Xiaoyu Song
In the past twenty years, China’s economic, trade and investment cooperation with Latin American and Caribbean (lac) countries has developed rapidly. At present, China is the second largest trad- ing partner in the region, and after Asia, lac has become the second largest destination for Chinese overseas investment.
As economic and trade relations between China and lac have become increasingly close, a prosperous scenario of trade and investment as well as financing has emerged. Since 2005, China’s financing activities in the region have intensified, specifically the number of financing projects from Chinese public banks (almost all the institutions that offer financing in lac are public ones) and the amount of money involved have attracted attention worldwide.
Two Chinese policy banks alone –the Export-Import Bank of Chi- na (Exim Bank) and the China Development Bank (cdb)– have provided more than 141 billion us dollars (Gallagher and Myers
2019)1 in loan commitments to lac countries which accounted for almost all Chinese financing in the region during 2005-2018, cdb has participated in 80% of these(eclac 2018:22). It is es- timated that this figure is also higher than all other financing received by lac from institutions such as the Inter-American Development Bank (idb), the World Bank and the Development Bank of Latin America (caf), during the same period.
In order to better understand this phenomenon, this research paper will focus on the main financing programs of the two afore- mentioned Chinese policy banks –cdb and Exim Bank–, by in- troducing their specific characteristics and how they operate. Of course, such financing resources are fundamentally different from other conventional financing projects in the world, since they are financial resources which originate from the Chinese public sector.
This study will, therefore, also discuss the specific meaning or im- pact of such financing on Latin American countries. To fulfil this research objective, the analysis will be presented in two sections.
The first, will examine the current programs of the cdb and Exim Bank in Latin America and explain how they work. The second, will review the financing programs (or products) from Exim Bank and consider their concrete application requirements.
1 The China-Latin America Finance Database (Gallagher and Myers 2019) is a collabo- ration between Inter-American Dialogue and the Global China Initiative at Boston University’s Global Development Policy Center. This example is one of the few pub- licly available statistics about Chinese financing in lac, if not the only one. It includes aggregated data such as year, lender, distribution by country and sector destinations of the financing of the cdb and Exim Bank. It should be noted that the statistics taken from these bank do not include disaggregated data on individual cases of Chinese fi- nancing in the region. At present, there are still no Chinese open sources on Chinese financing in lac, either aggregated or disaggregated. In the future, the creation of a database of Chinese financing in lac, organized by cases, would help to enable more specific and detailed research. It is therefore important to state that this research paper is based on a bibliographic review (mainly taken from newspapers) of a selection of cases whose information is available for public consultation.
Financing from the China Development Bank
The China Development Bank (cdb) was established in 1994 and is a policy financial institution that sits directly under the leadership of the State Council of China. The cdb is currently the world’s largest development financial institution in term of assets, and is China’s largest foreign investment and financing cooperative bank as well as being a medium and long-term credit bank and bond bank. Furthermore, it is currently the largest Chi- nese-funded bank in Latin America’s investment and financing cooperation.
In the last ten years of its business development, the cdb has established a network of two representative offices and eight coun- try working groups in lac. It has provided more than $100 billion dollars of loans to more than 200 multi-bilateral cooperation proj- ects in 18 countries in Latin America, including Brazil, Venezuela, Ecuador, Peru, Argentina, Cuba, Mexico, Colombia, Chile, Bolivia, Uruguay and Costa Rica. These loans have been mainly directed towards the areas of infrastructure, energy, mining, manufactur- ing, electricity, and communications as well as some specialist ar- eas such as aerospace and high technology. In an attempt to support the economic and social development of lac countries, the cdb has also set up a scholarship to support students from the region to carry out long-term studies in China (Xinhua 2019).
Below is a detailed review of each of the main financing pro- grams and products operated by the cdb in lac.
