China faces Catch-22 dilemma over Venezuela debt pile as default looms
10/04/2016 | Elliot Wilson
After lending Venezuela more than $65bn over the last eight years, China will soon have to decide whether to go double and keeping on lending, or go quits and let the beleaguered Latin American economy default
China is fast approaching a crossroads in its relationship with Venezuela, the troubled economy that it has funded to the tune of some $66bn but which is now facing an almost inevitable default, analysts believe.
With Venezuela needing to meet $10bn in bond repayments to foreign creditors and with a further $6bn in Chinese loans also falling due this year, default appears to be round the corner.
If it does, many observers are asking whether Venezuela will be able to turn yet again to China, its sole remaining financially liquid sovereign ally or whether the Asian superpower, tired of subsidising its wastrel friend, will turn its back.
Venezuela’s foreign exchange reserves slipped to $13.6bn in February 2016, according to Banco Central de Venezuela, down by more than half in less than two years, a direct result of low oil prices.
But it has remained afloat thanks to extensive financial support from China Development Bank. Between 2007 and 2015, China’s premier policy lender lent $61.6bn to the government and state enterprises; Export-Import Bank of China disbursed another $4.4bn.
The funds, which kept afloat a country that remains locked out of international capital markets, constituted a swap agreement: China stumped up cash; Venezuela responded by shipping crude to the mainland.
But experts say this arrangement cannot continue indefinitely. In China, Venezuela is a hot-button issue, dividing ideologues desperate to prop up a flailing ally and those keen to see mainland cash put to better use. “It’s a real dilemma” for China’s leaders, said Xiang Songzuo, chief economist at Agricultural Bank of China. “A lot of people are opposed to giving more money to a country with a high likelihood of default.”
But Xiang and others believe that, having lent so much to the cash-strapped state, China has little choice but to continue supporting its wayward friend.
Kevin Gallagher, co-director of the Global Economic Governance Initiative at Boston University, said China has boxed itself into a corner. “China has become ensnared with Venezuela, just as it has with the United States over its holding of US treasury bills. They are overexposed, and there’s little they can do other than cross their fingers and hope that the cash they’ve already lent is enough to turn Venezuela around.”
That now seems implausible. Analysts believe China is presented with three options. First, it can pull the plug on the petrostate. “There’s a chance that, if China suspects that Venezuela may not be able to pay them back in the future, they withdraw their financing,” said Edward Glossop of Capital Economics.
Second, it could formally bail out Venezuela, turning the government into a direct debtor. Or it could continue funding the country indefinitely, risking stoking anger back home. Experts believe the third option is the only viable one, leaving China in the invidious position, says GEIG’s Gallagher, of being “damned if it helps and damned if it doesn’t. For China, it’s the ultimate Catch-22 situation. It loses either way.”