Illustration by Shari Avendaño
Since the turn of the century, close to a hundred Chinese businesses have been set up in all but two of Venezuela’s 23 states. Yet this unprecedented inflow of Chinese capital has not translated into impactful projects. Financed by the two multi-billion dollar bilateral funds set up by presidents Hugo Chávez and Nicolás Maduro with China between 2008 and 2015, at least a quarter are still in an early or planning stage. Since then, issues surrounding the non-payment of loans have caused Sino-Venezuelan relations to cool considerably. Now, researchers from the Kiel Institute for the World Economy warn that at least half of China’s lending in recent years can be considered ‘hidden’. There are concerns that now, and in years to come, the opacity of China’s credit mechanisms could jeopardize crisis recovery in heavily indebted countries such as Venezuela.
54% opaque and no tangible results – the largest investment program in the world
Seventy-eight billion dollars. In just 11 digits, this striking figure summarizes the extent of the relationship between China and Venezuela from 1999 to 2015.
Numerous academic studies have shown that no other country comes close when looking at the size of China’s economic relationship with Venezuela.
At the beginning of the 21st Century, Venezuela’s great energy potential and the promise of oil paved the way for a multi-billion dollar loan portfolio channeled through two bilateral funds set up between 2007 and 2015. Infrastructure projects, donations and direct investment arrived from China under a framework of almost 500 agreements signed by the governments of Chávez, Maduro, and Chinese premiers Jiang Zemin, Hu Jintao, and Xi Jinping. This created an economic trap for Venezuela. It led to a massive debt burden that committed the country’s finances without delivering concrete results, high-quality products, or positive agreements.
Under the agreements, a whole series of Chinese companies arriving in Venezuela have provided nothing more than a combination of overpricing, inefficiency, and even legal disputes between both governments.
And yet before the breakdown of these bilateral agreements, businesses were queuing up to enter the market.
The list of companies involved in economic activities in Venezuela in 1999 is extensive. Transparencia Venezuela, part of the anti-corruption watchdog Transparency International, estimates that at least 92 China-backed companies are linked to the many agreements signed by both countries since Chávez’ rise to power that year.
The reach is impressive, too. The same companies can be found in 21 of Venezuela’s 23 states, in addition to the Capital District, a separate jurisdiction.
Their character and structure vary. It is important to note that the ownership of 50—or 54%—of the 92 businesses is unknown.
By cross-referencing public statements made by both countries and the disclosure of information related to their works, it became clear that only 13 of the 50 companies classed as having opaque or undocumented ownership structures could be confirmed as active in any specific Venezuelan state.
In 2017, the Venezuelan government restricted the amount of data available on its National Registry of Contractors, where information on all companies doing business with the state is supposed to be accessible. This decision affected the transparency of Venezuela’s governance, and in this particular case, made it especially difficult to trace Chinese businesses through key indicators including their articles of incorporation, lists of works, domestic contracts and services, and implementation rates.
Out of the parade of Chinese companies, the state-owned China National Petroleum Corporation (CNPC), an expert in hydrocarbon, oil and gas related activities, sticks out. In close to 500 commercial agreements between China and Venezuela, it is responsible for at least 13 projects.
CNPC subsidiary PetroChina, a state-owned industry leader in diesel, gasoline, fuel oil, kerosene, and other petroleum derivatives, is in charge of eight projects in Venezuela.
Making headlines in September 2019, CNPC announced the cessation of all exploration work at its ultra-heavy crude processing plants in the Orinoco Belt, an area considered to hold the largest deposits of heavy crude in the world. It was estimated at the time that the project represented an output of some 105 thousand barrel per day.
The decision appeared to be a result of the withdrawal of contractor China Huanqiu Contracting and Engineering Corp (HQC) from operations in the Orinoco Belt due to alleged non-payments, independent press releases noted at the time. Among the news items concerning Chinese capital projects closing in Venezuela due to delays in honoring commitments, it was perhaps the most sensational.
The decision was widely interpreted by energy sector analysts familiar with the region as one of the first casualties of the economic sanctions imposed by the United States on the Maduro administration.
Three weeks earlier, CNPC had declined to ship five million barrels of Venezuelan crude, presumably out of fear of facing sanctions or other penalties from the US.