China-Caribbean Infrastructure Special Loans
At the third China-Caribbean Economic and Trade Cooperation Forum in September 2011, the then Vice Premier Wang Qishan an- nounced, on behalf of the Chinese government, that the China- Caribbean $1 billion dollar infrastructure loan (中国加勒比基 础设施专项融资) would be launched as part of six policy ini- tiatives. Subsequently, in June 2013, during his visit to Trinidad
and Tobago, President Xi Jinping announced another $1.5 billion dollars which would form part of China-Caribbean Infrastruc- ture Special Loans. The aim of these loans is to further strength- en the financial and investment cooperation between the two countries. The financing is mainly used for infrastructure projects in the Caribbean which include national highways, ports, airports, railways, electricity, energy, transportation, urban public facili- ties, communications, free trade parks, construction, agriculture, environmental protection, tourism, and logistics, amongst others.
The project development can be completed by the government, an enterprise from the project country, or a Chinese-funded enter- prise, who submit a formal loan application to the cdb. The loan application must provide all of the relevant information about the project, including, but not limited to, information about the bor- rower, the total investment requested by the project, the amount of money applied for, the financial status of the borrower or share- holders of the project company, the project financing structure, the loan terms, the loan use, the repayment and guarantee meth- od, and the project schedule, etc. After receiving the project loan application, the cdb will first conduct a preliminary review of the project, and for those who pass the preliminary review, will then subject the applicants to a process of due diligence and a project review. The project review report is then submitted to the cdb’s loan committee and once approved, the cdb negotiates with the project party in order to implement the signing of a loan agree- ment (cdb 2016).
One representative case of the use of these special loans can be found in the Jamaica North-South Expressway project, a construc- tion that connects Jamaica’s Spanish Town with its touristic center Ocho Rios. The total length of the highway is 65.19km and the de- sign speed is 80km/h. The total investment for the project was $611 million dollars , and the application for medium and long-term loans currently stand at $426 million dollars plus 200 million yu- ans. The project is the first infrastructure Build-Operate-Transfer project (bot) implemented by Chinese enterprises in lac.
China-Latin America Infrastructure Special Loans
In July 2014, President Xi Jinping announced at the China-lac lead- ers’ meeting that China would formally implement a special loan (中拉基础设施专项贷款) of $10 billion dollars directed towards infrastructure, and that this loan would be overseen by the cdb.
Since then, the State Council has increased the loan to $20 billion dollars. It will be used to support infrastructure projects in lac, including energy, roads, communications, ports, logistics, electric- ity, mining, and agriculture.
The project development, loan application and loan approval process are consistent with the China-Caribbean Infrastructure Special Loans (see below). One example of the use of this loan can be found in the reparation project of the Belgrano freight railway in Argentina. In July 2014, during Xi’s visit to Argentina, the cdb took the opportunity to sign a loan agreement with the Ministry of Finance in Argentina. The total contract value of this project was
$2.47 billion dollars. The project, overseen by contractors China Machinery Engineering Corporation (cmec) is divided evenly into supplies and civil engineering. It of particular note because the supplies provided include the procurement of rail materials, rail track, track materials, vehicles, large construction machinery and vehicle accessories, brought specifically from China. The civil works section of the project includes 1500km of railway track renovation and 300km of track improvement. It is currently the largest railway reparation project under construction in lac and the amount invested equals the cost of repairing 10% of the total mileage of the Argentine railway (cmec 2016).
China-Latin America Productive Capacity Cooperation Fund In May 2015, at the China-Brazil Business Summit, Premier Li Keqiang announced the establishment of a China-Latin America Productive Capacity Cooperation Fund (中拉产能合作基金) of $ billion dollars. This fund would be used to finance multi-
bilateral cooperation in the improvement of production capacity and manufacturing equipment. The China-Latin America Produc- tion Cooperation Investment Fund Co., Ltd. was incorporated in Beijing and on June 16, 2015, it officially started operations. The Fund was initiated by the People’s Bank of China, the State Ad- ministration of Foreign Exchange (safe) and the cdb, and was jointly funded by safe and the cdb. The medium to long-term development investment fund, established in accordance with the Company Law of the People’s Republic of China, consists of a first phase of $10 billion dollars, in which the foreign reserve has also invested $6.5 billion dollars. The use of the fund is concentrated in the fields of manufacturing, high technology, agriculture, energy and mining, infrastructure and financial cooperation in Latin America.
