Previously, we had looked at the massive amounts of money pumped into Venezuela by lending institutions based in the People’s Republic of China, primarily state banks. With billions of dollars poured into a country that has quickly deteriorated and destabilized in recent years, one fundamental question has arisen:
What now?
We attempted to answer the question of why the PRC would invest so much money into Venezuela in the first place in the previous piece, focusing on the geostrategic implications. However, there have been some worrying developments in the realm of PRC finance which put their investments into Venezuela in a new light. Beyond this, however, we must also ask ourselves why the PRC would “cut and run” on such a costly investment, and what expectations are for future actions.
RECENT DEVELOPMENTS
Though there has always been a certain skepticism around the viability of the PRC’s economic and investment model (and indeed their entire method of governance), this skepticism has increased substantially in recent years. An obvious source of this has been the PRC’s mishandling of the beginning of the COVID-19 pandemic, though its tightening stranglehold on Hong Kong and president Xi Jinping’s ruthless “anticorruption” campaign- seen as at least just as much an attempt to root out his personal political enemies as much as any effort to clean up the government- were early warning signs for many. In the last few months, however, even more serious shocks and structural issues have begun to openly plague the country. The Evergrande debt crisis has far and away grabbed the most headlines, as it echoes the 2008 Subprime crisis in the U.S. However, the issues with Evergrande are not limited solely to the housing developer. Instead, they are indicative of one of the most fundamental problems with the broader PRC economy: much of the growth since (ironically) the 2008 crisis is due in large part to cheap loans given out without regard to their potential fallout. The risk of a global contagion similar to 2008 is being hotly debated- in no small part due to the fact that the PRC finds truthful reporting so anathemic that no one outside of the country has a clear picture of the true extent of the risk. It is entirely possible almost no one inside the country knows, either.
Even beyond these immediate structural issues (a concept that never bodes well), there are longer-term structural issues with the country’s economy. The PRC’s demographics have always been a source of much debate and scrutiny, and while the consensus has always been that they were going to slow down eventually due to the same processes which affect most other countries- people living longer and having fewer children- recent population data seems to indicate that that day is coming much, much sooner than anyone expected. As recently as June of 2021, when Part I of this piece was published, the general expectations were that the PRC’s population would drop to one-half of its current level somewhere around the end of the century. Population data released over the summer has changed this estimate to possibly within thirty years, or a single generation. This is, in a word, catastrophic. It would be unprecedented in the history of economics outside of major conflicts, diseases, or famines. If accurate, this would indicate the PRC’s ability to grow its economy through consumer consumption is already over, leaving it stuck in the infamous Middle Income Trap but with domestic (and international) expectations of its continued rise and prominence. This is not a recipe for stability- at home or abroad.
HAVE CHINESE INVESTMENTS BEEN OVERRATED?
To connect the dots between the Evergrande crisis and Venezuela, one must ask a further question: has the PRC’s investment savvy been overestimated in the rest of the world? There is significant evidence to say that it has, both within the PRC itself and abroad. The PRC’s weakness for cheap, easy credit to prop up the economy in times of distress is well documented and immediately discussed here. Evergrande is the most high-profile victim of this, but they are far from the only ones to have partaken- or perhaps been made to partake- in this particular vice. Another infamous symptom so far has been the enormous but sparsely populated “Ghost Cities” outside of the major metropolises. Many have been sitting under or even unoccupied for years, monuments to little more than the amount of debt that can be accrued in concrete and steel. Though some have been showing more life in the last year or two, if the population data previously discussed is accurate, it is likely that none will ever approach their theoretical economic potential. Instead, someone will have to answer for these tumbleweed-strewn white elephants, and in the PRC that someone will- in long run or short- be the state itself.
Investments abroad have at times been just as ill-advised, with Latin America seeing one of the worst boondoggles. In 2013, a plan was announced to build a canal through Nicaragua to rival the Panama Canal. The canal was set to have been completed in 2024 at a cost of US$50BN, all financed by PRC banks and loan financiers. Since that announcement, construction has not even started. The best case scenario for the PRC is that it was a money-laundering scheme all along, as the US alleged when it put several members of the project on a sanctions list. The worst case is that someone somewhere actually attempted to do some of the construction and simply burned more than three times the GDP of Nicaragua itself. PRC investment in other countries has been falling as well, with PRC policy banks not giving out a single loan to Latin America in 2020 and only four in 2019. Indeed, PRC policy bank investment in the region drops off dramatically after reaching US$21.5BN in 2015, dropping to 12.6 in 2016, 6.3 in 2017, 2.1 in 2018, and 1.1 in 2019. Commercial bank activity has picked up in the region, but it has been Argentina that has been the recipient of most of these, in both quantity and size of loans. After a decade of work and hundreds of billions of dollars, the PRC is, apparently, simply turning its back on Latin America, letting all that money and potential influence drift into the wind.
Or is it?
DEPARTURE OR DECLUTTERING?
While direct investment in Latin America by PRC policy banks has dropped off significantly, that may not be the full story. To begin, 2020 was, of course, an outlier year, and any economic data coming out of it should be taken with a heavy grain of salt, especially when it comes to investments and government spending. Instead, it was commercial banks who have been carrying the torch lately, giving out eight loans in 2019 and nine in 2020. Furthermore, the PRC expended a great deal of effort to get vaccines to Latin America, in some cases even before the US did (though the soft power effect of this is somewhat up for debate given the now well-known discrepancies in effectiveness between Sinovac and the various American, British, and even Cuban vaccines).
The overall trend of PRC investment in Latin America over the last few years has been reducing overall investments in favor of more targeted ones. This likely represents an effort to get smarter about their investments as their ability to invest declines. Argentina, despite being a well-known financial basket case, remains a country with more potential than most anywhere south of Mexico. Of particular importance are its large and successful agricultural and mining industries, the latter of which has been a particular target for investment coming out of the PRC in recent years. With Venezuela a failed state (or near enough), and it's economy entirely dependent on a material that, regardless of current demand, will be in decidedly lower demand in a generation or two, it’s hard to see a way out that can be offered by just one country. Even with tens of billions of dollars poured in, the PRC can only do so much. For now, there is little to be done, and few countries in the region could provide such immediate benefits.
CONCLUSION
While PRC investment in Latin America has been substantial over the last generation or so, it's slow tapering as of late likely reflects several different trends. For one, the history of PRC investment both domestically and abroad is littered with bad ideas and bad bets, even as some of their other investments have performed spectacularly. Domestic political and economic factors mean there is less room for truly out-of-the-box investing, and while Latin America remains a region with great potential, it is less of a sure bet than investing in Europe or Asia and in many ways carries lower potential upsides than investment in Africa. For the PRC, then, Latin American investments make less sense than continuing their investments in the Belt and Road Initiative or African investments, and there is- for the time being- less future in the region. Cutting Venezuela loose is surely a bitter pill to swallow, but given the pressures on the country and the shape the future is taking, it is likely the right one for the Peoples’ Republic of China.