purchasing and investing in Latin American primary commodities.

Today, China is the number one trading partner for some of the regions largest economies, and Chinas development banks pour more money into the region than the World Bank or the Inter-American Development Bank.

As China has risen, it has been guzzling oil from Venezuela, Ecuador and Mexico to fuel its expanding fleet of cars, lorries, and container ships.

China has wired more than half the worlds consumer electronics products with copper from Chile and Peru.

Many of Chinas new cities have iron ore from Brazil at their core.

As standards of living have risen, the Chinese eat more beef from cattle that are fed soya beans from Argentina and Brazil.

In turn, Chinese companies have flocked to the Americas to invest in these commodities, backed by blank cheques from Chinas state-run development banks.

Voracious appetite

In many ways, Chinas voracious appetite for Latin American commodities has been a saviour for the Americas, especially in the wake of the global financial crisis.

Latin America rode the coattails of the boom in China, growing at an annual rate of 3.6% from 2003 to 2013.

That stands in stark contrast to the previous two decades dominated by the so-called Washington Consensus, the belief that orthodox economic policy, complete opening of markets, and the reduction of the role of the state were the best ways for developing countries to grow.

Under the Washington Consensus, growth was a much slower 2.4%.

New shores

In the wake of the 9/11 attacks and then after the global financial meltdown that originated in the US, Washington turned to other shores.

So Latin America has quickly become incredibly strategic for China as a source for many of the key natural resources it needs to grow its economy and the appetites of more than a billion people.

That is why last month China hosted the first ministerial conference of the China-Celac Forum

Chinas Turn to Gouge Latin America

January 26th, 2015 in In the News

From  Bloomberg View

By Mac Margolis

January 25, 2015

To many in Latin America, the Caribbean and Latin America Community summit in Beijing earlier this month was the dawn of a new world order.

Chinese President Xi Jinpings big-money nod to the region $500 billion in trade and $250 billion in investment by 2025 fueled hopes for a long-awaited Beijing consensus, with China upstaging the U. S. in its own backyard.

The hopeful might be in for a disappointment. The bullish talk comes just as Chinas economy slows and Latin Americas commodities prices tumble. Now China is less eager to spray its reserves around and more reticent of deadbeats.

Venezuelan President Nicolas Maduro went to China casting for a lifeline for the sinking Bolivarian revolution. He landed a $20 billion investment pledge from the Chinese but, apparently, no new cash. Infrastructure financing is fine, but Venezuela is facing a short-term currency and credit crisis, said Barbara Kotschwar, of the Peterson Institute for International Economics. If Venezuela cant pay its bondholders, Mr. Maduro is looking at default.

With the price of its oil down 56 percent since June, Venezuela will have to pump double the crude to pay off its outstanding China debts, nearly $50 billion since 2007.

Ecuadorean President Rafael Correa also arrived in Beijing in need. Although his economy is in far better shape than Venezuelas, falling oil revenues and a spiking U.S. dollar (Ecuadors dollarized its economy in 2000) forced Correa to slash his budget by $1.4 billion on the eve of the parley and slap stiff tariffs on imports from Colombia and Peru, nearly starting a trade war. Correa left the summit celebrating $7.5 billion in fresh financing, and even deeper in hock to China, which already owns 30 percent of its foreign debt.

Jorge Guajardo, Mexicos former ambassador to China, told me this bodes ill for the region. The enthusiasm over China has no base in reality, said Guajardo, a consultant with McLarty Associates. The Chinese throw out big numbers but seldom deliver. Their financing comes with conditions that countries seldom like and usually displaces local suppliers. I told them, Weve been colonized before.’

Not long ago, all the talk in the Americas was over how cheap Chinese goods were killing native industry. Do you want an original or a xing-ling?’ my mechanic in Rio de Janeiro asked, using the local slight for cut-rate, made-in-China parts, when my car needed repairs.

Yet most emerging markets were grateful for Chinas appetite for their oil, minerals and grain, and they liked the lowball financing proffered with few questions asked. Indeed, until now Chinas banks have earned a reputation for rushing in where Western lenders dare not tread.

Frozen out of credit markets since the moratorium of 2001, Argentina gladly took $11 billion from the Chinese to pay off bondholders last year. Ecuador did the same after its own default in 2008. Before that, China took equity stakes in Peruvian mines even when Shining Path guerrillas controlled much of the countryside.

China, however, is not in the business of indulgences. Kevin P. Gallagher, of Boston University, found that Chinas state banks often charged Latin American borrowers higher interest rates than official Western lenders a practice that earned Chinas Export-Import Bank the moniker of the development bank that gives no aid.

Gallagher briefs Mass Senate Offices on global trade policy