The Ilya and Jubia hydroelectric power stations are two con- nected cascade hydropower stations in the Paraná River basin at the junction of São Paulo State and South Mato Grosso State in Brazil, with a total installed capacity of 4,995 million kilowatts.
The Brazilian hydropower project generally adopts a 30-year fran- chise model in which the government selects the power company for operation and maintenance through competitive procedures and then returns it to the government at the end of the 30-year period. In October 2015, the Brazilian government issued a tender notice and just 42 days later, the Three Gorges Group successfully raised the $3.7 billion dollars needed for their bid through a loan from the newly established China-Latin America Production Ca- pacity Cooperation Fund. In addition to its own technical experi- ence, the support of the Fund has also played an important role in the success of mergers and acquisitions (m&a) (sina 2016).
China-Brazil Productive Capacity Expansion Cooperation Fund
In June 2015, Vice Premier Wang Yang announced the launch of a China-Brazil Productive Capacity Expansion Cooperation Fund in Brazil (中国巴西扩大产能合作基金). The fund will stand at
$20 billion dollars, and China will invest $15 billion dollars to sup- port the production capacity of cooperation projects. In October 2016, the China-Latin America Fund and its Brazilian counter- part formally signed a memorandum of understanding regarding the fund. On May 30, 2017, the fund, which is overseen by the China-Latin America Fund, started operations.
Sovereign Loans
In addition to the aforementioned exclusive funds established for lac, the cdb also offers various financing products for countries in the region, including sovereign loans. In this case, the bor- rower is usually the central government of a sovereign state or the central bank of this state and is therefore concerned with pro- moting the socioeconomic development of the borrower country (financing the infrastructure, livelihood housing, hydropower, communication, agricultural development, education and health, transportation, energy, etc.). For example, the cdb and the Min- istry of Finance of Ecuador have launched four phases of a total of $7 billion dollars in sovereign financing cooperation to support economic and social development in Ecuador, and the Ecuadorian government has arranged financial repayments through the state’s budgetary procedures (China-celac Forum 2016).
Corporate Financing
In corporate financing, borrowers are usually powerful state-owned or private companies that finance corporate capital expenditures and daily working capital needs. For example, the Development Bank and Petrobras of Brazil have carried out three large-scale financing cooperation projects, mainly concerned with Brazilian development strategy and partly for the procurement of Chinese equipment and services, which total $18 billion dollars.
In 2008, as a result of the international financial crisis, oil prices fell sharply, and Petrobras urgently needed large sums of money to support business development. In 2009, the cdb provided $10 billion dollars to finance to its investment in oil exploration, min- ing and refining, and to promote the expansion of cooperation between Brazil and China’s oil and gas companies. The cdb’s fi- nancing effectively eased the tension on Petrobras’ chain of capital and promoted the continued healthy development of the com- pany’s business. Between 2010 to 2019, the Brazilian company has exported 200,000 barrels of crude oil to China daily. At the same time, it has stimulated the export of equipment such as shipbuild- ing and deep-sea drilling platforms in China, as well as the export of service contracts such as engineering contracting.
M&A Loans
The cdb can provide financing to merger and acquisition (m&a) companies that may be used to pay for m&a transaction prices and fees. For example, in 2014, the cdb led a consortium (includ- ing the Industrial and Commercial Bank of China and the Bank of China) that financed nearly $7 billion dollars to support the China Minmetals Group to take the lead in implementing the acquisition of the Las Bambas copper mine in Peru, the largest ever mining acquisition made overseas (Sohu 2015).
Project Financing
Such financing is often used for the development of large infrastruc- ture projects such as power generation, roads and airports, as well as exploration of energy and other natural resources. A specific project will be used as the financing object, and the source of repayment funds comes from the future income of the project’s operations;
the assets and income rights related to the project are understood
to be collateral of the El Dorado International Airport in Bogota, Colombia.
In order to meet the growing demand for passenger and cargo transportation, in 2009, opain, the international airport franchise company, entrusted the cdb and the Inter-American Develop- ment Bank to jointly lead a syndicated loan to support the airport expansion project. The total investment of the project was $1.16 billion dollars, and the financing demand $400 million dollars.
