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Venezuela looks to China for economic boost

China may become the South American state's biggest trading partner, but some economists are sceptical of the benefits.
Last Modified: 12 Mar 2013 09:31
Under Hugo Chavez, seen here jogging on the Great Wall, Venezuela developed closer trade ties with China [AP]

Caracas, Venezuela - As China’s economic and political footprint grows across Latin America and Africa, worrying some and enriching others, Alvaro Ruiz Sanchez has his eyes on the prize.

President of OrOctrading, a consulting firm, Sanchez - sporting thick cufflinks with the red Chinese flag and a dark blazer - has been teaching Venezuelan companies about doing business with the world’s second-largest economy.

“Usually, manufactured goods from China are coming into Latin America and raw materials are going out,” Sanchez told Al Jazeera. “Venezuela has posted a positive trade balance with China, because of oil exports, but without those we would have a major deficit.”

Trade between Venezuela, holder of the world’s largest oil reserves, and China grew to $18bn in 2011, a 24-fold increase from 2003, reported China Daily, a government-backed newspaper.

Venezuela exports more than 500,000 barrels of oil to the Asian giant daily, according to government figures, and plans to increase that to one million by 2015. The two countries had signed 300 bilateral agreements, including 80 major projects, according to a University of Miami study in 2010.

Looking east

Alvaro Ruiz Sanchez believes trade with China is the way of the future for Venezuela [Chris Arsenault/Al Jazeera]

As relations between Venezuela and the US soured in recent years, Venezuela looked away from its traditional trading partner towards the east. China could soon surpass the US as Venezuela’s largest trading partner.

Venezuela's interim President Nicolas Maduro, who took the job following the death of President Hugo Chavez on March 5, held talks with Chinese officials over the weekend.

"The best tribute that we could give to our comandante Chavez is to deepen our strategic relationship with our beloved China," said Maduro, who once served as Venezuela’s foreign minister.

In a televised meeting with Maduro, Zhang Ping, chairman of China’s National Development and Reform Commission, said “deepening relations between China and Venezuela” are “the only way to comfort the soul of President Hugo Chavez”.

If elected president on April 14, Maduro has said his first trip abroad will be to China.

Henrique Capriles, leader of Venezuela’s opposition, criticises most government policies but generally supports expanding trade with China.  

The countries have launched two satellites together in recent years, and China is negotiating a free trade deal with Mercosur, a South American trading zone.

Debt trap?

While China’s business deals with South America are welcomed by many, including politicians and young businessmen like Sanchez, some experts worry the manufacturing powerhouse is repeating old problems faced by Latin America, allowing countries to boost their economies purely through primary commodity exports.

Loans to Venezuela backed by the Chinese state and its development banks are being repaid in oil, directly from the spigot, rather than cash or government bonds.

Current oil deals are creating a “fundamentally unsustainable cycle of indebtedness and dependency”, according to the University of Miami study.

Since 2008, state-backed China Development Bank has agreed to lend Venezuela $46.5bn, according to a report from Tufts University. More than 90 percent of this debt is backed by sales contracts for crude. And the government is running up debt despite high oil prices.

With international lenders demanding high interest rates on Venezuelan government debt, and the Chavez government criticising the International Monetary Fund (IMF) and World Bank for their demands of privitisation and austerity, turning to China makes sense, according to some observers.

“Venezuela has a policy goal of trying to limit its exposure to the international debt market,” Mark Jones, Latin America expert at the Baker Institute for Public Policy, a think-tank specialising in the energy industry, told Al Jazeera. “For China, ideology has very little to do with it; they are investing for strategic reasons - to acquire natural resources.” Ideology, for Venezuela, is crucial.

Carlos Andres Perez, a former Venezuelan president, once slammed the IMF for “practicing economic totalitarianism which kills not with bullets but with famines”. But it’s unclear whether deals from totalitarian China, especially if they are backed with black gold, will be any better for Venezuela’s long-term prospects.

“My children and grandchildren will have to pay that debt,” Sanchez said, wondering if the billions in loans-for-oil deals could be “a double-edged sword”.

Dependency

"I have a client who used to manufacture school uniforms here. It has become so difficult to produce in Venezuela, now he is just trying to import them from China."

- Alvaro Ruiz Sanchez

In recent decades, Venezuela has been dependent on crude exports, and this dependence has deepened since 1998 when Chavez was first elected.

High oil prices, coupled with the government’s desire to increase social spending at home and rigid currency controls, have made life even more difficult for Venezuelan businesses.

Petroleum exports tend to raise the value of a country’s currency, making other exports less competitive - a phenomenon economists call the “Dutch disease”.

“I don’t think it’s feasible to create alternative exports in the next two years,” Venezuelan economist David Pinto told Al Jazeera. “The government that is elected in April will just have to focus on managing the oil exports it gets. The Dutch disease factor is just too high.”

Sanchez has seen the troubles faced by Venezuelan exporters first-hand. “I have a client who used to manufacture school uniforms here,” he said. “It has become so difficult to produce in Venezuela, now he is just trying to import them from China."

While economics drives the China relationship, demographics is playing an increasingly important role.

Migration

More than 200,000 Chinese nationals are currently living in Venezuela, Federico Chang, editor of Panda, a newspaper for Chinese people in Venezuela, told Al Jazeera.

Many work on large-scale oil and infrastructure projects, he said, but others run small grocery stores or restaurants.

Caracas’ Chinatown, a series of restaurants and small outdoor markets selling vegetables, knick-knacks and bootlegged DVDs, was busy on Sunday. Many of the Chinese vendors didn’t speak much Spanish, and none were interested in speaking to the media.

Privately, some Venezuelans worry that Chinese immigrants are not assimilating to the local culture and learning the language. But there are also ethnic Chinese who have been in Venezuela for the past 100 years, Chang said, who are thoroughly Venezuelan.

Chang doesn’t believe Latin American countries should be worried about a flood of cheap Chinese imports displacing local products.

“China has opened its large internal market to Latin American countries,” he said. “Venezuelan coffee, chocolate and other products are being sold through China and in other Asian countries where China has a certain degree of influence.”

Big plans

Some Chinese firms, including the appliance maker Haier and the communications company Huawei, have established production operations in Venezuela. But products from these factories often have a guaranteed market in Venezuelan government companies. It’s common to see Venezuelan pro-government activists talking on Huawei cellphones, which are heavily subsidised by the state.

Supporters of these projects say China is bringing new technologies and investment to Venezuela. Critics believe the Chinese, like the Americans before them, are looking for guaranteed markets for their value-added manufactured goods and easy access to resources, trapping countries like Venezuela in a cycle of debt and dependency.

While he takes an interest in debates on Venezuela’s new embrace of China, Sanchez has more pressing concerns. One of his clients wants to import spare car parts from China, while others are interested in textiles and building materials. He is planning another trip to Beijing next week and brushing up on his Mandarin, like other young entrepreneurs across South America.

“In Latin America and Africa, the Chinese are directly buying natural resources,” he said, finishing his coffee. “They are taking control of the US and Europe through buying companies and bonds."

1627

Source:
Al Jazeera
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