Maduro’s efforts to put a positive spin on Venezuela’s failing oil business were widely covered by the international press. These included income tax relief for any Chinese companies that continued to work in the country, in addition to the suspension of production royalties.
HQC’s business activities were carried out by Sinonvensa, a joint venture backed by Chinese and Venezuelan capital that had accumulated at least $7bn in funds from both countries.
According to research carried out by Transparencia Venezuela, Sinonvensa was the fifth such joint venture to be created by PDVSA and CNPC and had been announced in the state-owned newspaper Gaceta Oficial #38.860 on February 29, 2008.
The China-Latin America Finance Database, run by Washington think tank Inter-American Dialogue, includes a $4.02bn loan in 2013 directed at increasing ultra-heavy crude production from 105 thousand to 330 thousand barrels per day in the Orinoco Belt, as well as other related infrastructure improvements.
It also lists a $2.2bn loan from 2016 destined for a variety of joint ventures—including Sinovensa—to increase production from 160 thousand to 360 thousand bpd by means of a cyclic steam injection pilot project, and increased crude storage, transportation and processing capacity.
Transparencia Venezuela, however, reported management failures by Sinovensa. “Subsequent government announcements and press releases indicate that Sinovensa’s production expansion projects never took place. In fact, there was a drop in production in 2018. In 2019, the company announced a rise in production to 165 thousand bpd, well short of the targets announced in 2013 and 2016. Sinovensa’s production has remained between 105 and 130 thousand bpd since 2013”, it reports.
In 2020, Sinovensa continues to produce oil, although it exists essentially to pay off Venezuelan debt. Further losses to the Venezuelan state include the sale of 9% of its shares in Sinovensa.
Other firms that appear regularly in Sino-Venezuelan agreements made since 1999 include Huawei, with 16 agreements in the telecommunications sector; Sinopec, with 10 projects in hydrocarbon sector; Citic Construction, with 11 agreements in housing construction; and Haier Group, with 5 agreements covering the home appliances industry.
Also worthy of mention are the telecommunications agreements reached between Caracas and Beijing. Huawei is notorious here, not least because Maduro had referred to the company as the “principal driver” of new projects in Venezuela as recently as June last year.
With China’s help, 5G technology would arrive in Venezuela, Maduro declared, and more explicitly with Huawei.
“Huawei is staying in Venezuela”, Maduro claimed a month earlier when announcing new telecommunications investments by Huawei and other Chinese and Russian companies to “upgrade” telephone and internet infrastructure and services in Venezuela. Since then, there have been no further public announcements either in China or Venezuela about the project.
A July 2020 report from the US Senate Committee on Foreign Relations headed by senator Bob Menendez accused at least two Chinese firms of helping the Maduro government deploy telecommunications hardware and services to control the population.
Venezuela is using internet and mobile network equipment, smart monitoring systems and facial recognition technology, all developed and installed by Chinese companies, said the US Senate report, citing state-owned media network Voice of America.
The legislative report also refers to ZTE, a Chinese telecommunications company that has featured in Venezuela’s bilateral agreements with China since 1999. It is credited with helping the Maduro regime to create the “Homeland Card”, a type of identification document that offers access to subsidized services and other benefits. The card, however, has been criticized by political science experts as a method of social control.
ZTE has helped the Maduro government to build “six emergency response centers in major cities, and centralize government video surveillance”, states the US Senate document.
Not only China has been ready to penetrate smaller markets. Its companies have simply been far more competitive that their Western counterparts, the report says.
Recently, Washington has placed pressure on its allies not to use equipment from telecommunications giant Huawei in 5G networks.
China’s relationships with Latin American countries represents a desire to “establish, expand, internationalize, and institutionalize a model for digital governance that this report describes as “digital authoritarianism”, the US Senate paper concludes.
Research carried out by the Venezuelan Parliament, in addition to comprehensive reports by national and international news agencies such as Reuters and Armandoinfo, a Venezuelan independent journalist network, has revealed cases of corruption, bribery and shortcomings by state-owned businesses involved in the bilateral agreements.
CAMC Engineering (CAMCE), the Chinese firm involved in at least 13 Sino-Venezuelan agreements in water, electricity, industry, agriculture, and communications projects, has featured heavily in many of these investigations.
