Executive Briefings

China Is Investing Seriously in Latin America. Should You Worry?

This past week, China held its second ministerial meeting with the Community of Latin American and Caribbean States (CELAC) in Santiago, Chile. There China announced plans to have the Belt and Road Initiative (BRI), its flagship economic and development program, invest in Latin America.

During the past decade, Chinese policy banks, charged by the government to finance infrastructure and trade, have provided more than $140bn in loan commitments to Latin America. With the BRI expanding into the region, Latin America is assured that these financing spigots will not only stay open, but also will further China’s integration with the region’s trade. Chinese Foreign Minister Wang Yi says Latin America has already become the second-largest destination for Chinese overseas investment.

How does China’s investment approach compare to that of Western lenders? And will China be able to recoup its investments in a region with a history of debt?

China’s approach: ‘patient capital’

My research shows that, unlike the approach taken by Western investors, Chinese lending often takes the form of patient capital. By emphasizing nonintervention in sovereign affairs and refraining from imposing conditions like fiscal austerity or transparency, as Western governments do, China promises its financing horizon will not be influenced by such short-term policy targets. That helps regions have the flexibility to spend during economic downturns.

China’s patient capital also tends to align better with debtors’ long-term development goals, allowing countries to incrementally correct policy errors without the threat of abrupt financial destabilization. Chinese state-to-state financing packages are clearly aimed at boosting exports and commerce, often featuring guaranteed contracts for Chinese contractors or machinery suppliers. But they also tend to promote infrastructure and foreign direct investment as key drivers of longer-term growth.

This patient capital strategy could promote Latin American development, avoiding the region’s volatile cycles of boom and bust. However, there’s a potential moral hazard. By lending without conditions, China may encourage governments to spend without bounds, sowing the seeds for future debt problems.

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During the past decade, Chinese policy banks, charged by the government to finance infrastructure and trade, have provided more than $140bn in loan commitments to Latin America. With the BRI expanding into the region, Latin America is assured that these financing spigots will not only stay open, but also will further China’s integration with the region’s trade. Chinese Foreign Minister Wang Yi says Latin America has already become the second-largest destination for Chinese overseas investment.

How does China’s investment approach compare to that of Western lenders? And will China be able to recoup its investments in a region with a history of debt?

China’s approach: ‘patient capital’

My research shows that, unlike the approach taken by Western investors, Chinese lending often takes the form of patient capital. By emphasizing nonintervention in sovereign affairs and refraining from imposing conditions like fiscal austerity or transparency, as Western governments do, China promises its financing horizon will not be influenced by such short-term policy targets. That helps regions have the flexibility to spend during economic downturns.

China’s patient capital also tends to align better with debtors’ long-term development goals, allowing countries to incrementally correct policy errors without the threat of abrupt financial destabilization. Chinese state-to-state financing packages are clearly aimed at boosting exports and commerce, often featuring guaranteed contracts for Chinese contractors or machinery suppliers. But they also tend to promote infrastructure and foreign direct investment as key drivers of longer-term growth.

This patient capital strategy could promote Latin American development, avoiding the region’s volatile cycles of boom and bust. However, there’s a potential moral hazard. By lending without conditions, China may encourage governments to spend without bounds, sowing the seeds for future debt problems.

Read full article