As Its Economy Slides Into The Abyss, Venezuela Turns Toward China 3
BEIJING, CHINA - JANUARY 7: Venezuela's President Nicolas Maduro (R) walks with Chinese President Xi Jinping (L) as they review an honor guard during a welcoming ceremony at the Great Hall of the People on January 7, 2015 in Beijing, China. (Photo by Andy Wong-Pool/Getty Imgaes)

For Venezuelans, the recent opening of the country’s border with Colombia couldn’t come soon enough. One hundred thousand of them poured across the frontier this month in desperation to buy food and medical supplies.

The collapse in crude prices has depleted government revenue and exposed the country’s fatal dependence upon oil revenues. Now, events are spiralling out of control. Hyperinflation has taken hold and is expected to top 600% very soon. Food along with power are being rationed– a painfully ironic development for a country with vast oil reserves. The government has declared a state of emergency as the country seems destined to crash head-first into a full-blown humanitarian disaster.

At this point, only an unfeasibly rapid increase in oil prices can rescue Venezuela – or unprecedented help from overseas.

Enter China

Over the past decade, Beijing has provided more than $60 billion in oil-backed loans to Venezuela, mainly through the state-owned emerging markets powerhouse that is the China Development Bank. In so doing, China has helped to sustain the Chavista socialist program, which initially reduced poverty but also snuffed out the private sector, making the economy entirely oil-oriented. The policies turned Venezuela into a Latin version of Saudi Arabia – with the critical exception that Saudi oil is a lot cheaper to drill.


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Beijing didn’t pay too much attention to how the Caracas government used its loans, just so long as Chinese firms got lucrative construction contracts and a steady supply of oil. But with crude prices so low, the deal isn’t looking quite as lucrative for China – particularly given that Venezuela no longer has the money to repay its debt. Many in China’s foreign policy elite are questioning the logic behind so much credit going to a spindrift Venezuela. Some feel it’s time for China to cut its losses.

But that’s not the mainstream view. More influential voices see the Caracas government as a strong Chinese ally that stands up to the US and should be supported in its hour of need. To this end, China has not only been giving Venezuela more time to pay its debts but also has lowered its interest rates. Geopolitics aside, patience might seem the more profitable proposition from Beijing than allowing Venezuela to default and get little or nothing back.

Even so, China is carefully hedging for disaster and the advent of a new government. Venezuela’s opposition parties are pushing for a referendum to remove President Nicolas Maduro. While he’s outmaneuvered them for now, the deepening economic and social crisis will only increase the pressure on him to resign. So, Beijing’s diplomats are quietly opening channels to the opposition to make sure its politicians are ready to work with Chinese banks should they take power. China is likely to offer fresh funds to a government that can steer the economy back on track.


Venezuela, however, isn’t the only country in the region that has Beijing’s attention. For many Caribbean and Latin American nations, China has become their biggest overseas investor and trade partner, usurping the US in its own backyard. Its appeal lies partly in its restraint from getting involved in local politics, preferring to stick to its credo that it respects national sovereignty and doesn’t interfere in the affairs of other states.

There are some governments that wish it would get more involved, viewing Beijing as a potentially useful political ally for their own interests. Neighboring Venezuela is the small nation of Guyana, where China has invested heavily, and at times controversially. A shady deal by timber company Bai Shan Lin to exploit the Guyanese rainforest seemingly rode roughshod over local laws and international agreements on logging. Many accused the government in Georgetown of aiding the Chinese company.

Having backed the “One China” policy against Taiwan for many years, Guyana’s government has called on China for support in its own territorial dispute – with Venezuela. Tensions dating to colonial times, when Guyana was a British colony, have suddenly resurfaced since the discovery of oil in a stretch of sea adjacent to land coveted by Venezuela. It’s prompted fresh claims from Caracas and aggressive maneuvers by the Venezuelan navy. Some fear Maduro might even launch an offensive to reclaim the disputed land by force. Even against a near-bankrupt Venezuela, Guyana’s tiny military would have little chance in such an encounter.

So far, China has remained silent on the matter and is clearly hoping to avoid getting drawn into the dispute. An attack from Venezuela doesn’t look imminent at this stage. Yet, by inviting Chinese investment and kowtowing to Beijing, Guyana is at least giving Beijing another good reason not to get too close to the ailing and increasingly desperate President Maduro.

Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

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