China in Venezuela: loans for oil

Despite its frequent anti-american rhetoric (which should not stop with Maduro’s election), Venezuela remains largely financially dependant of the US. It does not brag about this and has been seeking throughout the Chavez years to escape the US sphere of influence. It is quite naturally that the socialist state, since Chavez’s election in 1998, has been turning more and more towards China. Indeed, Chavez visited China 6 times in his 14 year rule in attempts to integrate its alternative world system. The energy-hungry dragon on the other hand has very clear objectives in Venezuela: securing through investment and loans a fair share of the world’s largest recoverable oil reserves.

al jazeera

Chavez on the Great Wall

In the past decade but especially in the past 3 years, bilateral trade has soared more than exponentially from $500 million in 1999 to $7,5 billion in 2009 and over $20 billion in 2012 (PDVSA). China is now Venezuela’s second trading partner after the US  (Venezuelan trade ministry). In 2012, 65% of oil exports went to Venezuela’s traditional oil partner, the US, through its american subsidiary Citgo ; China was in second place with 20%. These numbers clearly show China’s new interest in the world’s 10th largest oil exporter (2012). More importantly, according to the US Geological Survey and the OPEC, Venezuela holds the world’s largest oil deposits in its Orinoco Oil Belt (although mostly heavy crude which needs important refining) and contracts are up for grabs. The oil industry, which accounts for 95% of the country’s exports, is controlled by PDVSA (Petroles de Venezuela), a state owned company created in 1976. The process of nationalisation of oil resources continued in 2007, when Chavez nationalised the Orinoco Belt projects, giving the state a minimum 60% ownership in all joint ventures. In these difficult conditions for foreign investors, China has two great advantages compared to its Western counterparts which are independence from the US and money.

Indeed, China is Venezuela’s biggest creditor. Venezuela’s difficult economic situation (growth of 6%, high inflation at 20%, budget deficit at 20%, growing public debt at 50% of GDP in 2012) means that it cannot easily borrow from global capital markets to pay for Chavez’ expensive social programs. Beijing and Caracas established a Joint Investment Fund in 2007 with an initial investment of $4 billion by China and $2 billion by Venezuela later boosted to a total of $12 billion in 2009. This fund is mainly used for investment in infrastructure, energy and agricultural projects. A study of Latin America funding by China in 2012 by Trufts University confirms another advantage of Chinese lending over the West as seen in Algeria: banks do not impose any policy condition on borrowing governments and generally have low environmental guidelines. These “tied loans” do however require equipment purchase and oil sales. For example the China Development Bank lent $500 million to PDVSA to buy machinery and equipment for oil drilling with contracts mostly awarded to Chinese-owned companies. Thereby, China serves as an alternative to international banks for financing with low rate loans, while securing access to Venezuela’s oil at a fixed low price and creating business opportunities. Beijing has lent $46,5 billion since 2008, which represents over half of the loans the country has received (95% are loans-for-oil).  Thus Venezuela is becoming oil-debt dependent which is naturally a great advantage for Chinese state-owned companies in trade deal and contract negotiations.

PDVSA

Venezuela oil fields – Orinoco oil belt

In the Chavez era, China has invested heavily in raw material. First and foremost in oil: China imports about 10% of its global oil imports from Venezuela – 600 000 barrels per day in 2013 aiming to reach 1 000 000/day in 2015. Of these, 270 000 barrels/day are to repay debts, for a price sometimes as low as $5/barrel according to wikileaks. Chinese state-owned companies have also been awarded many prospecting, drilling and refining contracts offshore and especially in the vast Orinoco belt. Sinopec and CNPC both have established joint ventures to exploit reserves and build refineries in the Junin area while CITIC (China Internatioal Trust and Investment Corporation) and Sinohydro agreed to build condominiums in the Junin and Carabobo areas. China has also invested heavily in Venezuelan mining.  Aside from contracts to build industrial condominiums and 33 000 homes in the belt, CITIC has also been awarded a joint ventures in 2012 to explore the Las Cristinas gold and copper mine in Bolivar state, which is one the world’s most important gold reserves. Chavez nationalised the gold industry in 2011, in effect expropriating Canadian “Crystallex” from the mine, who is still at the moment seeking compensation with the help of the World Bank. This is a good example of the shift from Western to Chinese investors and especially to CITIC which is one of Venezuela’s Chinese creditors. Furthermore, like with PDVSA, Venezuela’s stade-owned mining company CVG (Corporacion Venezolana de Guayana) agreed in 2010 with WISCO (Wuhan Iron and Steel Corp – China’s 3rd steel company) on fixing long-term iron ore under the market prices compared to other South American competitors (such as Brazil’s Vale). This shows China’s ability to negotiate cheaper raw material and secure new important contracts after years of domination by the US and other Western powers.

