The New Banks in Town: Chinese Finance in Latin America
By Kevin P. Gallagher, Amos Irwin, and Katherine Koleski
In this report we estimate that since 2005 China has provided loan commitments upwards of $75 billion to Latin American countries. China’s loan commitments of $37 billion in 2010 was more than the World Bank, Inter-American Development Bank, and the United States Export-Import Bank combined for that year.
After providing estimates of Chinese finance we also examine the common claims that Chinese loans to Latin America have more favorable terms, impose no policy conditions, and have less stringent environmental guidelines than the loans of International Financial Institutions (IFIs) and Western governments. We find that:
It is our hope that this report will provide a more empirical-based foundation for research on Chinese finance in LAC. The investigation we performed here lends credence to some of the claims about China in Latin America, and less so to others. On the positive side, it is clear that China is a new and growing source of finance for LAC countries, especially for the set of nations that are having trouble gaining access to global capital markets. Moreover, from an LAC perspective those loans do not come with the policy conditionalities that are tied to IFI and Western loans. Finally, LAC nations can get more financing for the infrastructure and industrial projects they seek to enhance long-run development--rather than the latest Western development fads.
All that said, and contrary to much of the commentary on the subject, by and large LAC nations have to pay a higher premium for loans from China. That higher premium is in the form of interest rates, not loans-for-oil. It is commonly thought that LAC simply sends barrels of oil to China in return for financing and thus may end up losing out given the rising price of oil. Our analysis shows that such thinking is misreading the evidence, the majority of Chinese loans for oil in Latin America are linked to market prices, not quantities of oil. Another cost of Chinese finance is that it can often be tied to working with Chinese contractors and businesses. This reduces the amount of “spillover” effects in terms of local contracting in LAC related to the loans. And finally, though the IFI/Western banks’ environmental record is far from perfect, the Chinese banks are not on par with the environmental guidelines of Western banks. This is of grave concern given that the composition and volume of Chinese loans is potentially more environmentally degrading than Western banks’ loan portfolios to LAC.
Download the full report, The New Banks in Town: Chinese Finance in Latin America.
Global Development And Environment Institute