A subsidiary of the China National Machinery Industry Corporation, also known as Sinomach, CAMCE began operations in Venezuela in 2001. Signed by the Venezuelan Ministry of the Environment and Natural Resources (now known at the Ministry for Ecosocialism), its first contract, valued at $100m, appeared two years later for the construction of an aqueduct in the oil-rich Falcón State.
Non-compliance with specifications, irregularities, and budget overruns in the aqueduct project, were among the observations made in 2007 by Venezuela’s Comptroller General, according to information published by Armandoinfo. Yet this kind of attention did little to slow down its questionable activities in Venezuela. It is estimated to have managed $3bn in designated funds across different areas thanks to agreements signed under Chávez and Maduro.
The company, it reports, forms part of a group of discredited entities that have been sanctioned by the World Bank for fraudulent and corrupt practices.
Billion-dollar project tenders in Ecuador and Bolivia have earned it further corruption scandals. According to Ecuador’s Works Contracting Service, CAMCE won tenders for 17 public projects totaling $745m. The Ecuadorian government demanded the return of $22.6m for the construction of a government platform, and in 2019 accused it of having charged for the construction of 12 regional medical centers, when it only delivered seven.
In its 2015 annual report, the Venezuelan Ministry of Energy refers to CAMCE in its coverage of a delayed electrical project.
Works related to the 570 megawatt-capacity Don Luis Zambrano Thermoelectric Plant in Mérida State barely advanced 12 percent, the Ministry reported. The total amount of the project had increased to approximately $827m, yet the equivalent of only around $182m of work had been carried out.
A special commission set up by Venezuela’s National Assembly, its legislative arm, to investigate the 2016 energy crisis found that projects valued at $26bn in the sector had been misappropriated. In response, it summoned all private contractors that had been linked to works in the sector since 2000 to testify. CAMCE’s Julio Peng Wei went to parliament on May 4, 2016 to share details of the work carried out at the Don Luis Zambrano plant.
The overall project cost had overrun to $1bn, the special commission’s final report revealed in 2017. It identified a 60% mark up in the cost of works carried out, equivalent to $317m.
Corpoelec, the state electricity company run by Maduro officials, barred CAMCE in 2017 from obtaining further government contracts due to the submission of false documentation in a tender for an electricity transmission and distribution expansion project in Los Valles del Tuy, in Miranda State, an important economic center.
Among the commission’s other findings, China Machinery Engineering Corporation (CMEC) had overcharged by 125% or $1.4bn for a project financed by Chinese loans for the refurbishment, improvement and expansion of the strategically important Planta Centro thermoelectric facility in Carabobo State. Two electricity projects run by Sinohydro, one of the largest government-owned firms in China, indicated that the Venezuelan government had been overcharged by $900m.
Sinohydro and CAMCE were involved in an Andorran lawsuit concerning bribes of $1m to a dozen Venezuelan nationals in a bid to obtain lucrative contracts for the Termocarabobo thermoelectric plant—also known as “El Palito”—in addition to the La Cabrera substation located in the center of the country, according to a news report published by Reuters.
Construction contracts for four Venezuelan thermoelectric plants had been secured by Sinohydro, the report stated, although according to engineers familiar with the projects, “none of the works fulfilled the specifications of the contracts”.
In response, an announcement by China’s foreign ministry stated that “the reports about alleged bribery by Chinese companies in Venezuela have obviously distorted and exaggerated the facts. There is a hidden agenda here.”
One of such cases is that of Chinese commercial vehicle manufacturer Yutong. Yutong’s name appears in four agreements from 2011, 2013, 2014 and 2015 for public transport improvements across the country.
Yutong’s projects in Venezuela are marred by inefficiency and overpricing. “An estimated total of 7,016 units, made up of 4,716 complete armed transport units, and 2,300 unassembled units were imported”, lists the report by Transparencia Venezuela. It also notes that only 1,600 units have been assembled at Yutong’s Venezuela factory, making the estimate for completed units around 6,316. Yet in a televised interview on March 21, 2019, the president of Yutong in Venezuela, Carlos Osorio, stated that there were “1,600 Yutong transport units in operation throughout the country, and that the government had ordered the repair of 2,000 units by the end of this year”. This meant that roughly 23 percent of the transport units contracted to Yutong Hong Kong were operational in Venezuela in 2019.