China’s investments are not limited to natural resources and are diversified. Many projects are under way enabling technological transfer to Venezuela.  A joint venture railway company was launched in 2009 controlled at 40% by CREC (China Railways Engineering Corp). More importantly, China has built and launched Venezuela’s two satellites. The first, a geostationary telecommunication satellite called Simon Bolivar, was launched in 2008 from Sichuan in China. The controls were handed over to the Venezuelan government in 2009 after the training of Venezuelan engineers. The second, a monitoring satellite called Miranda, was recently launched in 2012 from Gansu also in China and was widely greeted in Latin America as a great technological leap. China has also launched many joint ventures in electronics with factories built in Venezuela allowing a full transfer of Chinese know-how. In 2009, Venezuela’s first cellphone company, VTELCA (Venezolana de Telecomunicaciones), was set up as a joint venture between the government and Chinese state-controlled telecommunications company ZTE. The factory produces the “Vergatario” for Venezuelan and Caribbean markets which, highly subsidised by the Venezuelan government, is sold about $7 and may well be the world’s cheapest cellphone.  Most workers (housewives and labourers) come from surrounding villages and are trained and supervised by the Chinese while ZTE supplies parts and know-how. A last sector where China is operation a technological transfer is in the Agricultural sector with the establishment in 2011 of a joint venture in between PDVSA (70%) and Heilongjiang Beidahuang Nongken Group (30% – China’s largest agricultural company). Indeed, China which has a poor amount of arable land, is expanding its agricultural companies abroad to diversify its imports. In Venezuela, the company provides machinery and labourers as well as a greater variety of seeds in return of approximately 20% of the harvest. Again, China’s main priority is to secure resources and conduct business but Venezuela is thereby achieving a great technological leap.

Indeed, China is investing in Venezuela for energy security but also for business and profit. Beyond the numerous bilateral benefits, it has two main negative aspects on China and its international relations with the US, but also on Venezuela and its economy. For example, due to the transport distance (it takes about 40 days to ship oil to China) and refining problems, Chinese state-owned companies sell up to a third of Venezuelan oil locally for profit (there is a noticeable gap in between PDVSA export and Chinese import figures). China however wishes to conduct business in South America without raising tensions with the US, either by enforcing Venezuela’s anti-american rhetoric or by challenging their presence in their “back yard”. Thus, although mainly conducted by state-owned companies, China has to put great effort into separating its business from its politics contrarily to Venezuela. As for Caracas, one of the consequences of raised dependence on oil exports is the decrease of other business due to the “Dutch Disease”. This effect takes place when important natural resources export increase the value of a country’s currency, thus making other exports more expensive and less competitive. A good example in Venezuela is in the textile industry, where it is becoming cheaper to import Chinese textile than to produce it locally (which once again indirectly benefits China).

Beyond these difficulties, prospects are good for China-Venezuela relations, even after Chavez’s death. Since his election, Maduro has already promised that his first trip abroad would be to China. He even said “the best tribute that we could give to our Comandante Chavez is to deepen our strategic relationship with our beloved China”. China seems evermore poised to secure new deals in Venezuela’s oil-economy and eventually buy stakes in debt-ridden PDVSA if it is denationalised. Talks have also started in 2012 to establish a free trade agreement with Mercosur. The dragon’s strategy of tied loans and loans-for-oil means it is at the same time securing resources and creating business through its investment. Although not risk-free, it is clear that Venezuela will need Chinese funds in the future and should respect the deals even in the case of a collpase of Maduro’s government. It is also establishing itself as the second power in the Caribbean region and in Latin America. China will have to be careful not to push the continent into a bipolar balance of power and not confront the US but rather build partnerships with it, so as not to hinder its “peaceful rise” global strategy.

Cuba and China: a communist understanding?

The Caribbean’s largest island and China have natural political ties. The fall of the Soviet block in the 90s, in addition to the US embargo, has lead to a business boom in between both countries, especially in the last decade. China is now Cuba’s second trade partner (after Venezuela) and its share is rising as traditional European and Mexican partners decline. The dragon is evermore becoming an alternative to the US and its allies.

Political ties have always been strong, as Cuba was the first Latin american nation to recognize China and establish diplomatic relations in 1960. However both countries started to interact and intertwine over a century before that. After England’s abolition of slavery in 1833, many southern Chinese labour workers migrated to Cuba, from 1850 to 1880, on 8 year contracts to work in the plantations. Although work conditions were deplorable (prompting the Chinese government to intervene), the Chinese community flourished giving birth to “el barrio Chino” in La Havana, Latin America’s largest Chinatown. By 1959 and Castro’s revolution, 50000 Chinese lived and worked there, mainly owning small businesses such as restaurants and shops. Castro’s mass nationalisation and expropriation naturally put an end to this way of life and pushed most of the Cuban Chinese to migrate abroad. Nowadays the Chinatown is very small and has very few links with China. International relations also went sour in the 70s when Cuba sided with the Soviets in its ideological confrontation with China. It is only after the collapse of the USSR that a new Sino-cuban relationship took off, the Cuban Chinese even benefiting from small-scale private rights (small restaurants and groceries).

