China Counts the Costs of Its Big Bet on Venezuela

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When China hatched the first of a series of oil-for-loans agreements with Venezuela in 2007, it seemed like a perfect match. Venezuela had the world’s biggest oil reserves; China was poised to become the biggest energy consumer.

Twelve years and more than $50 billion in loans later, a political crisis in Venezuela is threatening China’s payout and drawing Beijing into a proxy standoff as it supports a Venezuelan leader the U.S. is intent on toppling. It is a conflict with Washington that Beijing could do without, amid efforts to resolve a trade dispute that is weighing on the Chinese economy.

Venezuela’s deepening crisis is also damaging China’s credibility in Latin America, while fueling criticism abroad—and debate at home—about its overseas lending, as other nations also face debt problems linked to Chinese loans.

In public, China has joined Russia in standing by Venezuelan President Nicolás Maduro, after the U.S. and several other nations recognized opposition leader Juan Guaidó as the country’s head of state in January.

At a Lunar New Year reception last week at the Gran Melia Hotel in Caracas, the Venezuelan capital, Chinese Ambassador Li Baorong said Beijing was opposed to “hegemonism and interventionism.”

He congratulated Mr. Maduro on his new term in office, offering to “exchange views on governance more closely.”

Behind the scenes, though, there is deep concern in Beijing about why its Venezuelan venture backfired and how it can salvage its investment, according to experts on relations between the two countries, some of whom said China was likely building channels to Mr. Guaidó’s camp.

Beijing “maintains close contact with all parties through various means” and wants to work with all sides to facilitate negotiations, Chinese Foreign Ministry spokesman Geng Shuang said on Friday when asked if the Chinese government was in contact with Mr. Guaidó.

“No matter what the situation may involve, our cooperation should not be harmed,” Mr. Geng said.

Venezuela still owes Beijing around $20 billion, according to estimates by China’s Commerce Ministry. On top of that, China is the Latin American country’s second biggest arms supplier behind Russia and, by Beijing’s count, had $3.2 billion in direct investments 2017. Among those are at least three joint ventures between China National Petroleum Corp, or CNPC, and Venezuela’s state oil company, Petróleos de Venezuela SA, or PdVSA.

The U.S. Treasury imposed sanctions on PdVSA this week in a bid to wrest control of Venezuela’s oil wealth from Mr. Maduro—a move that potentially constrains his government’s ability to repay Beijing.

A Chinese hospital ship, a sign of China’s outreach to Venezuela, is welcomed to the port of La Guaira in September.
A Chinese hospital ship, a sign of China’s outreach to Venezuela, is welcomed to the port of La Guaira in September.PHOTO: FEDERICO PARRA/AGENCE FRANCE-PRESSE/GETTY IMAGES

China’s investments are now at risk under Mr. Maduro—and Beijing also recognizes that a U.S.-backed Guaidó administration might refuse to honor outstanding debts.

China’s Commerce Ministry spelled out this concern on Tuesday. “If the opposition party holds power in the future, a new Venezuelan government could use ‘protecting national interests’ as a reason to renegotiate contract terms with China and even just refuse to repay remaining debts,” the ministry said in its latest investment guidance report on Venezuela.

“China has learned an important lesson from this,” said a Chinese government adviser on Latin America. “We have to do things on a commercial basis, looking at market conditions, rather than for the sake of appearance and government-to-government agreements.”

China’s decision to ramp up lending to Venezuela 12 years ago was driven by a perceived imperative to secure oil supplies to fuel its growing economy at a time world-wide demand was pushing crude prices toward $100 a barrel. Sweetening the deal was the prospect of a strategic foothold in the U.S.’s backyard, as well as a potentially lucrative market for Chinese arms-makers, dam-builders and railway engineers.

Since then, China has provided Venezuela with more than $50 billion in loans, repayable in oil, according to China’s Ministry of Commerce; independent researchers put the figure at more than $62 billion.

The arrangement worked well enough for the first five years. Venezuela’s oil exports to China soared and Chinese companies won contracts for Venezuelan projects, including what was billed as Latin America’s first high-speed railway.

The Chinese support was instrumental for Venezuela’s president at the time, Hugo Chávez. He channeled Chinese loans into funds under his personal control, financing programs that helped re-elect him in 2012, including one that sold refrigerators, televisions sets and other appliances to the public at a discount.

Problems became more prominent soon after Mr. Maduro took power in 2013. Venezuela’s oil production plummeted with falling prices and chronic underinvestment, with revenue diverted by corruption and spending on security and social welfare.

Venezuelan repayments to China appear to have slowed to a trickle since around 2015 following a renegotiation of terms, Chinese and foreign experts said.

Amid those frictions and a foundering of the Venezuelan economy, many Chinese projects, including the high-speed rail, have stalled and many Chinese companies have withdrawn their staff, according to people working for those companies.

Beijing has stood by Mr. Maduro, who announced after a visit to Beijing in September that he had secured another $5 billion of Chinese funding. Chinese President Xi Jinping expressed his support for the countries’ cooperation.

Even so, China has limited tools with which to back Mr. Maduro. Further financial or security assistance is unlikely to ease the political crisis, and direct military intervention—something Beijing has little experience with, isn’t a realistic option so far from Chinese shores, experts said.

China is wary of being drawn into a proxy conflict with the U.S., which has refused to rule out military intervention in Venezuela, at a time when China-U.S. relations have soured on a range issues from trade to cyberhacking to the South China Sea.

Beijing’s support for Mr. Maduro also risks alienating other Latin American countries that have backed Mr. Guaidó and undermines the image Beijing cultivates as an enabler of development and stability to other developing nations.

“In this case, they miscalculated, and then once that miscalculation became clear, they didn’t do anything about it,” said Matthew Ferchen, a research fellow at the Leiden Asia Center in the Netherlands who has studied China’s relations with Venezuela. “They have chosen to keep their head in the sand as the situation in Venezuela has deteriorated.”

Mr. Ferchen said China would quickly cooperate with Mr. Guaidó if he did take power, and in turn he would seek strong economic ties with Beijing, given its appetite for oil, while pushing to renegotiate Venezuela’s debts.

By Jeremy Page
WSJ

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