In the last years China and Latin American relations have increased very fast to the point that now China is the second biggest trade partner of the region, a growing source of foreign direct investment, a provider of aid and has become its biggest lender. In this article financial cooperation between China and Latin America will be discussed. Nowadays this is done mainly through the loans that China has been giving to Latin America. First, a review of the present situation will be given; Second the problems arising in this field are mentioned and also the causes and how to overcome them; Third, how can China and Latin America could cooperate more in the financial area will be seen; Fourth, what should be done to encourage more Latin America capital flows to China; and last, some Conclusions will be given.

1. Financial Cooperation between China and Latin America
Carlos Aquino Rodriguez
In the last years China and Latin American relations have increased very fast to the
point that now China is the second biggest trade partner of the region, a growing
source of foreign direct investment, a provider of aid and has become its biggest
lender. In this article financial cooperation between China and Latin America will be
discussed. Nowadays this is done mainly through the loans that China has been giving
to Latin America. First, a review of the present situation will be given; Second the
problems arising in this field are mentioned and also the causes and how to overcome
them; Third, how can China and Latin America could cooperate more in the financial
area will be seen; Fourth, what should be done to encourage more Latin America
capital flows to China; and last, some Conclusions will be given.
1. State of Financial Cooperation between China and Latin America
From the last decade China has lent a lot of money to Latin American countries.
According to the web site of The Dialogue, from 2005 to the year 2016 China has lent
to the region a total of 141 billion dollars1. That amount is more of what the World
Bank and the Inter-American Development Bank has lent to the region. The biggest
recipient of these loans has been Venezuela with 62.2 billion dollars, then Brazil with
36.8 billion dollars, Ecuador with 17.4 billion dollars and Argentina with 15.3 billion
dollars. See Table 1.
1
China-LatinAmericaFinance Database: https://www.thedialogue.org/map_list/

2. Table 1: Total loans from China to Latin American countries 2005-2016
Source: The Dialogue, China-Latin America Financial Database
The loans has been given through the China Development Bank and China Ex-Im
Bank. The first gave 114.3 billion dollars and the Ex-Im Bank 27 billion dollars.
According to the same source, of that amount the biggest part has gone to the energy
sector, with 100 billion dollars, infrastructure with 24.3 billion dollars, other with 14.8
billion dollars, and mining with 2.1 billion dollars.
But several countries in the region have problems in repaying these loans, specifically
Venezuela and Ecuador. These countries went to borrow from China because they
could not access loans from global capital markets (they were not eligible for that),
and China was willing to give them loans based more on diplomatic considerations
than economic ones. But there is a risk that both countries could incur in default given
the economic difficulties they are experiencing
2. What are the problems, the causes and how to overcome them?
China has been lending to the region as has been told based more on diplomatic
considerations than in economic ones. China has been called a lender of last resort for
some Latin American countries. These countries go to China because they can`t
access other sources of financing, and China does not impose many conditions on the

3. loans. But then perhaps to avoid problems some conditions should be attached to those
loans.
An element to consider is that perhaps China does not have first-hand information on
the financial conditions of countries in problems. To overcome this problem China
should work together with international institutions that have expertise in the region,
like the IADB, the World Bank and even the IMF. Also there are many private credit
rating agencies, like Fitch, S&P, and Moody`s.
But it is interesting to see that China has a rating agency, Dagong Global Credit
Rating, that it seems conduct research and rate countries according to their financial
conditions. In 2014, when Argentina could not pay, or refused to comply with a US
court order to pay holdout hedge funds (related to the country`s 2001 nonpayment on
debt obligations), Argentina was declared in default. Following this, in August 1 of
that year Dagong Global Credit Rating declared Argentina in default of its debt
obligations2. Even so, after that the Chinese government declared its commitment to
continue giving Argentina financial support. But then, as can be seen in the Finance
database of the Dialogue mentioned before, after August 2014 no new loans from
China to Argentina has been recorded.
So China has already a kind of way of knowing if a country can pay or not the loans,
but again political and diplomatic considerations could override those considerations.
China can also lend money through some multilateral institutions, like the Asian and
Investment Infrastructure Bank (AIIB) to Latin America or the Inter-American
Development Bank (IADB). These kind of institutions have a screening process that
evaluate the loans given to the countries to avoid the misuse of them and the capacity
of the country to repay them. There is already one example when the Chinese
government initiated the China- LAC Cooperation Fund in the year 2015 with an
initial amount of $5 billion3. $2 billion are administered by the IADB in projects like
education, water conservation and energy, and the other $3 billion is administered by
China Ex-Im Bank as a private equity fund.
2 The Dialogue:“Will DefaultDampen China-Argentine Ties?”:
https://www.thedialogue.org/blogs/2014/09/will-default-dampen-china-argentina-ties/
3 China-CELAC Forum: Introduction of the China-LAC Cooperation Fund:
http://www.chinacelacforum.org/eng/ltdt_1/t1269475.htm