Indeed, China has launched many bilateral deals in the past fifteen years in cultural, medical and technical fields and has taken on the Soviet’s legacy as Cuba’s main manufacturer. Bilateral trade has risen from $440 million in 2001 to $1,9 billion in 2010 (official Chinese figures), mainly due to Chinese exports. While China imports nickel, sugar, tabaco and biotechnology, Cuba mostly imports electronics and construction material. China has also repeatedly offered interest free loans and credit lines to Cuba as it opens its markets. These Chinese funds are in many cases used to buy Chinese products: in 2001, a $200 million loan was used to modernise telecommunication and $150 million to buy Chinese television sets. However the particularity of Sino-cuban trade is that it includes two communist state-controlled partners. This benefits Chinese goods directly as they are coordinated and distributed nation-wide by the Cuban government. For example China has recently exported many low consumption electronics (refrigerators, washing machines, televisions and air conditioners) which were directly put on the government and domestic markets with virtually no competition. In exchange of these official state channels for Chinese goods many joint ventures include Cuban based factories and technological transfer. The first was in 1997 with a bicycle factory using Chinese capital and expertise, followed by electric fan factories, slippers, etc. This gives China great control over its trade with Cuba, from the production to the distribution of goods and even funding.

China has also heavily invested in raw material, mainly nickel and oil. Cuba is one of the world’s important nickel producers and the metal, used in the production of stainless steel and other corrosion-resistant alloys, is its leading export. China on the other hand, which consumes 40% of the world production of nickel wishes to secure some of these reserves. In 2004, China decided to invest $500 million in a nickel processing facility of Las Camariocas which is jointly owned by Cubaníquel (51%) and Minmetals Corporation (49% and Chinese). Likewise, although Cuba is a net oil importer (notably from Venezuela), China has chosen to invest in Cuba’s oil infrastructure. Since 2008, China has been exploring offshore oil in the Pinar del Rio region with Sinopec and Cuba’s oil company CUPET. The Scarabeo 9 $750 million deep-sea drilling platform recently built in China for Saipem (subsidiary of Italian energy company ENI) is also operating in the same sector. CNPC, the other major Chinese oil company also runs explorations in the gulf of Mexico (Camarioca Norte 100 exploration well) and has launched a joint venture in 2011 with Cuven Petrol SA (Venezuelo-Cuban company) to invest in the Cienfuegos refinery. China’s investment is not, as in a most cases, a way to secure oil resources in Cuba, but an opportunity to establish itself as an alternative to Western powers and gain experience in offshore drilling and refining.

the best way to travel in Cuba

In the past 10 years China has been modernising Cuba’s Soviet-era infrastructure, from transport to IT and communications. HuaWei and ZTE, two Chinese telecommunication equipment companies, are omnipresent in bringing up to date the Cuban internet infrastructure. HuaWei for example has been updating the very slow inland internet system and China  helped build Venezuela’s underwater ALBA broadband cable to Cuba in 2011. A number of deals were made in between both countries to modernise all types of  transport. From 2006 to 2008, 100 Chinese locomotives and 1000 Yutong buses were delivered. Indeed, after the end of the Soviet era, bus spare parts stopped being produced and Cuban bus mobility was reduced to 20-30%. Today though, bus transport has been restored and Cuban buses are sometimes even referred to as “Yutong” by the population.  In 2011, The China Harbor Engineering Company also started work on the Santiago port project. This is important for China as it thus gains the capacity to use Cuba as a pivot for its trade in Central and South America.

China has also invested in Cuba’s innovative medical field. In 2008, president Hu invested $70 million in health infrastructure to upgrade Cuban hospitals. Many joint ventures have also been created in Cuba or in China such as an ophthalmology hospital in Hefei. One major success in the domain is BPL (Biotech Pharmaceutical Co Ltd), established in 2000. The company is dedicated to monoclonal antibodies and vaccine research, and produced the first approved genetically engineered monoclonal antibody in 2007.  In 2011, Cuba’s MIC (Molecular Immunology Center) announced that the anti-lung cancer vaccine CimaVax EGF made by BPL would be conducting trials in China, thereby sealing the partnership between both countries in biotechnology.

Both countries have a different vision of communism. China has achieved growth while embracing open market and is now investing and imprinting Chinese-style market orientated reforms in Cuba (especially since Raul Castro has taken charge). Thus it has both a political and economical objective in Cuba: it is establishing itself as an alternative to the US (and showing this to the other Latin-american countries) and is securing an outpost in the Caribbean for trade. China-Cuba relationship is not based on socialist solidarity but on business.