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What is the Impact of China’s ‘Predatory’ Loans to Latin America?

What is the Impact of China’s ‘Predatory’ Loans to Latin America?

By Alejandra Arredondo/Voice of America (VOA)/Edited by the Diálogo Staff
November 13, 2020

Over the last 10 years, China has flooded Latin America with money, with more than $117 billion in loans, making the region one of the world’s most indebted to the Chinese government.

The conditions of these loans, which some politicians have described as predatory, worry economists.

Latin America, along with Sub-Saharan Africa, both regions geographically distant from China, are the most indebted to the Asian country, according to a study by the Kiel Institute.

Venezuela is the country that has received the most money from China — $62.2 billion in 17 loans — mainly for the energy sector, according to a database from the Inter-American Dialogue think tank.

For the U.S. government, China’s growing importance in Latin America is an interference in its area of geopolitical influence.

During his visit to the region in 2019, U.S. Secretary of State Mike Pompeo warned nations about China’s “predatory” loans, which inject “corrosive capital into the economic bloodstream, giving life to corruption and eroding good governance.”

What do the Chinese government loans consist of?

The main lending institutions are the so-called institutional banks, which serve the government’s economic policies: China Development Bank and the Export-Import Bank of China (Exim).

Chinese state banks have become leading lenders in Latin America. In addition to Venezuela, other South American nations are among those in the region that have received the most money from these Chinese lending institutions.

Most loans (about 67 percent) went to energy projects, while almost 20 percent went to infrastructure, according to the Inter-American Dialogue.

The lending terms and the recipients of the loans are the targets of those who criticize the loans issued by the Xi Jinping government.

“Chinese loans are described as predatory, because they are usually granted to countries that are most likely to default,” said Margaret Myers, researcher and expert in Latin America-Asia relations.

Mitigating risk and favoring China

According to Myers, the Chinese lending model is designed to “mitigate risks and favor China to some extent.”

“Generally, there is a condition in loans that requires the use of Chinese companies and equipment,” Myers said.

Chinese state banks are also criticized for lending money without many conditions, such as public or economic policies that usually accompany funds from multilateral organizations like the IMF or the Inter-American Development Bank.

“The problem is that you need to have a responsible government […]; when this doesn’t happen, money can be used for unfortunate purposes or is wasted, leaving a country in a worse position than before,” the expert said.