What China Gets From Giving Venezuela $45B

The largest Venezuelan note is now worth 12 cents.

Next week, the IMF is holding meetings in Lima, Peru in the region that has suffered as much as any other from the global slump in commodities. It's not bound to be a happy occasion for many of those gathered. Despite everything, some commodity exports have managed to accumulate substantial foreign exchange reserves precisely in anticipation of these lean years. Others, meanwhile, have tried to lessen dependence on commodity exports to literally fuel growth.

As you would expect, Venezuela has done none of these things as it amassed very little in reserves--preferring to waste oil revenues on quite frankly idiotic attempts to show "global solidarity." Diversification away from oil? If nothing else, Venezuela has become more dependent on energy in the past few years...just as China-buoyed global demand has ebbed. Meanwhile, as the rest of the world combats deflation, Venezuela is confronting hyper(inflation) as the bolivar heads to oblivion. It has fallen by 88% in 2015:

Venezuela’s bolivar passed the physiological barrier of 800 bolivars per dollar Tuesday in black market trading as Venezuelans rushed to protect savings amid rising inflation. That means that the country’s biggest currency note of 100 bolivars is now worth about 12 U.S. cents.

The currency has declined 14.7 percent in the past month to 816 bolivars per dollar, according to dolartoday.com, a website that tracks trading in street markets where Venezuelans go to skirt limits on foreign-exchange purchases. The government maintains official rates of 6.3, 13.5 and about 200 bolivars per dollar for authorized purchases of items deemed essential.

Venezuela’s inflation, estimated by some to be nearing 200 percent, is the fastest in the world as President Nicolas Maduro’s administration prints more currency to pay budget expenses as the falling price of oil reduces foreign currency income. The amount of bolivars in circulation passed 3 trillion for the first time on Sept. 19, up 97 percent in the past year, according to data compiled by Bloomberg.

The only thing keeping Venezuela from economic oblivion is not the hated IMF, but rather the People's Republic of China. Ricardo Hausmann, the Venezuelan economist at Harvard, blames the worsening of Venezuela's worrisome situation to continued Chinese cash infusions which now amount to an astounding $45 billion. Who needs the IMF when you've got the PRC?

The billions of dollars China loans to Venezuela in exchange for oil are a “disgrace” and used for corrupt purposes that go undisclosed to the general public, said Harvard professor Ricardo Hausmann.

Venezuela, which has tapped China for more than $45 billion over the last decade, is increasingly reliant on the world’s second-biggest economy for cash because of its unwillingness to comply with the requirements of the International Monetary Fund, Hausmann wrote in a Sept. 28 opinion piece for Project Syndicate. Those loans have become more important than ever as the nation’s international reserves tumbled with oil prices to a near 12-year low.

“The Chinese have not required that Venezuela do anything to increase the likelihood that it regains creditworthiness,” wrote Hausmann, a former Venezuelan planning minister. “They merely demand more oil as collateral. Whatever the IMF’s faults,” China Development Bank “is a disgrace.” The loans have “built-in privileges for Chinese companies” in sectors including telecommunications, appliances, cars and oil drilling, Hausmann said. An e-mail to the bank seeking comment, sent after business hours, wasn’t immediately returned.

Think of tt as underdevelopment theory with a twist. Instead of the "imperialistic West" making its dictates known through the IMF, you have "third world champion" China. Remove the labels though and what you see happening is similar: ever-broader swathes of the Venezuelan economy falling into the hands of the Chinese. I hardly think the Chinese are doing this for altruistic reasons--would they extend so much credit to a resource-poor country? In China's calculations, $45 billion is a drop in the bucker compared to gaining leverage over the vast reserves Venezuela supposedly holds--especially in the form of unconventional reserves.

The question remains, though, of whether the Chavista leaders will continue to have warm relations with China into the future. Or, if these Chavista leaders will remain in place as they are quite unpopular for obvious reasons with the Venezuelan electorate. I guess China throwing billions and billions of dollars at them is one way of helping to guarantee that they do until such as time that China can be paid in full--and more.

I don't use the word "giving" instead of "lending" in the title for nothing.