Quoting Yutong’s media relations department, Transparencia Venezuela found that each of the two thousand units purchased by Venezuela held a value of $17,000. The watchdog writes that this price was “fairly high”.
“There was a precedent set by Yutong activities in the Philippines in 2014, where 140 units were acquired at a price of $70,000 each. And in 2016, Yutong’s 7.7-meter V7 Urbano and 8.3-meter V7 Full models entered the Chilean market with a sale price of $42,500 and $48,000 respectively”, the investigation states.
As projects fail, the revolving door starts to turn
The arrival of Chinese businesses into the country from 1999 was a ‘free flow’, indicates Transparencia’s Christi Rangel, with few, if any, opportunities for domestic firms to participate in the many bilateral agreements.
The agreements favored powerful groups linked to the Sino-Venezuelan High-Level Joint Committee. “It was a patronage cost that benefitted the military, thanks to its role in consolidating the executive power of both Chávez and Maduro”, she believes.
The creation of these agreements and the ensuing results, in the case of the joint ventures or the arrival of Chinese businesses in Venezuela, generated a double ‘revolving door’. At first, it meant doing business in the country over a number of years, then dissolving or return home. Broadly speaking, this served to improve China’s credibility, representing the tip of the iceberg of its economic presence in Latin America and the Caribbean.
“Chinese companies arrived in Venezuela, yet the results have been far from positive. Many of the companies have subsequently closed, or no longer exist, or are no longer based in the country. Those that remain have minimal, if any, business activities”, underlined Rangel in her findings.
By way of example, Transparencia’s report includes 15 failed projects linked to joint companies or those that had been funded by Chinese lending.
These cover a range of projects in the water, electricity, transportation, hydrocarbons, housing, and manufacturing sectors that failed to achieve their intended objectives. The amount invested by the Government of Venezuela for these projects amounts to $19.6bn, largely financed by Chinese credit.
“The failure of these projects has been explained by the ‘gaps’ or ‘loopholes’ in governance observed by Transparencia. The risks of abuse of power in the management of public funds runs high if there are no controls, counterweights, or rule of law, and they are worsened by a culture of secrecy”, the report indicates.
Over the last decade, the case of Haier home appliances stands out. Ten years after an initial $800m investment, the status is still ‘in progress’. It was declared completed by Haier, the group responsible for its execution in Miranda State. Yet Transparencia believes that the funds have “only served as a deposit”, as no electrical appliance has been assembled to date.
Another noteworthy example is the PDVSA-run $2.90bn Battala refinery located in the Santa Inés industrial complex, Barinas State. The project remains ‘in progress’, despite having begun in 2010. Chinese company Wison Engineering and Korean firm Hyundai Engineering & Construction are responsible for the work, yet only an electricity plant that would serve the new refinery has been constructed.
Transparencia also refers to a $200m round of funding for a PDVSA Agrícola rice processing facility in Delta Amacuro State, although its status has also been ‘in progress’, since 2010. CAMCE is linked to this project, too. The plant was never completed, and related works were not carried out. Its food production is close to zero.
The list includes the Luis Zambrano facility, a $956m investment where CAMCE also appears as responsible. Although the 2011 project seems to be completed, Venezuela’s National Assembly estimates a markup in the real cost of the project of $371m.
Looking at other projects from 2011, the thermoelectric plant José Félix Ribas also sticks out. Following a $604m investment, Sinohydro won the tender in Aragua State, although the National Assembly estimated afterwards that the project was overpriced by $359m.
Another clear example of overpricing is the $1.12bn Termocarabobo plant which was completed in 2012. Sinohydro charged $572m over the real cost.
Planta Centro, a thermoelectric facility in Carabobo State is yet another example. After an initial $1.47bn investment, its status has remained ‘in progress’ since 2013. The Venezuelan parliament estimates overcharging of $805m, in addition to operating levels well below capacity. The firm behind this project is CMEC. The findings in Andorra point to a $55m payment that secured the contract.
A $417m Yutong Venezuela bus factory in Yaracuy State has remained ‘in progress’ since June 2014. The facility should have completed by Zhengzhou Yutong Bus Company in 2016, yet it remains under construction, and is another example of lower-than-expected production output.
