Washington Post<\/p>\n
This past week, China held its second ministerial meeting with the Community of Latin American and Caribbean States (CELAC) in Santiago, Chile. There China announced plans<\/a>\u00a0to have the Belt and Road Initiative (BRI), its flagship economic and development program, invest in Latin America. During the past decade, Chinese policy banks, charged by the government to finance infrastructure and trade, have provided more than $140 billion in loan commitments<\/a> to Latin America. With the BRI expanding<\/a> into the region, Latin America is assured that these financing spigots will not only stay open, but also will further China\u2019s integration with the region\u2019s trade. Chinese Foreign Minister Wang Yi says Latin America has already become the second-largest destination for Chinese overseas investment.<\/p>\n How does China\u2019s investment approach compare to that of Western lenders? And will China be able to recoup its investments in a region with a history of debt?<\/p>\n My research<\/a> shows that, unlike the approach taken by Western investors, Chinese lending often takes the form of patient capital. By emphasizing nonintervention in sovereign affairs and refraining from imposing conditions like fiscal austerity or transparency, as Western governments do, China promises its financing horizon will not be influenced by such short-term policy targets. That helps regions have the flexibility to spend during economic downturns.<\/p>\n [Donald Trump\u2019s team has questions about China in Africa. Here are answers.<\/a>] <\/i><\/p>\n China\u2019s patient capital also tends to align better with debtors\u2019 long-term development goals, allowing countries to incrementally correct policy errors without the threat of abrupt financial destabilization. Chinese state-to-state financing packages are clearly aimed at boosting exports and commerce, often featuring guaranteed contracts for Chinese contractors or machinery suppliers. But they also tend to promote infrastructure and foreign direct investment as key drivers of longer-term growth.<\/p>\n This patient capital strategy could promote Latin American development, avoiding the region\u2019s volatile cycles of boom and bust. However, there\u2019s a potential moral hazard. By lending without conditions, China may encourage governments to spend without bounds, sowing the seeds for future debt problems.<\/p>\n How did China achieve such a high level of financial integration in Latin America, and what are the policy implications of its Western expansion? As the United States has retreated from its lead role in globalization \u2014 first because of the 2008 financial crisis, and now under President Trump\u2019s leadership \u2014 China has become a major global economic player. China\u2019s 2001 entry into the World Trade Organization enabled it to invest in trade with Latin America<\/a>; China is now the top trade partner<\/a> for Brazil, Chile and Peru. After the 2008 crisis curtailed U.S. demand, China began using investing overseas to create new opportunities for trade.<\/p>\n [China\u2019s \u2018Belt and Road\u2019 opens up new business in Africa \u2014 for both the U.S. and China<\/a>] <\/i><\/p>\n China, as the world\u2019s largest saver, has rapidly expanded its cross-border lending since the crisis, more than doubling its overseas banking presence, as you can see in the figure. Today China\u2019s global lending continues to increase at a blistering pace of $100 billion annually, putting the country on the brink of becoming one of the top five countries for international bank lending. Since 2013, much of this lending has been channeled through the Belt and Road Initiative<\/a> (BRI). Its original goal was to invest more than $1 trillion\u00a0\u2014 or 9 percent of China\u2019s GDP \u2014 in infrastructure across more than 60 neighboring Asian, European and African countries. Aiming to spur global growth and development, and ultimately demand for Chinese goods and services, the initiative has now been expanded to Latin America.<\/p>\n Why is China making such a hefty commitment to Latin America?<\/p>\n Some U.S. policymakers, influencers, and pundits fear that China is investing in Latin America not for commercial reasons but to buy geopolitical influence, pushing the United States aside. For example, Trump\u2019s national security strategy<\/a> claims China is attempting to \u201cchallenge American power\u201d by seeking \u201cto pull the region into its orbit through state-led investment and loans.\u201d Similarly, a recent National Endowment for Democracy report<\/a> suggests the China-CELAC forum, which excludes the United States and Canada, is a \u201cconvenient policy framework to introduce and promote its soft power agenda.\u201d<\/p>\n Are they right, or are they missing some nuances?<\/p>\n Despite long-standing U.S. concerns about unfair trade competition, China\u2019s approach is clearly built on multilateralism, free trade, and globalization \u2014 values that previous Republican and Democratic administrations shared. Shoring up regional public goods like infrastructure may end up benefiting U.S. firms, making trade and investment easier. While China may be interested in geopolitical influence, it most certainly also has many commercial objectives in the region, including promoting new export markets, alleviating its domestic overcapacity and helping its companies globalize their operations by gaining cheap assets, market share, and key marketing, distribution, and engineering capabilities.<\/p>\n But investing in soft power<\/a> has had its down sides<\/a>. It\u2019s true that Latin American governments have flocked to Chinese capital, eager to address long-standing infrastructure deficits. But many Latin Americans have criticized China for its extensive promotion of Chinese firms, labor, and machinery within state-to-state investment contracts, and its lack of local governance standards, including inadequate environment and labor protections.<\/p>\n But critics of Chinese investment in Latin Americas have failed to notice an important concern: not its current boom in investment, but a sudden bust. A boom may help the region develop; a bust could lead to another regional debt crisis. So will China lend prudently and foster its promised development, or instead lend too ambitiously and foment a bubble?<\/p>\n At times China has mispriced investment risk, and the country has lent defensively to absorb its bad investments. For example, China\u2019s extended its loans to Venezuela for more than a decade during periods of volatility \u2014 first through the global financial crisis and then through the 2014 commodity downturn. But of course, Venezuela\u2019s situation is deteriorating rather than improving. The country is struggling to repay its outstanding Chinese debts (totaling about $17 billion to $20 billion) amid its historic crisis<\/a> and dwindling state-oil production. In response, China has reportedly loosened the terms on some of Venezuela\u2019s outstanding loans, allowing the country to pay interest only and defer its principle payments, and also the underlying collateral, removing minimum oil shipment quantities and extending repayment deadlines.<\/p>\n China has enough foreign reserves to absorb such losses, even beyond Latin American borders from Sri Lanka to Indonesia. How can it avoid such moral hazard problems and ensure successful investments in the future? China\u2019s success in reaching its growth targets domestically during its miracle years revealed its ability to prosperously manage local investment projects. Can it also foster good governance internationally?<\/p>\nChina\u2019s approach: \u2018patient capital\u2019<\/strong><\/h3>\n
The global financial crisis gave Chinese lenders an opportunity\u00a0<\/strong><\/h3>\n
China invests in both trade and geopolitical influence \u2014 pushing free trade and multilateralism, as the U.S.\u00a0once did<\/strong><\/h3>\n
How will China balance its investment risks?<\/strong><\/h3>\n