The New Banks in Town:
Chinese Finance in Latin America
By Kevin P. Gallagher, Amos Irwin, and Katherine Koleski
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Also available in Spanish and Portuguese
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See the China-Latin America Finance Database
In this report we estimate that since 2005 China has provided loan commitments upwards of $75 billion to Latin American countries. These figures have now been updated through 2012, showing $87 billion in loans, as part of the China-Latin America Finance Database, a collaboration between GDAE, Boston University's Global Economic Governance Initiative, and the Inter-American Dialogue. 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:
- The Chinese Development Bank (CDB) loans carry more stringent terms than World Bank loans.
- China’s Export-Import Bank, by contrast, generally offers lower interest rates than the U.S. Ex-Im Bank—though this difference stems from the fact that the World Bank offers concessional interest rates as a form of aid, while China offers concessional rates not through CDB but rather China Ex-Im.
- Chinese banks provide financing to a significantly different set of countries than the IFIs and Western banks—namely Argentina, Ecuador, and Venezuela that are not able to borrow as easily in global capital markets.
- Chinese and IFI/Western banks do not overlap significantly in Latin America because they give different-size loans to different sectors in different countries. Chinese banks have largely focused on loans to natural resource based and infrastructure sectors.
- Chinese banks impose no policy conditions on borrower governments, but do require equipment purchases and sometimes oil sale agreements.
- The financing terms in oil sale agreements seem to be better for the South Americans than most people believe.
- Chinese finance does operate under a set of environmental guidelines, but those guidelines are not on par with those of their Western counterparts.
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.
Published in Spanish by Centro de Estudios China-México de la Facultad de Economía de la UNAM
Published in Portugese by The Inter-American Dialogue
Download the Policy Brief.
The China-Latin America Finance Database stems from an ongoing collaborative project between GDAE, Boston University's Global Economic Governance Initiative, and the Inter-American Dialogue. The interactive database, which will be updated annually, is the most up-to-date source of information on Chinese lending activity in Latin America and the Caribbean.
Profiting from Precaution: How China’s Policy Banks Can Enhance Social and Environmental Standards, Kevin P. Gallagher, Paulson Institute Policy Memorandum, July 9, 2013
Las finanzas chinas en Latinoamérica: ¿un financiamiento más verde?, Kevin P. Gallagher Katherine Koleski Amos Irwin, Apuntes Vol. XXXIX, N° 71, November 2012
Atravesando el océano pensando en los TBI: arbitraje inversionista-Estado en los tratados bilaterales de inversión chinos, Amos Irwin, Apuntes Vol. XXXIX, N° 71, November 2012
The Global Development and Environment Institute’s Globalization and Sustainable Development Program examines the economic, social and environmental impacts of economic integration in developing countries, with a particular emphasis on the WTO and NAFTA's lessons for trade and development policy. The goal of the program is to identify policies and international agreements that foster sustainable development.