LatinFinance - Latin America-China Investment Guide 2016 CLONE - 66

The Dialogue collects data for lending
by the China Development Bank and China
Export-Import Bank (Chexim), the two
most established policy lenders, for its
China-Latin America Finance Database.
For 2015, it recorded a huge increase in
aggregate lending volume by the two banks
on 2014, from $10 billion to $24.1 billion, the
highest level since 2010. That total includes
$10 billion in commitments to Brazil and $5
billion to Venezuela.
For Magdalena Forster, analyst in
Deutsche Bank Risk Research's emerging
markets group, the increase in volumes
simply highlights the political investment
that China has in the region. She comments, "I wasn't surprised at the increase
in 2015. Policy lending involves strategic
and structural considerations. It's linked
to policy goals and resources security, and
cyclical conditions are less of a concern.
The oil price fall on its own did not have a
substantial effect. Perhaps in a scenario in
which Chinese growth slowed more sharply
than expected, you might see a contraction
in lending."
According to Myers, the size of the increase came as something of a surprise,
given the slower growth that both China
and Latin America have experienced
recently. "Chinese policy bank finance in
Latin America is supportive of China's own
growth objectives, just as One Belt, One
Road initiatives are thought to be."
China's president, Xi Jinping, unveiled
One Belt One Road (OBOR), in 2013, and
it has recently been renamed the Belt and
Road Initiative (BRI). According to Henry
Tillman, the founder of boutique research
and advisory firm Grisons Peak, OBOR/BRI
comprises two overland routes through
Eurasia, one through Central Asia and
Russia, Belarus, Germany and The Netherlands, and one through Iran, Turkey,
Greece and the Balkans, that will connect
China with Europe, as well as the Maritime
Silk Route, which connects parts of East
Africa and Southeast Asia to China.
OBOR/BRI includes 60 countries and
4.4 billion people, but not Latin America,
though the region has continued to attract
policy loans. These loans have been focused on infrastructure, renewable energy,
or links to ports, most of which meet the
initiative's green (renewables) and blue
(maritime trade) criteria.
"I think you'll continue to see increased
investment in the region, particularly in
coastal cities or links to ports", suggests
Tillman. He points to discussions between

66 L ATINFINA NCE.COM - September/October 2016

Energy intensive
Share of Chinese policy bank lending by sector
Other

Mining

Infrastructure

Energy

Infrastructure

Other

Source: InterAmerican Dialogue's China-Latin America Finance Database

MAGDALENA FORSTER
DEUTSCHE BANK

"CHINESE FINANCING
ALLOWS BORROWERS
TO DIVERSIFY THEIR
FUNDING SOURCES.
FOR COUNTRIES
WITH LIMITED - OR
EXPENSIVE - ACCESS
TO CAPITAL MARKETS,
IT'S WELCOME"

China Railway Engineering Corporation,
the government of the Brazilian state of
Bahia and Rede Ferroviária Federal, Sociedade Anônima (RFFSA) about a new line
between Bahia Mineração's proposed Pedra
de Ferro iron ore mine and a port facility in
the city of Ilhéus.
Tillman suggests that Chinese loans into
the region, which were originally focused
on oil (such as Venezuela and Brazil),
are now increasingly focused on
BRI-friendly loans
in infrastructure
and renewables, or
trade finance loans
linked to Chinese
equipment purchases, mostly in IT.
He adds that China
has concentrated on
strengthening relaEnergy
tionships with key
countries, including
Brazil, Argentina
and Ecuador, by
elevating these to the
status of "strategic
partner", the term
Mining
that President Xi
has used to describe
them since 2015.
How strategic are strategic partners?
For all this increased emphasis on infrastructure, energy remains central to China's
involvement in the region. Deutsche Bank's
Forster notes that more than half of all Chinese policy loans to the region have been in
the energy sector. The loans can be vital to
the recipient economies, with Forster adding that Chinese policy loans over the last
ten years would be equivalent to about 15%
of Ecuador's GDP.
But many of these loans, if not most by
aggregate volume, are linked to oil sales.
Borrowers such as Petrobras and Petróleos
de Venezuela (PDVSA) repay loans either
with the proceeds of oil sales or directly
with oil, with the value of that oil indexed to
market prices. The deals, often called prepays, since the loans are essentially downpayments on future oil deliveries, make
explicit the link between Chinese financing
and its resources security. They give the
policy lenders visibility about the source of
any loan's repayment, and diversify the borrowers' funding sources. They also, notes
The Dialogue's Myers, provide an outlet for
China's foreign currency reserves.

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