4. Another problems associated with Chinese loans are the fact that these are more
oriented to the natural resource sectors and it is said that this will perpetuate Latin
America condition as producer and exporter of natural resources, or that the region
will become dependent of Chinese loans, etc. To overcome these problems the region
need to invest the money in others sectors, like infrastructure (railways, seaports,
airports, energy grids) and in the manufacture sector. But then this depend on the own
Latin American governments decision. China in a sense realize this problem and that
is why when Premier Li Keqiang visited Latin America in 2015 he announced the
setting up of a Fund of 30 billion dollars with the aim to help industrialize the region4.
Also, as most of Chinese loans are for the energy sector, some problems with the
environment has been recorded. To avoid this, compliance with the existing
regulations should be enforced (something that it is not easy to do, not only in the
case of some Chinese projects abut also in other countries projects).
Sometimes it seems there is a lack of understanding between the priorities of some
projects promoted by China and the priorities of the countries that would benefit from
those projects. A case in point is the Peru-Brazil railway or the “twin ocean railway”
project proposed by China in 2015. During the visit of the newly elected Peru`s
President to China in September 2016, he did not show interest in the project and for
the moment this is tabled. For some people it seems China was more interested in the
project because it would allow to bring soybeans and raw materials from Brazil to
China cheaply, but for Peru investing in the project would entail taking a loan from
China of perhaps 25 billion dollar or more and the benefits were not that high (at least
not in the short and medium term). Instead, Peru proposed China to invest in short
distance railways between Lima and surrounding areas.
Finally one problem, this one for China, is the political risk of some countries
defaulting on its loans, especially in Venezuela, and then this country, for example,
refusing to acknowledge the loans. Venezuela has received around 44% of all Chinese
loans to Latin America in the period 2005-2016. The loans were given with the
conditions of being paid in oil, and now with the price of oil so low (and with no sight
of it increasing in a significant way in the near future) Venezuela is struggling to repay
4 China Daily:“Li pledges $ 30 b industrial fund for Latin America”:
http://www.chinadaily.com.cn/world/2015livistsa/2015-05/20/content_20767745.htm

5. those loans. The country is in dire conditions and it could collapse and a new
government (from the opposition) could arise that could refuse to repay the loans, as
China is accused of propping up the Chavez-Maduro regime (amid allegations that
part of that money has been misused and stolen by Chavez-Maduro regime)5.
3. How can China and Latin America cooperate more in the financial area
As stated in the “Vision and actions on jointly building belt and road”, the action plan
of Chinese proposed Belt and Road initiative, several measures can be taken to
promote cooperation in the financial area among countries involved in the initiative6.
Those are mentioned specifically for the countries in the Asian region but can be
applied for Latin American ones also. These contemplate the following for example:
- Bilateral currency swap and settlement between China and the region. In fact there
is already one currency swap agreement between China and Chile signed in May
2015, during the visit of Premier Li Keqiang to Chile. By this agreement the
People`s Bank of China and Chile Central Bank signed a three year currency swap
deal of 22 billion yuan ($ 3.5 billion)7. Also the China Construction Bank opened
its branch in Santiago as an official RMB clearing bank, the first one in South
America. Besides, China and Argentina have a similar currency swap agreement
and in July this year it was extended for another three years. The deal is for 70
billion yuan or 10.37 billion dollars8. More of these kind of agreements should be
encouraged for other Latin American countries.
- Countries in the region should be encouraged to join the Asian Investment
Infrastructure Bank (AIIB). This multilateral financial institution has as its aim to
provide loans to finance the infrastructure needs of its members, something that
the Latin America region also need Already several Latin American countries are
5 Foreign Policy:“Venezuela`s Road to Disaster is Littered with Chinese Cash”:
http://foreignpolicy.com/2017/06/06/venezuelas-road-to-disaster-is-littered-with-chinese-cash/
6 Xinhua Net: “Full text: Vision and actions on jointly buildingBeltand Road”
http://news.xinhuanet.com/english/china/2015-03/28/c_134105858_3.htm
7 China Daily:“China,Chileink multi-billion-USD currency swap deal”
http://www.chinadaily.com.cn/world/2015livistsa/2015-05/26/content_20816109.htm
8 CNBC: “China c. bank extends currency swap agreement with Argentine”
https://www.cnbc.com/2017/07/18/reuters-america-china-c-bank-extends-currency-swap-agreement-
with-argentina.html