The so-called “Carbozulia Revival” enterprise in Zulia State was a joint effort between Venezuela’s Ministry of Ecological Mining Development, CAMCE and state-owned coal miner Yang Kuang Group that came at a cost of $400m. It was completed in 2017, but the rights to unregulated coal mining was handed over to the detriment of the national company. Production fell, and project responsibility was passed on to another company.
A separate investigation by Reuters found that out of the 790 public investment projects funded by the joint FCCV and FGVLP funding mechanisms between 2008 and 2015, as many as 205 are “ongoing”, and 90 are in an “early stage”.
This means that at least 25 percent of projects that have Chinese funding did not fulfil their objectives. Both governments state that 495 of these projects have been completed, yet it is clear that this does not guarantee their integrity, effectiveness, or transparency.
Most projects undertaken are in the construction industry (217), followed by basic and intermediate industries (146), agriculture (96), telecommunications (34), social and communal economy (31), and tourism (21).
Among the conclusions of its research, Transparencia warns that the political and institutional environment, in addition to the exchange rules of the relationship, “permit the identification of gaps or loopholes in governance that limit the proper monitoring and formal citizen control of the arrival of funds and their use. These resources had a detrimental effect on Venezuela’s democratic institutionality, fiscal sustainability and economic performance”.
Venezuela was a de facto revolving door for Chinese companies in the region, suggests Luis Angarita, of Universidad Central de Venezuela (UCV). “They took advantage of the political and financial situation. It was a major plus that Chávez was there; more accessible, less bureaucratic. And, of course, there were all the economic opportunities brought about by the oil bonanza”, he comments.
2008-10 was an important period for the injection of Chinese funds into Latin America and the Caribbean. This was largely due to the economic and financial crisis in the West triggered by the US housing bubble, and the relative safety found by financial markets in creditor countries such as Russia and China.
Among those to believe that oil was the key that helped China unlock the door to Venezuela is political scientist Carlos Piña. Yet just as keys can open doors, then can close them, too. The door opened to China during the boom years, but as they left, there was economic collapse.
The last known transaction of Chinese funds was carried out in April 2015. It took the form of a $5bn Tranche B (III) loan held under the FCCV.
No further loans between China and Venezuela have come to light since 2016. In its register of Chinese lending in LAC, the Inter-American Dialogue records a final loan to Venezuela in November 2016 for $2.2bn destined for oil-related development projects. According to the Washington think-tank, the disbursement was made by China Development Bank.
Borrowing hit a peak in 2010 at $21.4bn. There was a second spike in 2013 at $10.1bn, but levels moderated between 2014 ($4bn) and 2016, until no new loans were announced.
“The pace of lending began to slacken. The economic relationship cooled off when both oil prices and production fell. A single country received ten percent of China’s global lending over a 17-year period. I remain convinced that Venezuela was the gateway for China into Latin America”, says Piña.
In terms of lending, economic relations between China and Venezuela lost all momentum between 2017 and 2020. Yet China was far from losing interest in the region.
China lent over $6.2bn to LAC in 2017, according to data gathered by the Inter-American Dialogue. The lion’s share went to Brazil, at $5.3bn, with further loans of $481m to Argentina, $326m to Jamaica, $60m to Cuba, and $45m to Guyana.
A further $2.1bn in Chinese lending entered the region the following year, with $1.1bn to Argentina and $969m to Ecuador.
At $1.1bn, 2019 saw China’s loans to the region shrink to their lowest levels since 2008. The Dominican Republic received $600m, Argentina $236m, Suriname $200m, and Trinidad and Tobago $104m.
Between 2010 and 2013, Venezuela received the highest level of Chinese lending in the region. In absolute terms, the total was double that borrowed by Brazil, the second highest borrower, since 2005 ($28.9bn), and triple the third largest debtor, Ecuador, at $18.4bn.
The chill before the fall
There are many reasons why bilateral relationships cool off, and it is rarely to do with the relationship per se, rather each country involved in the agreements.
A collapse in oil prices is one reason. At the time of the first disbursement of Chinese funds in November 2007, the oil price was $88.84 per barrel. When the final loan was agreed In April 2015, this had dropped to $57.06. Now, in September 2020, it was $37.58.
During the Chávez and Maduro governments, Venezuela experienced two oil price booms. This coincided with China’s peak lending period from 2007-15. The first, from 2004-08, represented gains of $290.97bn for Venezuela. The second, from 2011-14, represented a $339.03bn gain, according to data compiled and analyzed by the economist Jesús Casique.
