Myths of unconditional Chinese loans debunked

PUBLISHED : Friday, 24 February, 2012, 12:00am
UPDATED : Friday, 24 February, 2012, 12:00am


Since 2005, China has provided loan commitments of about US$75billion to Latin American countries, according to a report by the think tank Inter-American Dialogue. In 2010 alone, for example, China's loan commitments of US$37billion to the region were more than those of the World Bank (US$14billion) and the Inter-American Development Bank (US$12billion) combined.

The bulk of the Chinese loans since 2005 have come from the China Development Bank (82per cent), and some 75per cent of total financing reached Argentina, Ecuador and Venezuela - countries that have difficulty borrowing in global capital markets.

The report dispels certain demonisations of China's loans strategy. First, the interest rates are not lower or at especially better terms than those offered by Western competitors. Second, the loans-for-oil agreements, which constitute about two-thirds of Chinese lending to the region, do not entail underpriced oil for China. The lender nations agree to ship a number of barrels of oil to China every day for the duration of the loan. In return, China pays spot market prices and deposits the money in the oil-exporting country's CDB account, from where the bank repays itself. These countries generally pledge more oil than necessary to repay the loan, thus ensuring extra income.

China receives two main benefits from these loans: a steady supply of oil, and large-scale projects for its companies.

But while the liquidity and Chinese know-how accumulated over decades of rapid development offer tangible benefits, issues with corruption and lax environmental regulations may offer less positive returns to the region. Chinese companies are perceived to be the most prone, after Russian firms, to pay bribes, according to Transparency International's 2011 Bribe Payers Index. In terms of environmental regulations, there have been important improvements, but the guidelines still pale in comparison to Western standards.

In recent years, there have been reports of corruption, labour or environmental problems in a land deal in Argentina, petroleum refineries in Costa Rica, a hydroelectric dam deal in Ecuador, mining ventures in Peru, and with oil contracts in Venezuela, among others. The secrecy surrounding China's dealings make it difficult to separate conspiracy theories from reality.

Beijing's use of the label 'developing country' has served it well in the recent past; for China's aspirations to be a great power, however, it is imperative that it does not act like one when using its resources abroad.

Sebastian Castaneda is a graduate student at the University of Hong Kong researching relations between China and South America