China plays by its own rules while going global

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When Venezuela seized billions of dollars in assets from Exxon Mobil and other foreign companies, Chinese state banks and investors didn’t blink. Over the past five years, they have loaned Venezuela more than $35 billion.

Elsewhere around the Caribbean, as hotels were struggling to stay afloat in the global economic slowdown, the Chinese response was to bankroll the biggest resort under construction in the Western Hemisphere – a massive hotel, condominium and casino complex in the Bahamas just a few miles from half-empty resorts.

All over the world, from Latin America to the South Pacific, a cash-flush China is funding projects that others won’t, seemingly less concerned by the conventional wisdom of credit ratings and institutions such as the World Bank.

The Chinese money is breathing life into government infrastructure projects that otherwise might have died for lack of financing. For commercial projects such as the Caribbean resort, China is filling a gap left by Western investors retrenching after the 2008 financial crisis.

But some in the Bahamas worry what will happen if the sprawling Baha Mar project fails. They picture an economy saturated with hotels, dragged down by an expensive Chinese white elephant. Likewise, the infrastructure loans are loading financially shaky countries with more debt and letting them avoid economic reforms that other lenders would likely have demanded.

“The Chinese play by other rules,” said Kevin Gallagher, a Boston University international relations professor who has studied Chinese lending to Latin America. “We’ll give you financing with no conditions, and we’ll finance things the International Monetary Fund won’t fund, things others won’t fund anymore, like big infrastructure projects. It allows countries to shop around, which has good and bad sides.”

Venezuelan leader Hugo Chavez talked up his independence last year while highlighting another $4 billion in Chinese loans, part of a wave of money that has translated into new railways, utilities and other projects.

“In a few days, they’re going to deposit 4 billion little dollars more from Beijing,” Chavez told reporters, holding up four fingers for emphasis.

“Fortunately, we don’t depend on the dreadful bank. . . . Poor are those countries that depend on the World Bank, the International Monetary Fund.”

Venezuela’s Oil and Mining Minister Rafael Ramirez says China has loaned his country $36 billion since 2008, and others put the figure even higher. The Spanish-language version of a report co-authored by Gallagher, The New Banks in Town: Chinese Finance in Latin America, estimates it at $46.5 billion.

The loans have added to Venezuela’s $95.7 billion in public foreign debt as of mid-2012, which has risen even as the country rakes in record-high oil revenue. Some analysts say the spending helped Chavez win re-election in October, despite battling cancer.

China has emerged in recent years as the largest provider of development loans not only to Venezuela but also to Ecuador and Argentina, according to the Gallagher report. All three are junk bond countries, ratings agencies say. In contrast, the World Bank and Inter-American Development Bank remain larger lenders in Brazil and Mexico, both countries with higher bond ratings.

In cases such as the tiny South Pacific islands of Tonga, China is lending enormous sums to countries few expect will be able to repay.

What has surely given the Chinese banks courage is the trillions of dollars in reserves the country holds in U.S. Treasury bonds, investments that pay almost nothing in interest. Making that money work harder for a return overseas has become a national priority, part of China’s trumpeted “going out” strategy.

China’s economy is the second-largest after the U.S., and many of the deals stipulate repayment in oil and natural gas, locking in the commodities China will need to sustain its growth for decades to come.