The second reason, more importantly, was the breakdown of Venezuela’s oil production capacity. Casique reflects on how the gradual collapse of national oil production impacted the source of 97% of Venezuela’s gross domestic product (GDP). In December 1998, the country produced over 3.3 million barrels of oil per day. By November 2019, this had dropped to 912 thousand, according to data released by PDVSA to the Organization of the Petroleum Exporting Countries (OPEC).
The ‘free fall’ in oil production over a 21-year period accounts for a drop of over 2.6 million barrels, according to OPEC’s secondary sources cited by Casique.
Venezuela may have lost $55.93bn in revenue as a result of the oil price slump, estimates Casique.
It was not only oil but the economy as a whole that suffered during this period. According to International Monetary Fund data, Venezuela experienced a 70.1 percent drop in GDP between 2013 and 2019, something that no other country in the region has witnessed. This drop was recorded before Washington imposed sanctions on the Maduro administration early 2019.
Venezuela has been going through a phase of continuous economic depression since 2013, says Casique, when Maduro assumed executive power. Inflation, including in its superlative phase, deteriorated the country’s purchasing power and its ability to acquire products of Chinese origin, which had been the objective of the joint agreements.
The inflation rate between March 2013, a month before Maduro took over the presidency, and August 2020 was over 12.32 billion percent, according to data compiled by Casique.
“Companies such as Orinoquia, Vetelca, Haier, and Yutong all took off quickly”, says Piña. “China gradually took over different sectors of the market, but when consumption dropped and the Venezuelan economy ground to a halt, most of these investments lost momentum. Most of the companies that were set up are now closed. The impetus of direct investment was lost. Direct investments into factories were lost – nobody is going to buy cars, telephones, or buses,” he argues.
The drying up of Chinese financing is not exclusive to Venezuela, Piña explains. “It has happened in other countries too. China has already moderated its economic growth. It no longer grows at over 10 percent per year, producing less money as a result. Second, China has other plans, such as the Belt and Road Initiative. They are injecting large amounts of money into this infrastructure strategy, largely focused on Central Asia and Europe”.
Also known as the New Silk Road, the Belt and Road Initiative has been promoted since 2013 by China as a strategy that will form maritime and rail links between China and Europe, involving the whole of Eurasia.
Since January 2019, political instability has put a damper on this initiative. On January 23, 2019, then president of Venezuela’s parliament, Juan Guaidó, assumed the interim presidency of Venezuela. The Venezuelan constitution states that, in case of a power vacuum—this time generated due to the fraudulent elections of 2018—the head of parliament is to assume the presidency until new elections are held. Maduro’s presidency was hence officially declared as illegitimate by the Venezuelan parliament after January 10, 2019, when his mandate officially ended.
The General Secretary of the Organization of the Americas, Luis Almagro, and more than 60 countries have recognized Guaidó over Maduro, the main sponsor of Sino-Venezuelan agreements, as Venezuela’s legitimate president.
A change in the tone and vigor of Caracas’ ties with Beijing can be attributed in part to the death of Chávez in 2013. Simply put, China’s relationship with Maduro has not been the same.
Issues surrounding debt repayments, whether by oil or by other mechanisms, have certainly discouraged China, authors and academics of the Sino-Venezuelan relationship agree.
“The Chinese authorities are frustrated by an atmosphere of uncertainty in Venezuela, and a general lack of compliance with joint agreements. Since the 2017 default, China has little recourse but to wait and see what happens next”, Angarita says.
For Piña, it boils down to one simple equation. No payments, no loans. Although another, starker, thesis could fit this summary well. No profit, no relationship.
The extent of the deterioration of the Sino-Venezuelan joint venture model was laid bare in August 2020. Press reports at the time indicated that CV Shipping Pte Ltd, jointly owned by PetroChina and PDVSA since 2008, had collapsed amid litigation.
PetroChina took control of the three CV Shipping-owned ultra large crude carriers (ULCCs) Junín, Boyacá and Carabobo between January and February 2020, after placing the company in bankruptcy.
It did so by filing a lawsuit in Singapore, where the company was headquartered. Economic sanctions imposed by the United States against PDVSA had left the vessels without insurance, causing millions in losses to the joint venture.