6. applying to joint it, like Argentina, Bolivia, Brazil, Chile, Peru and Venezuela9
(Brazil being a prospective founding member).
- Latin American governments, companies and financial institutions with good
credit rating could issue Renminbi bonds in China. Chinese institutions lack
investment opportunities and this will be a good way to diversify their investment.
- Financial regulation cooperation between China and Latin American countries,
through their Central Banks and their Financial Regulatory authorities should be
established. In this way a system of risk response and crisis management could
arise, even if still financial flows between China and the region is low, compared
to the one between China and Asia for example.
- Latin American countries should encourage the establishment of branches of
Chinese banks in the region to encourage financial competition. The same should
be said of Latin American banks being established in China.
Besides the measures above mentioned, China should promote more the
internationalization of the yuan, to give countries in Latin America an alternative to
avoid dependence on the dollar.
Regarding Latin America, to attract more Chinese capital to the region it could open
more its financial market. As above mentioned, in the banking sector still is not easy
for Chinese banks to open branches in several countries as they impose many
restrictions on them. For example Peru just at the end of last year allowed the opening
of a representative office of a second Chinese bank, the Bank of China10, after several
years that the ICBC opened its branch. In several Latin American countries there are
oligopoly structures in the banking sector, so more competition should be allowed.
Also, the stock markets are not well developed in the region as few companies list in
the Stock Exchange as many companies are mainly family owned, and also not want
to become transparent. Besides this, in some of these countries their Stock Exchange
are very small and the daily amount transactions are very small. In Peru for example,
a country with a GDP of around 200 billion dollars and 31 million people, where its
9 Accordingto the web siteof the AIIB: https://www.aiib.org/en/about-aiib/governance/members-of-
bank/index.html
10 El Comercio: “Bank of China ingresa al Peru para ampliar negocios bilaterales”:
https://elcomercio.pe/economia/negocios/bank-of-china-ingresa-peru-ampliar-negocios-bilaterales-
154613

7. stock exchange was established more than 150 years ago, on October 26, 2017, the
daily amount negotiated was of only 48.9 million of Soles (around 15.1 million
dollars) and of the more than 270 companies that are listed, only less than 40 have
their share negotiated on a daily basis.11
4. What should be done to encourage more Latin America capital flows to China?
China should open more its financial market. China is still closed in several aspects
and the government has controls regarding the inflow and outflow of capital in the
country12.
It is know that China is working to have the RMB as an international currency that
perhaps can compete with the dollar, but for this to happen it needs to do several
things (as stated in the Report of Brookings cited in note 10): First, it has to make its
currency easily tradable in global financial markets; second it has to ease restrictions
on inflows and outflows; third, the exchange rate has to be more flexible (in this
regard the Chinese government is doing already a lot); fourth, it has to develop the
financial market to make it more broad, deep and liquid for investors by giving them
access to financial assets in RMB.
China has to offer more settlement of trade transaction with RMB, allow issuance of
RMB domestic bonds, to offer some banks the possibility of offering offshore RMB
accounts, also of becoming offshore RMB clearing centers. By doing these measures
China will encourage the RMB to become part of international reserve portfolio of
Central Banks.
In summary, Latin American capital could flow to China when this country offer more
access to its stock and bond markets, when money is easy to move in and out of the
country, and when its exchange rate become more freely traded.
5. Conclusions
China loans to Latin American countries are very important, and those will surely increase
in the future, given the necessities of the region for that, and China own needs for bigger
involvement in the region.
11 Lima Stock Exchange web site: http://www.bvl.com.pe/mercempresas.html
12 Brookings:Testimony: China`s economy and financial markets:Reforms and risks”by Eswar Prasad:
https://www.brookings.edu/testimonies/chinas-economy-and-financial-markets-reforms-and-risks/

8. To avoid some problems arising from the loans, of countries being unable to repay them,
a system of credit rating should be implemented, although this could be overcome by
political and diplomatic considerations. Also, loans should be more oriented to the
infrastructure and manufacture sectors to change the economic structure of the region
dependent in natural resources.
Financial cooperation should be promoted by encouraging more countries in the region
to have currency swap agreements with China, make them to join the AIIB, to issue
Reminbi bonds in China, and to be able to have the Chinese currency as an alternative to
the dollar by encouraging the internationalization of it. Latin America should also open
more its financial markets to allow Chinese capital to establish its banks for example or
to participate in its capital markets of share and bonds.
Finally, China should open more its financial market to encourage Latin American
governments and companies to also participate in the Chinese market.