Leonardo E. Stanley
Introduction
Argentina and the People´s Republic of China’s (prc) bilateral relations date from March 1972, after which the relationship grew steadily. However, the relationship has become increasingly eco- nomically significant since 2003, when Chinese demand created a soybean boom in the Pampas, permitting Argentina to recover from its worst economic crisis. Likewise, the arrival of Chinese investors to Argentina remained limited up until 2003 increasing after that and peaking in 2010. The presence of Chinese engi- neering and construction giants is expanding as Argentina´s infrastructure gap remains significant. Argentina’s special relation- ship with China has gone beyond trade and investment flows, to increased involvement and financial links.
This chapter focuses on China´s financial involvement in Ar- gentina during 2000-2018, though the bulk of investments started to arrive in the aftermath of the global financial crisis. During a visit to Latin America in July 2014, Xi Jinping enunciated the
“blueprint for the future” (commonly referred to as “1+3+6”) which aims to design a ”roadmap for cooperation,” with finance taking a central role. To accomplish the plan, it envisions three dif- ferent channels: funds, credit loans and insurance. As for the case
of Argentina, Chinese bank loans and Beijing financial assistance is now paramount to transform the People’s Bank of China (PBoC) as Argentina’s lender of last resort1.
China has transformed into a global financial powerhouse, hosting the world’s most extensive banking system (in terms of financial assets to gdp). Chinese banks’ cross-border claims, ad- ditionally, now exceed the amount intermediated by traditional financial centers such as Switzerland or Luxembourg (Cerutti and Zhou 2018). China’s leading position in global sovereign markets is undoubtedly shocking, accounting for a quarter of total bank lending to emerging markets in order to become the world’s first official lender (Horn et al. 2019). The bulk of the Chinese finan- cial system remains in state hands and their main entities un- der government (national, regional or local) control (Hernández Cordero 2016). Chinese financial expansion is not unrestrained from critical judgment and examination. An increasing number of scholars are claiming that China profits from its financial power2. For others, Chinese loan facilities have lead recipients to behave irrationally and forget their financial constraints (“Chinese debt trap” hypothesis). It is primarily the lack of transparency that char- acterizes Chinese funding development practices.
This chapter organizes around three main sections, followed by conclusions. The first section evaluates the bilateral swap agree- ments scheme, trying to explain why China has become an enthu- siastic supporter of it. Argentina, a devoted partner, has become a leading example of the benefits generated by such a deal. In the second section, attention turns to Chinese loans, and why Argentina has become a primary beneficiary of them. Finally, we ask whether Chinese financial assistance influences the bilateral relationship and if we can observe a “Chinese debt trap”.
1 The PBoC is the central bank of the People’s Republic of China responsible for carrying out monetary policy and regulation of financial institutions in mainland China.
2 One of the leading exponents is Mike Pompeo, us Secretary of State, who blame for
“the predatory” lending practices and other “malign or nefarious” behavior by Beijing had injected “corrosive capital into the economic bloodstream, giving life to corruption and eroding good governance” (Carvalho 2019). Rex Tillerson, who preceded Pompeo as the secretary, made a similar statement.
China and the Bilateral Swap Agreements
The global financial crisis made authorities in Beijing aware of the costs of relying on the us dollar, pushing to advance with the rmb internationalization. Accordingly, Chinese monetary authorities (PBoC) decided to actively sign a series of bilateral swap agree- ments (BSAs).
The BSAs framework is commonly seen as a way to deliver funds, a short-term response from one sovereign-nation to an- other facing a liquidity crisis. The swap line funding is aimed to replace or complement private funding, with little effect on net banks’ positions, as the line is expected to revert in a short period.
After the line activates (at the request of the borrower), parties interchange currencies (or a third currency is specifically chosen, usually the us dollar). Once reversed, central banks exchange back their currencies at the exchange rate of the initial transaction. The contractual agreement states, on one of the partners at least, for them to be an international currency issuer (Destais 2014).
The Chiang Mai Initiative (cmi), installed in the aftermath of the Asian crisis, represents an outstanding example of this type of financial cooperation, whose swap deals were an anchor in the us dollar. Years later, and following the global crisis, the us Federal Reserve Board would reinvigorate the mechanism, expanding in scope and funds. This crisis also lead to reconfigure the cmi ini- tiative (now becoming Chian Mai Initiative Multilateralization), to increase available funds (up to $120 billion dollars)3, and in- serting a novel institutional structure to coordinate and supervise the line. The global financial crisis has undoubtedly helped to dif- fuse the scheme, observing around 160 swap arrangements around the world (Bahaj and Reis 2015).