US glass manufacturer O-I Glass Inc is seeking to acquire Venezuelan VLCC Ayacucho in a Singapore court as part of a $500m arbitration award after the expropriation of two of its plants in Venezuela in 2010.
Reflecting the tense and bitter state of the relationship, documents leaked during the PetroChina lawsuit shed further light on the current condition of the Sino-Venezuelan partnership.
In a letter to PDVSA executives dated September 17, 2019, PetroChina executive Xia Hongwei offered a glimpse of just how far the relationship had deteriorated. “The fundamental purpose of this joint venture has already been irretrievably broken”, he said.
Venezuela has become a ‘red mark’ in China’s Latin America portfolio due to a disastrous set of results, says Félix Arellano, a political scientist and expert in international relations.
“Venezuela’s administrative chaos means everything tends to be overly complicated, entangled, and miscalculated. The parting of ways began with Xi Jinping in 2013, when he decided China would no longer invest in ‘lost causes’, setting his country’s sights for Russia, India and Iran instead. Presently, it is convenient for him to stand by Venezuela, but with caution, as the fundamental signal that China wants to transmit to the US is that it wants to put things in order with Venezuela”, he says.
The more China deepened its understanding of the Venezuelan reality, and how it was being aggravated by the internal crisis, the more it understood that the dream of access to vast oil reserves was not going to be profitable, considers Arellano.
Another reason behind the special relationship’s slow-down was the quality of its products and projects, says Arellano.
“China concentrated on advanced technology, and high value-added products such as 5G models”, he says. Arellano believes that the agreements that took place between 2007 and 2015 never reached this kind of level.
China is no longer a lifeline for Venezuela. It no longer serves as a supplier of goods and economic support to help lay political foundations, he believes.
Thousands of executives and other workers from China simply came across very real obstacles in Venezuela, such as the collapse of public services.
“These sums were given to Venezuela because of oil, and because of China’s deep pockets. At the time, nobody ever imagined that the resources would be squandered like this. The Chinese must have been affected by all the disorder in the country. Imagine setting up a company, and the moment you arrive on foreign soil a major crisis erupts. There was administrative chaos. And there was corruption on a vast scale. This destroyed the state-owned companies, and the Chinese were slow to appreciate fully the extent of the disaster”.
Now, China is relying on diplomacy to enforce its economic rights in Venezuela. Diplomatic channels allow Chinese officials to get closer and work out solutions to these obstacles, and above all guarantee some returns for Chinese companies”, Angarita believes.
Transparencia Venezuela measures both sides of the Sino-Venezuelan partnership. Among the gains made by China, the watchdog points to the establishment of at least 92 companies and other entities across various economic activities, and the accompanying benefit of hiring a majority of Chinese labor for large-scale projects.
Privileged access to Venezuelan oil, coupled with a geostrategic foothold in the Americas, was a major benefit to China. Transparencia calls this China’s ‘revolving door’ to the region. There was, in addition, Venezuela’s guarantee to purchase any products that came out of China’s direct investments.
In terms of losses, the report refers to the redirection of resources from joint projects between 2012 and 2014, where Asian companies committed their own funds. In the event of any losses, the funds were not recoverable, and so the situation affected their assets and caused numerous works to halt.
China’s steep learning curve, in light of its withdrawal of economic ties with Venezuela, has been that of economic pragmatism. The lesson is simple, do business with efficient partners.
While commercial and financial ties between Venezuela and China from 2007 to 2015 are incomparable in terms of the overall amount, this is not reflected in the results. As Maduro so eloquently put it in 2017, “this is not chicken feed”.
China, meanwhile, is pushing ahead with the Belt and Road Initiative, its ambitious foreign policy strategy.
Launched by President Xi in 2013, it has led to at least $461bn of lending to the countries involved. The majority are in Africa, and considered a high credit risk, according to Washington-based intelligence firm RWR Advisory Group. Other sources place the total at around $500bn.
The success of China’s ‘debt diplomacy’ is on hold, thanks to COVID-19. As well as affecting the global economy, the pandemic has undermined the reputation of Xi, and of China, because of their handling of the crisis.
The economic impact of coronavirus has provided countries in Africa, as well as Pakistan, Kyrgyzstan, Sri Lanka, and most probably Venezuela, with compelling arguments to restructure, postpone or even forgo their debt repayments to China.
