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China Reconsiders, As Venezuela Doubles Down

Oct 07 , 2016
The crisis in Venezuela has reached yet another low, this time the problem areas is in China-Venezuela economic relations. The new situation means long-time backers and supporters are looking closely to cut their losses as the South American country’s economic tailspins, while a populist government seems committed to pursuing a failed course.
In a recent Wall Street Journal article, “China Rethinks Its Alliance with reeling Venezuela,” Kejal Vyas reports that Chinese envoys, businesses, and expatriates are now calculating that the risks of continued backing for Venezuela far outweigh the benefits.
The situation is obvious for anyone interested in facts. First, after nearly two decades, failed economic policies, mismanagement, corruption and misappropriation of funds have all but destroyed the country’s economy. A country with the world’s largest petroleum reserves (298.4 billion barrels, and formerly one of the wealthiest in the world, has essentially squandered generous Chinese loans and revenues from oil sales on politically-motivated schemes meant  to buy the votes of the nation’s poorest.
Today, Venezuela has less than an estimated $11 billion in foreign reserves. There is a high probability that the country might default on nearly $20 billion still owned to the People’s Republic of China (PRC), in addition to defaulting on $100 billion in government and state-oil company bonds. The country’s bonds trade at distressed prices, with the Financial Times reporting that the benchmark 2022 bond currently yields at 33 percent. By comparison, government bonds in Brazil, which is having an economic slowdown, yield at 12, with Colombia at 7, Mexico and Peru at about 6, and Chile at 4 percent.
Further, estimates of the Venezuelan economy show a decline of 6 percent last year and it is expected to decline by 10 percent this year. Inflation, which the government refuses to acknowledge as its own creation through the creation of worthless bolivares, has reached a remarkable rate of over 700 percent. The decline in the global price of petroleum has had a devastating effect on a country where oil accounts for nearly all export earnings and approximately half of the government’s revenue.
The Wall Street Journal article, as well as accounts from the Financial Times, report that at least three members of the opposition-controlled National Assembly have visited Beijing this year in an effort to renegotiate debt repayment in the event a transition government should succeed the regime of the feckless Nicolás Maduro.  Maduro’s support has eroded significantly as Venezuelans face food and power shortages and the disappearance of basic necessities and medicines. The Economist (September 10th-16th, 2016) titled an article about Maduro, “Chávez without the charm.”  The government’s almost exclusive response is to blame economic sabotage and to increase its repression against opponents through the use of increasing arrests and detention.
Second, Venezuela is plagued by rampant insecurity and it is now affecting foreign nationals. The country has the world’s largest petroleum reserves, but, lamentably, it also registers the world’s second highest murder rate. High murder and kidnapping rates are now making targets of Chinese workers in Venezuela — both PRC nationals and 200,000 Chinese Venezuelans living in the South American country. Asians, particularly Chinese living and visiting major cities such as the capital Caracas, are being targeted by criminals. This has prompted the embassy of the PRC to issue warnings to Chinese nationals urging them not to travel unaccompanied and to stay off the streets at night.
Reportedly, some Chinese companies are moving their workforces to Colombia and Panama, given the crime situation and the fact that many projects have been suspended or cancelled, as a result of Venezuela’s economic crisis.
While Chinese officials have yet to publicly acknowledge the heightened tension over debt repayment, failed investments and the crime situation, the PRC’s actions are another matter. No new loans are forthcoming and only a few trucks were sent to Venezuela recently to alleviate the transportation problems in order to relieve food shortages around the country.
China may now be facing what others have dealt with in the past. Years ago, American and Canadian investors watched as their investments in the Las Cristinas and Las Brisas gold deposits disappeared as Hugo Chávez populist government nationalized their claims. Almost immediately, Chávez moved to nationalize PDVSA (the state oil company, Petróleos de Venezuela) and began using it as a cash cow for social spending. Word capital markets eventually responded by giving Venezuela junk bond status. Venezuela has a long history of defaulting on loans and debts thus making it a risky investment, and the current government is certainly upping the magnitude.
For China, in the new era, with anywhere from $60-70 billion in loans to Venezuela (at one point about a third of China Development Bank’s total overseas loan portfolio), the prospects for taking a massive haircut is now a very real prospect, given the fiasco created by the Chávez and Maduro governments. According to Reuters, the decline in oil prices has also placed a major strain on Venezuela’s ability to pay its debts to China:
“Venezuela in 2014 shipped 630,000 barrels of oil and fuel to China according to PDVSA's 2014 financial results, which are the most recent available. Around 45 percent of the value of those shipments was used to pay down debt, with PDVSA receiving the remainder in cash, according to Reuters calculations based on information released by PDVSA.”
On one hand, the decline in global oil prices means China pays less for its Venezuelan oil, but on the other hand, the situation has made it harder for Venezuela to pay its other debts. The country is having a terrible time acquiring badly-needed foreign imports, such as medicines, and in securing dollar reserves to pay for the same.
A long-standing structural problem is Venezuela’s failure to use loans to help diversify its income-generating base. Venezuela remains a petroleum-exporting dependency, as some economic nationalists have long decried and condemned.
It now appears Chinese economic and financial actors are revisiting their investments in a failed venture.  The fault lies less with China’s loans, credits and investments, which have been generous. The real problem involves the failure to use such resources in establishing a functioning, and far more dynamic, economy.
Today, as the costs of past policies are proving ruinous, the Venezuelan leaders seem set on doubling down with reports of sending urban citizens to go work in the fields to grow food which the country can no longer produce or import. More bizarrely, Maduro appears to be getting economic advice from a Spanish professor, Alfredo Serrano, whom he calls the “Jesus Christ of economics.”  Serrano, a supporter of Spain’s hard left Podemos party and the author of The Economic Thought of Hugo Chávez, has no experience managing economic policies but supports ever-more radical measures, even rejecting a stabilization plan recently presented to Maduro by UNASUR, a Venezuelan-sponsored entity.
It seems others will eventually have to pick up the pieces in Venezuela’s and some might walk away with pennies on the dollar, if they are fortunate. So far, Maduro’s hopeless economic strategy — if his advisers are any indication — seems a little like asking Pol Pot for advice on urban planning.
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