3 Members countries later decided to increase funds ($ 240 billion), to raise the imf linked portion to 30 percent of each member’s quota (initially settled in 20%), and, to introduce a new precautionary line (cmim-pl) towards crisis prevention.
Bilaterally in origin, however, swap lines do not necessarily express political relations between states but instead reflect com- mercial relations between national financial systems, endeavour- ing to provide liquidity (Merhling 2015). The scheme involves contractual, not institutional relationships between partners. Con- trary to traditional imf assistance packages, this particular tool does not introduce any kind of surveillance, nor conditions on the economic policies pursued by the beneficiary country (Merhling 2015). Swap lines are not a response to current account imbalances in the way that imf loans operate (Bahaj and Reis 2015).
A different picture might emerge when analyzing China-led
BSAs. The PBoC has already signed more than 100 swaps, with more than 40 different countries that jointly represent ¥1 trillion renminbi available for partners confronting liquidity problems - an amount competing with imf resources (Bahaj and Reis 2018).
One of the innate objectives of the program, however, is to inte- grate the rmb and China’s financial sector with the global financial market. The bilateral scheme has been implemented to smooth offshore rmb market operations; henceforth, leveraging the on- going rmb internationalization process. Independent of whether the line use might follow short-term liquidity reasons to solve the partner’s structural needs, in both situations, the scheme responds to economic reasons. China’s swaps, however, are not necessarily driven purely by economic consideration, but also by political con- cerns which might also come into consideration (Cheung 2016).
The first of the bilateral deals signed by the PBoC were made with the Bank of Korea in December 2008, amounting to ¥200 billion renminbi and having a maturity of 3 years. The agreement was designed as a liquidity channel favoring banks’ operations in domestic currencies (Chinese rmb and South Korean won), instead of delineating to make the liquidity in dollars (McDowell 2019). A second agreement was signed in January 2009, with the Hong Kong Monetary Authority (hkma), as the special island status permits the issuance of an independent monies by local authorities. In Latin America, the PBoC has accorded lines with the central banks of Argentina, Brazil and Chile.
The pre-announced fall of the currency peg, subsequent sov- ereign debt and financial crisis left Argentina as an international financial pariah. An unexpected commodity boom, however, helped to transform authorities’ despair into hope and economic redemption. Even so, the government debt rescheduling proposal did not obtain total bondholder support and Argentina remained isolated from international financial markets. As boom turned to bust, the economy turned suddenly and fell short of funding.
Prevented from market financing, China came to the financial rescue of Cristina Fernández’s government. In March 2009, the
PBoC and the Argentinean central bank (bcra) signed a ¥70 bil- lion renminbi ($11.0 billion dollars) swap agreement (a three-year maturity arrangement, ending in April 2012). The agreement al- lowed the respective countries access to credit (in practice, all coming from China), permitting companies of each of the signa- ture parties to trade in their local currencies instead of us dollars.
Five years later, during July 2014, both countries signed a second swap agreement (again, compromising $11.00 billion dollars)4. Contractual’ financial specificities remained a secret, a practice commonly observed in several financial deals initiated by China (Carciofi 2015; Brenta and Larralde 2018; Horn et al. 2019). A year later a new administration arrived. Shortly after to calm the market the new government initiated a desperate attempt for the increase in international reserves. Mauricio Macri put Alfonso Prat-Gay and Nicolás Caputo5 on a flight to Beijing to renegotiate a reciprocal agreement, which needed to be signed by the 15th of December, 2015. Regrettably, the new stabilization plan had an ideological bias which was unable to deal with all the macroeco- nomic constraints the government was going to face during the transition. Despite the macro inconsistency, international inves- tors were highly enthusiastic with Macri and markets started to finance the transition. As the macro honeymoon waned, a deep currency crisis erupted in mid-2018. The sudden drain of external
4 The bcra neither the pbc asked for the swap renovation, expiring on April 1st, 2012.
5 By the time N. Dujovne reported as Ministry of Finance, and N. Caputo in charge of the under-secretariat office at the Ministry.