The Venezuelan and Chinese economies seem like they could hardly have less in common. The Venezuelan government of Nicolás Maduro has looted the state-run oil company Petróleos de Venezuela (PDVSA) to pay for the “Bolivarian revolution,” the socialist movement begun under the late leader Hugo Chávez. With oil prices down, the country is unable even to repair rigs or pay workers to generate income, and the government now faces the prospect of a mass uprising. Meanwhile, half a globe away, China’s gleaming malls stand in stark contrast to Venezuela’s empty shelves.
But Venezuela’s ruinous state has more to do with China than one might think — specifically, with Chinese President Xi Jinping’s plan for expanding China’s global influence through financial diplomacy. Venezuela’s collapse is about to serve as an object lesson on that plan’s high costs for China’s erstwhile partners — and ultimately for China itself.
Within a few years of Chávez assuming power in 1999, China, seeing in the new leader an ideological ally, began increasing lending to Venezuela. By 2006, the Chávez regime’s debt levels had become worrying enough that then-World Bank President Paul Wolfowitz, referring to Venezuela, notedthat “there is a real risk of seeing countries which have benefited from debt relief become heavily indebted once more.”
Officially, lending from Beijing comes without strings or concerns about nonfinancial matters. The reality is more nuanced. No one doubts Beijing cares little for niceties such as human rights, environmental protection, and anti-corruption when working abroad. Until recently, even geopolitical flag planting was relatively unimportant to Chinese technocrats.
But there was still a hard-edged focus on Chinese interests. The driving motivation of Chinese investment and lending since 2000 has been an obsession with opening up new export markets and securing access to natural resources. China’s interests in gaining friends in the Western Hemisphere while securing access to oil overlapped with Venezuela’s interest in diversifying its customer base away from the United States. But that overlap of interests doesn’t mean China has ever offered any sort of discount on its loans. China lent at exorbitant rates to Venezuela. Now, China refuses to renegotiate those debts, even as the South American country’s economy and oil industry crater.
From 2007 to 2014, China lent Venezuela $63 billion —53 percent of all its lending to Latin Americaduring this time. There was an important catch to this largesse; to guarantee repayment, Beijing insisted on beingrepaid in oil.With most lending agreed to when oil hovered at more than $100 a barrel, as it did for most of 2007-2014, it seemed a good deal for both sides. However, when oil dropped to close to $30 a barrel in January 2016, this caused Venezuela’s price tag for serving its debt to explode. To repay Beijing today, Venezuela must now ship two barrels of oil for every one it originally agreed to.
If Venezuela collapses and Maduro departs unceremoniously, China faces a large risk of diplomatic and financial blowback. Opposition politicians are well aware that China propped up the ruinous Maduro rule. A new Venezuelan government could well refuse to honor the Maduro-era obligations entirely and look to Washington for support instead. That would be both economically and politically embarrassing for China, which in the past has been a vigorous supporter of the right to default — as long as the debts were owed to the West.
But a Venezuelan default could have consequences far beyond Caracas and Beijing. As part of its Belt and Road Initiative (BRI), China is planning to extend the same kind of deal it made with Venezuela to many more countries around the world. By leveraging its financial strength and expertise in infrastructure, China saw an opportunity to push its influence farther afield, winning friends and securing assets at the same time.
America’s abdication of its historical leadership role under Donald Trump has made it easier for China to push this grand geostrategic vision, especially after the Barack Obama’s administration’s failure to follow up the much-hyped “pivot to Asia” with real substance. Many Asian countries talk quietly, and some openly, about craving greater U.S. engagement in the region rather than quiet surrender to Beijing’s dominance. But if the choice is a risky deal with Beijing or no deal at all with the West, many have shown that they will choose the former.
Venezuela collapsed thanks to a malevolent dictatorship pushing disastrous economic policies aided by a benefactor willing to extend near bottomless credit. This same toxic mix is present throughout many of the countries receiving large amounts of Chinese lending under the BRI. Worried about stagnating economies, autocrats around the world see an opportunity to drive growth by borrowing from China to fund white elephant projects regardless of the long-term consequences.
While China may argue that it makes investment decisions on a purely commercial basis, its history with Venezuela argues otherwise. That has been confirmed by the problems that have already cropped up in BRI-related projects. In the short time since 2016, we’ve already seen major debt problems from Chinese infrastructure projects in Sri Lanka and Pakistan. China negotiated a swap of its debt for a 99-year leasehold in a Sri Lankan port project along with surrounding business park development interests. China provided emergency funding to Pakistan over the past year to stave off a potential currency crisis but still plans to invest $52 billion over the next few years in infrastructure projects.
Beijing likes to cite the Marshall Plan when talking about the BRI, but its deals are far more shrewd and self-serving. The BRI scheme isn’t offering concessionary lending or international aid but market-based lending rates with high-interest loans. The borrower countries then have to use Chinese firms, inputs, and workers to build out their railways and ports. China is making the loans not out of a long-sighted vision of a better global order, as its boosters like to claim, but from a calculation of the financial incentives it needs to keep its own over-indebted firms afloat and their workers working.
That’s going to come with hard costs for China. Reports indicate that Chinese officials expect to incur significant losses from their loans to South and Central Asian countries that can’t necessarily pay them back. Consider Sri Lanka, which effectively defaulted on a $2 billion loan from China but subsequently received an offer for an additional $32 billion from Beijing to fund infrastructure projects. There are also good reasons to think Pakistan won’t be able to absorb China’s large investment inflows without triggering inflation, thus undermining its ability to repay the loans.
Officially, China plans to invest $5 trillion over the next 10-15 years in the BRI. If this amount actually materializes in practice, it represents a major sum, even for China, whether in absolute terms or relative to GDP. That means that even relatively small defaults could have a serious cost, economically and politically.
There’s no surer way for China to lose goodwill worldwide than to provide large amounts of ruinous lending that pushes developing countries to financial ruin. Sri Lanka has seen widespread protests and riots over Chinese debt. Meanwhile, Beijing has been leaning on the Venezuelan opposition not to default on the existing debts. All this is already having reputational costs for China. Having witnessed the consequences of Beijing’s lending in Venezuela, Sri Lanka, and Pakistan, other potential borrowers seem to have cooled on the possibility of borrowing from Beijing — or at least to be more discerning of the risks.
Large-scale lending projects without a focus on their economic viability and the repayment capacity of the borrowers are hardly the soundest basis for financial diplomacy of the sort China is attempting to practice. At best, it will lead to mutual suspicions and tensions between lender and borrower. At worst, it will prove financially ruinous for countries burdened with debts they cannot repay in foreign currency they do not possess. Unless China’s lending gets smarter, it may find that nobody’s interested in the money it has to offer.