Asia-Pacific, Economy & Trade, Financial Crisis, Global Governance, Headlines, Latin America & the Caribbean

FINANCE: China Cements Partnership with Latin America

Emily Garr

WASHINGTON, Nov 6 2008 (IPS) - China’s evolving commercial and political affiliations with Latin America and the Caribbean are once again in the spotlight, with the entrance of China to the Inter-American Development Bank (IDB) in late October.

The Inter-American Dialogue recently hosted a panel of experts to discuss these and other recent developments, where David Shambaugh, professor at George Washington University and a leading China expert, concluded that China’s intentions are “not negative or clandestine but self-interested”.

More than simply diversifying its portfolio of international relationships, China has shattered the status quo of hemispheric relations in the wake of 20th century politics, from presidential visits to trade and investment. In 2007, trade between China and Latin America was more than 13 times what it was in 1995, and totaled 110 billion dollars.

“By almost every conceivable metric…China’s relations with Latin America have never been so robust,” stated Daniel Erikson of the Inter-American Dialogue, a Washington think tank, in his testimony before the House Committee on Foreign Affairs in June.

China’s growing interest in the region was reinforced last month, when the IDB announced that China will become its 22nd donor member. In doing so it commits 350 million dollars to help fund the bank’s programmes in the face of the Latin America and the Caribbean’s “complex development challenges”, according to IDB President Luis Alberto Moreno.

“It is a historic decision that takes China’s thriving commercial relationship with our region into the development sphere,” he said.

China first submitted an application to become a member state in 1993. Fourteen years later, in March of 2007, negotiations formally began when the U.S. lifted its opposition. After a month-long voting process that ended Oct. 15, China became the third East Asian nation to join the Bank, after Japan (1976) and South Korea (2005).

So why did it take so long for the region’s second largest trading partner – after the U.S. – to be approved as a donor member to the IDB? While the reason for the delay largely had to do with both the price of entrance and resistance from the U.S. until 2007, the Bank of China’s investments appear to be welcomed amidst the onset of economic insecurity worldwide.

Over the 15 years since the country first applied for membership, China has become an increasingly important financial actor on the world stage. China currently has a Gross Domestic Product almost equivalent to that of Latin American and Caribbean countries’ entire economy – 3.3 trillion dollars compared to 3.4 trillion.

The two economies hang in a tight balance between partnership and competition, with political and diplomatic favouritism often tipping the scale. The nuances between partner and competitor have seemed – at best – grey until this announcement, which relied on a vote of 26 borrowing member countries that have a slight majority voting power, or 50.02 percent of shares, in the Bank.

While China’s political and military alliances have been strengthened with larger countries like Brazil and Venezuela based on China’s increased demand for raw materials like soya, iron ore, copper and oil, smaller countries compete with China for labour intensive industries such as electronics and textiles. However, no country, large or small, seems exempt from the fear of their domestic markets being crowded by cheap imports.

Central American countries specifically have lost a competitive edge in recent years, and may harbour angst over China’s commercial intentions in the region.

Economic interests aside, Haiti has also been known to question its motives, when the strategic peacemaking arm of China arrived in 2004. Perhaps not coincidentally, Haiti, Honduras and Nicaragua are three of five countries (including Bolivia and Guyana) that are explicitly receiving 125 million dollars in soft loans as part of the 350-million-dollar investment package.

Additionally, 75 million dollars will go to an equity fund directed at small and mid-sized private business, 75 million dollars targets microenterprise (through the Multilateral Investment Fund), and the remaining 75 million will be used as grant funding to strengthen the capacity of municipal governments and private sector institutions.

“China’s membership in IDB will provide both sides with a platform and opportunity for increased two-way trade and investment,” said China’s Ambassador to the United States, Zhou Wenzhong.

“This is a win-win decision that will serve everyone’s interest.” He also noted that China currently enjoys a “little”, though declining, trade surplus with the region.

When asked about the threat that China may pose to the United States on the world stage, Wenzhong responded that “we don’t want to compete with the U.S. for anything” and that China favours of harmonious and sustainable development.

China’s financial investments in Latin America continue growing, but may be exaggerated in light of the U.S.’s inattention under the present administration. The U.S. still enjoys 30 percent of the shares of the IDB, while China will own a mere .004 percent of overall shares in the Bank. Borrowing member countries maintain ownership of just over half of holdings.

There are 48 member states in the IDB. Collectively, they provide the single largest source of long-term lending for Latin American and the Caribbean. Long-term lending refers to loans that have a maturity date of at least 10 years.

The admission of China into the IDB may represent a shift, from a bona fide competitor in international markets to a veritable partner. Conversely, the vote that took place in October could also have echoed a desperation on the part of emerging economies to keep their heads above water, as the current financial crisis boils to capacity.

As export growth slows and jobs are threatened in China’s domestic sphere, the consumption of many Latin American and Caribbean products may decline. And stagnant, if not shrinking, consumption in China’s now-slowing economy does not bode well for international markets.

Eyes will now look toward Peru later this month, when the Republic’s President Hu Jintao visits Lima for the APEC summit. One thing is certain; China’s economic – and diplomatic – performance has just become everybody’s business.