In 2004, Chinese President Hu Jintao and Venezuelan President Hugo Chávez agreed to form a “strategic partnership for common development.” The benefits from that partnership looked as if they would ensure an enduring relationship between their two governments. China would gain greater access to Venezuela’s oil reserves, which are not only among the world’s biggest, but are also considered by China to be more strategically secure than others, because they reside in a country outside of American influence. In return, Venezuela would gain a benefactor who could enable Chávez to transform his country into a modern socialist state and export his “Bolivarian Alternative*,” an anti-American coalition, across Latin America.
Source: Inter-American Dialogue
Hence, it was no surprise when the China Development Bank (CDB) and Venezuela agreed to a multi-year loan agreement in 2007. It allowed Venezuela to borrow up to $5 billion each year from the CDB, providing Chávez with the immediate financing that he needed to pursue his ambitions. In exchange, Venezuela would service its debts by shipping oil to China.
But times change. Not only has the price of oil dropped, so too has China’s voracious appetite for it. Plus, Russia has been aggressively pitching its large and strategically secure oil and natural gas reserves to China. Meanwhile, Chávez’s socialist policies floundered. Rather than modernize Venezuela’s economy, they amplified its dependence on oil. From 1999 to 2014, oil’s share of Venezuela’s export revenues rose from 69 percent to 96 percent. Rather than improve Venezuela’s food security, they reduced its agricultural output. Today Venezuela imports more of its foodstuffs than it did before chavista land reform began. The failure of Chávism has put Venezuela in a precarious economic position.
Nonetheless, both the CDB and China Export-Import Bank have continued to make new loans to Venezuela. Nearly every year since 2007, China has ploughed money into the country (see the chart above). Although signs of trouble were already evident, Chinese President Xi Jinping decided to double down on Venezuela in 2014. He elevated China’s relationship with Venezuela to the status of a “comprehensive strategic partnership.” But as a condition for China’s continued investment, Venezuela would have to give Chinese companies more preferential treatment in its infrastructure contracts.
That bought Venezuela some time, but not much. In 2015, the revenues of Petróleos de Venezuela S.A., Venezuela’s state-owned oil company, plummeted over 40 percent from the year before. To help out, the CDB appears to have been willing to take less oil than what some of its loans required. In other cases, it was willing to accept payments in the form of devalued Venezuelan bolívars, instead of U.S. dollars. In July, the CDB opened an office in Caracas to nominally boost its relationship with Venezuela. But more likely, it did so to keep a closer watch on its investments there.
Certainly, China needs to do so. Increasingly desperate to raise money, Venezuela’s central bank sold over 30 percent of its gold reserves in the last year—12 percent in just the first quarter of 2016. In June, Reuters reported that Venezuela asked the CDB to further relax the terms of its loans. Caracas was said to have requested a one-year grace period in which it could escape principal payments if the price of Venezuelan oil dropped below $50 per barrel (which it already is). At this writing, it is unclear whether the CDB agreed to the request.
China is learning that “yuan diplomacy” can be riskier than it once thought. Already, the CDB has had to forgive some $4 billion of its loans, mostly to African countries. One might expect China to do the same for at least some of Venezuela’s $65 billion worth of Chinese loans, given its friendship with Caracas’ chavista government. But China has not done so. Instead, China has distanced itself from Chávez’s successor, Nicolás Maduro. According to the Financial Times, China reached out to Venezuela’s political opposition, which controls the country’s legislature. Beijing likely sought assurances that should Maduro leave office Venezuela would still honor its debts to China.
Perhaps China is concerned about triggering a wave of requests for loan forgiveness. After all, China has lavishly provided loans to many other energy-rich countries, all of which have felt the pinch from declining oil and natural gas prices and a slowing global economy. In the end, however, China may have to accept some sort of restructuring of its loans to Venezuela in order to avoid an outright default.
True friends are tested in adversity. Clearly, the Maduro government’s growing inability to repay its loans to China has put their relationship in a difficult spot. Equally clear is that Beijing’s desire to recoup as much as possible from its development loans to Venezuela has trumped its friendship with the country’s chavista government. By turning to his political foes, China must have upset Maduro. But it also made plain what China’s real priorities are.
* Now called the “Bolivarian Alliance for the Peoples of Our Americas”