What Chavez Taught China

by Margaret Myers

Just months after the Chinese press celebrated Hugo Chavez’s presidential victory, concerns are mounting in China about the Venezuelan president’s health, his future successor, and the fate of the ‘Bolivarian revolution.’ With loans to Venezuela estimated at $38 billion, some of China’s largest overseas entities are facing an uncomfortable degree of political and investment-related uncertainty. A likely political transition in Venezuela will test China’s appetite for risk-taking in its future engagement with Latin America, as well as its capacity for risk calculation. China is unlikely to abandon its ‘risky’ ventures in the region, but will approach future deals with a greater degree of caution and research.

Chinese entities have been attracted to Venezuela and other countries in the region by the promise of profit, access to raw materials, and deals facilitated by government-to-government interaction. In many cases, central government backing has meant that certain Chinese firms and lenders are more inclined to assume risk when lending or investing abroad than their foreign counterparts. Though considered economically unstable by other foreign lenders, Venezuela, Ecuador, and Argentina have been favorite destinations for Chinese lending institutions and investors over the past decade.

However, risk-taking and occasional miscalculation by Chinese firms, lenders, and investors has resulted in a series of setbacks. China faced embarrassing missteps in Burma, Libya, Peru, and elsewhere due to autonomous decision-making by certain firms. Chinese entities with limited background in the countries where they are operating have occasionally made decisions that run counter to China’s foreign policy objectives. The July 8 capture of three Chinese nationals by FARC insurgents in Colombia was a recent reminder of the perils of ill-conceived overseas engagement.

Having learned from missteps over the past decade, Chinese entities are working to more thoroughly anticipate risk when operating overseas. But sophisticated decision-making will require many more technical and regional experts to advise on central government and firm-specific deals. Firm-based think tanks and other advisory groups exist, but they lack sufficient understanding of foreign politics and policy-making.

Aware of these shortcomings, China’s major firms and lenders are working to strengthen their capacity for risk calculation. Chinese entities operating in Latin America are hiring dozens of Spanish and Portuguese majors from China’s top universities and keeping increasingly close tabs on country- and even community-specific developments. According to one Colombian diplomat, the Chinese firm Sinohydro is said to have mastered the inner workings of the Colombian parliament.

China is also producing more policy-focused and country-specific assessments in an effort to strengthen risk tracking. Arecent study by the Chinese Academy of Social Sciences carefully examines the sources of Latin American oil sector disputes over the past two decades. It calls for better threat prediction, emergency response capabilities, and communication with local officials on the part of Chinese firms. Other studies warn of contract adjustment, social conflict, strict environmental regulations, and civil sector involvement in Latin America.

China’s lenders feel that their oil-backed loans and content stipulations already mitigate a significant degree of risk, but Chinese investors are watching recent nationalization efforts, protectionist policies, and tax regulations in certain Latin American nations with concern. The China National Petroleum Company (CNPC) released a report on the implications of Venezuela’s new tax plan for the Chinese petroleum industry. It concluded that the tax burden for China’s large-scale oil projects could be as high as eighty percent of total profit and pegged the policy as a deterrent to future investment.

Increasingly enlightened Chinese entities may determine that ‘risky’ partnerships are more trouble than they are worth, especially in the face of shrinking profits. And in a turbulent post-Chavez Venezuela, government-to-government engagement is unlikely to have the same appeal for Chinese companies and lending institutions. The country’s ‘open-door policy’ for China may indeed come to an end.

Though more aware of country-specific risk, China is unlikely to abandon its deals and strategic agreements with Venezuela and other ‘risky’ nations in the region. China’s leaders instead are genuinely committed to expanding relations throughout Latin America in coming years, including investment and lending in a wider variety of sectors. Recent agreements with the UN Economic Commission for Latin America (ECLAC), Community of Latin American and Caribbean States (CELAC), and the Inter-American Development Bank (IDB) suggest as much. The region as a whole is looking east for economic opportunity. A new Venezuelan leadership­—whether ‘chavista’ or not—would be likely to do the same.

China’s strategic partnerships with Venezuela and other countries will remain intact. Its foreign policy apparatus is looking to forge stronger and longer-term friendships, and its firms will continue to engage the region based on a combination of Chinese domestic interests and profit-driven motives. But the trend is toward comprehensive risk assessment and a more cautious, research-based, and well-informed approach to the region. Latin America should expect ever more methodical engagement from China.

About the Author

Margaret Myers is the Director of the China and Latin America Program at the Inter-American Dialogue in Washington, DC.

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