Despite measures taken by Latin American and Caribbean (LAC) governments to contain the spread of coronavirus, the region will be forced to grapple with the effects of the virus for the foreseeable future. Facing low commodity prices, a possible long-term contraction in tourism and tightening global financial conditions, many leaders in the region will look for assistance from a range of trade and investment partners, international financial institutions and other sources.
In that search, China may loom large. After all, it was Chinese trade and investment that spared many LAC countries from the worst effects of the global financial crisis, with Chinese demand for the region’s raw materials nearly doubling from 2009-2011. More recently, China has acted as a sort of lender of last resort for countries in the region with limited access to global financial markets.
But while China may be of some help to LAC economies post-coronavirus crisis, the extent and form of its support will likely vary considerably from China’s post-2008 engagement. Though critical to the region’s economic well being, it is unlikely that China-LAC trade relations will have the same buoying effect on the region’s economies as they did after the financial crisis.
One reason for that is actually China’s growing influence in the region. After the global financial crisis, China served as an alternative to the U.S. and other markets that had lost their appetite for LAC products. But after a decade of booming trade, China’s markets are now the primary destination for the region’s raw materials. China imported 78% of Brazil’s soybeans and 41% of Chile’s copper ore in 2018, as just two examples.
That means China now has little room to significantly increase its supply from the region, even if its own economy rebounds. If anything, the coronavirus pandemic has exposed LAC’s extensive reliance on China as a destination for raw materials exports.
There are also questions as to whether Chinese credit can be counted on as a silver bullet to help LAC governments manage the economic fallout of the outbreak. While China may well provide some relief, especially if lending conditions tighten among other international financial institutions, its financing to the region has been steadily declining for four years. Chinese policy bank finance to LAC governments and state-run companies fell to roughly $1.1 billion in 2019 – the lowest showing from China Development Bank (CDB) and China Eximbank since 2008, according to a newly-released report from the Inter-American Dialogue and the Boston University Global Development Policy Center.
Also, though China was once forthcoming with finance to Hugo Chávez and then Nicolás Maduro in Venezuela, it has largely stopped serving as a financial lifeline for the region’s most fragile economies; Venezuela itself has received no new finance from China in the past three years. China’s slowing economic growth and diminishing reserves have likely forced its policy banks to choose overseas projects more carefully, especially as CDB and Eximbank continue to struggle with sometimes problematic portfolios in Latin America, including the prospect of losses in Venezuela and delays in other scheduled projects.
Still, a robust rebound could resurrect Chinese state finance to the region, especially as a form of economic diplomacy or in pursuit of especially valuable assets. The policy banks have for many years provided loans to a range of LAC countries as a form of development assistance, at concessional rates and in support of political objectives. Just last year, an Eximbank concessional loan to Trinidad and Tobago supported the planned development of an industrial park. And Eximbank backed an electricity distribution project in the Dominican Republic after that country cut ties with Taiwan. Despite U.S. criticism of China’s effect on debt sustainability in the developing world, new concessional loans to LAC nations in a time of critical need would do much to boost public perceptions of China in the region.
To this end, China is already harnessing its vast resources to assist LAC countries with their immediate responses to local outbreaks. A number of countries, including Argentina and Bolivia, have received Chinese thermal imaging cameras. Venezuela will receive Chinese shipments of medical supplies, according to Venezuelan government officials. China will also send 1,500 testing kits to Argentina. And Huawei, in collaboration with other Chinese partners, will reportedly use artificial intelligence-enabled technology to analyze medical images from presumed coronavirus patients in Guatemala, despite the country’s continued diplomatic ties to Taiwan.
China may also have a role to play in debt relief for the region. Dealing with soaring cases at home, the United States has thus far largely held back in providing assistance to LAC countries. U.S. and other investors have pulled their investments out of the region at a faster pace than they did in 2008. The Federal Reserve extended swap lines only to Brazil and Mexico, and the U.S. played a key role in rebuffing Venezuela’s requests for assistance from the International Monetary Fund (IMF). Argentina and Ecuador, two of the other large debtors to China in the region, currently have IMF programs that are floundering in the midst of the crisis. Chinese loans are a relatively small part of each country’s balance of payments problem (5% for Argentina and 14% for Ecuador), but could China step in to offer needed debt relief or at least provide stopgap financing? There is some evidence of China providing debt relief in Africa, though still little in LAC to date.
In addition to these possible forms of assistance, Beijing might also support counter-cyclical foreign direct investment (FDI) in the region, seizing opportunities for market share as Western finance retreats, as it has to some degree over the past decade. China has thus far supported overseas FDI through earmarked loans, subsidies, and by facilitating public offerings in China and overseas equity markets. Chinese foreign direct investment in LAC surged last year, according to Boston University’s 2020 China-Latin America Economic Bulletin, supported in some cases by policy bank loans to Chinese companies.
Much will of course depend on Beijing’s own recovery efforts. Even as China slowly gets back to business, much of the rest of the world is still coping with the crisis at hand. Demand for Chinese exports will lag for many months to come, affecting China’s own recovery prospects, global commodity prices, and the country’s appetite for overseas investment. It is clear, though, that more than a decade after the global financial crisis, the region’s economic health is more closely tied to China’s own performance and continued Chinese engagement than ever before. Rather than depending on China or the U.S., the region should put together its own plan – just in case.
Myers is the director of the Asia & Latin America Program at the Inter-American Dialogue. Gallagher is a professor of global development policy at Boston University’s Frederick S. Pardee School of Global Studies where he directs the Global Development Policy Center.
Tags: China and Latin America, China-Latin America 2.0, Public Health