The cdb, the idb and the caf jointly supported the expansion project with a loan of $175 million dollars and the airport agreed to a source of repayment via its operating income. After the comple- tion of the project, it is estimated that passenger numbers in El Dorado International Airport will increase by 45% in 2027 and cargo transportation volume will increase 47%. The project is the first offshore airport project financed by the cdb and the first syndicated loan cooperation generated between the cdb, the idb and the caf (Hebei Business 2018).
Export Credit
When borrowers seek to finance the export of large domestic ma- chinery, full sets of equipment, large-scale engineering projects and other products for overseas importers (via buyer credit) or domestic exporters (via seller credit), generally insurance pro- vided by China Export-Credit Insurance Corporation (Sino Sure), is required. For example, in 2012, the Development Bank provid- ed Venezuela’s national oil company with $500 million dollars in buyer credit for its purchase of petroleum equipment from China.
Bank Credit and Loan Transfer Credit
In cases of bank credit and loan transfer credit, borrowers tend to be strong banks, and they are therefore used as a loan-to-loan sup- port mechanism to assume responsibility for ultimate repayment
obligations or to supplement their own working capital. The De- velopment Bank aims to establish strategic partnerships with key local banks in key partner countries. For example, in 2007, the Development Bank provided a $750 million dollar loan to the Bra- zilian National Development Bank in order to support the 954km Brazilian Kasene gas pipeline project of the Sinopec International Engineering Company.
In addition, in April 22nd, 2019, the China Development Bank took the lead in setting up a development financial cooperation mechanism between China and lac. This is the first multilat- eral financial cooperation mechanism established between China and Latin America. Among the founding members are the Latin American Foreign Trade Bank, the Argentine Investment and For- eign Trade Bank, the Ecuadorian National Development Bank, the National Foreign Trade Bank of Mexico, the Peruvian De- velopment Finance Corporation, the National Bank of Panama, and the National Development Finance Corporation of Colombia.
The mechanism aims to further strengthen links between various institutions, to give play to their respective advantages, to deepen cooperative working processes, and to promote a higher and closer level of China-Latin America financial cooperation.
Financing from the Export-Import Bank of China
The Export-Import Bank of China is a state-owned policy bank, under the direct leadership of the State Council, which supports China’s foreign economic and trade investment, and international economic cooperation.
China-Latin America Cooperation Fund
In July 2014, President Xi Jinping officially announced the launch of the China-Latin America Cooperation Fund (中拉合作基金) during his visit to Brazil and promised to contribute $5 billion
dollars to it. In April 2015, the State Council took the decision to in- crease the financing to $10 billion dollars. The fund was specifically built by the Export-Import Bank of China and officially started operations in January 2016. Presented by the Chinese govern- ment, it is a private equity investment fund that specifically targets the lac and is both “government-led [and] market-oriented”
(clac fund 2019). The fund will invest in Latin America’s energy resources, infrastructure construction, agriculture, manufactur- ing, technological innovation, information technology, capacity cooperation and other fields through the use of equity and credi- tor’s rights.
The China-Latin America Cooperation Fund was initiated by the Chinese government, and it invested $5 billion dollars at its launch. The fund consists of two parts: the first, is China’s co- financing fund for lac into which the Chinese invested $2 bil- lion dollars and entrusted to the idb the provision of financing support for projects in the fields of education, water and energy in the region. The second, is the “Equity Investment Fund” and in this China participated with an investment of $3 billion dollars, which was implemented by the Exim Bank of China. The “Equity Investment Fund” is mainly invested in six areas: energy resources, infrastructure construction, agriculture, manufacturing, techno- logical innovation, and information technology (China-celac Forum 2019).
Foreign Aid Concessional Loans and Preferential Export Buyer’s Credit
China’s foreign aid concessional loans and preferential export buyer’s credit are preferential financial arrangements granted by the Chinese government to the governments of developing coun- tries. The Exim Bank of China is the sole contractor of the “two preferential” loan businesses designated by the Chinese govern- ment. The borrowers of the “two preferential” loans are generally sovereign institutions of the borrowing country. In some cases,