The G20 forum, which includes China, agreed in April 2020 to allow 73 countries to suspend their debt service payments until the end of the year. Yet the big question is what will happen to China’s loans after the date passes.
A study published in mid-2020 by German think-tank Kiel Institute for the World Economy concluded that 50% of China’s loans to developing economies are not reported to the IMF or World Bank.
The Kiel Institute’s report China’s Overseas Lending, compiled by economists Sebastian Horn, Carmen Reinhart y Christoph Trebesch, established and analyzed a new database of 5,000 Chinese loans made to 152 countries between 1949 and 2017.
Venezuela is a member of the $520bn Chinese loan club, representing the estimated total for all Chinese credit. It features prominently as the most indebted country in the Americas to Asian institutions.
“Compared to China’s lead status in world trade, its role in global finance is poorly understood,” the economists warn.
This flow of Chinese funds has been dubbed ‘hidden lending’ by Horn, Reinhart and Trebesch. Despite the massive scale of lending, the overriding characteristic of China’s capital export is its opacity.
“The data are scarce, and the loan process is not at all transparent. This helps explain why there has been so little research into China’s large-scale overseas investments”, they point out.
Compared to other major economies, almost all of China’s loan and investment portfolio is ‘official’, the Kiel Institute points out. In essence, this means that it is run by the Chinese government through state-owned banks and companies controlled by the Communist Party.
“China does not report its official lending, and there are no comprehensive, standardized data on its credit flows, or its overall reach”. Debt restructuring agreements between China and debtor countries seen as ‘credit events’ are typically ‘off the radar’ of most credit rating agencies, according to research compiled by the Institute.
This ‘hidden lending’ can distort policy oversight, risk pricing, and the analysis of debt sustainability.
Citing unpublished data from the World Bank’s Debtor Reporting System, the Institute found that a ‘significant portion’ of Chinese loans go unreported and that the volume of ‘hidden loans’ has grown to more than $200bn since 2016.
One potential explanation for the reporting gaps, says the Institute, is that China uses a ‘circular’ lending strategy to minimize default risks and the non-payment of its loans.
“For riskier debtors, China-owned banks typically choose not to transfer funds to accounts controlled by the recipient government. Instead, the loans are transferred directly to the Chinese contracting firm responsible for implementing the project overseas. It is a closed circle”, they explain.
In this way, loans stay inside China’s financial system, making it harder for borrowers to misuse funds. “As this type of lending doesn’t actually leave Chinese territory, there is no flow to report, which results in incomplete data”, they mention.
The opacity of China’s ‘hidden loans’ is not universally welcomed by private sector investors and is, according to the authors, an obstacle when it comes to crisis resolution in recipient countries.
These mechanisms witnessed spikes in 2009, and between 2011 and 2015, during the final years of China’s capital injection into Venezuela via the two joint funds that had been set up by 16 High Level Joint Committees.
The bulk of the direct loans were channeled through the China Development Bank and the Exim Bank of China, two large financial institutions controlled by the Chinese state, according to the Institute.
“Details of the size and composition of a country’s debt are crucial to ensuring a fair distribution of burden and orderly crisis management,” the authors add.
In an interview with the BBC, Trebesch admits that China’s rise to power in the financial system of the 21st Century is ‘little understood’, adding that ‘more research’ was urgently needed into the modus operandi of these major capital injections.
The sheer scale of Venezuela’s receipt and discretionary use of Chinese resources is unprecedented in Latin America, and this new information from the Kiel Institute on the world’s largest creditor represents a challenge in terms of transparency and crisis solution.
The opacity and discretion of the agreements signed between Venezuela and China since 1999 resulted in the creation of a potentially fertile field for hidden mechanisms to obtain funds from China. The suspected total could be considerably more than the official figure of $60bn that includes loans, grants, infrastructure projects and direct investment.
The ‘revolving door’, according to findings from the Kiel Institute, made more turns than those publicized by the media or included in any stamped documentation, which in themselves were already opaque at best.
Between 1999 and 2020, and especially during the years of peak flow, the entire Sino-Venezuelan relationship resulted in a convoluted trajectory of shortcuts and secret pathways, the traces of which, for now at least, seem difficult to follow. Even with your eyes wide open.
Translated by Edward Longhurst-Pierce