Home > Uncategorized > China has good reason to help stabilize Latin American economies

China has good reason to help stabilize Latin American economies

from Mark Weisbrot

In the last week or so much of the international business press has been focused on the problems of financial stability in developing countries, some of whom have recently become more vulnerable to capital outflows.  The main cause is that investors are trying to get the jump on possible moves by the U.S. Federal Reserve to allow U.S. interest rates to rise, which will draw capital from developing countries and cause their borrowing costs to rise.

Argentina has gotten some of this attention, as it allowed the peso to fall by 15 percent in one day and increased some access for Argentines to dollars on the official market.  Venezuela is not so much affected by these market developments, but is always negatively portrayed in the international media, and more so in the last year since its exchange rate system problems have caused its inflation to rise to an annual rate of 56 percent over the past year.

The two countries face different sets of problems, but they will both likely have to stabilize their exchange rates in order to resolve them.  This is where international help can make a big difference, and there is one country that has both the ability to help and a compelling interest in doing so:  China. 

China has already helped Venezuela with tens of billions of dollars of loans – much of which has already been repaid – as well as investment. It has also provided significant lending and investment in Ecuador, Cuba, Brazil, and other countries.  But there is more that they could do at this moment.

Much of Argentina and Venezuela’s problems stem from some residents believing – with strong encouragement from the media – that their domestic currency is not safe to hold. While it is true that both countries have high inflation and their currencies have depreciated on their respective black markets, it is not clear how much of this is due to fundamental causes and how much is driven by a bubble in the black market dollar price of their currencies.  (Certainly in Venezuela, the black market dollar rate is a bubble caused by buyers who are betting that the local currency will continue to fall.)

In any case, both governments could stabilize their currencies, and would get a big head start on bringing down inflation, if they were to have a large enough supply of dollar reserves. And they would not necessarily have to use these reserves:  Bolivia, for example, has had a very stable exchange rate throughout the seven years of Evo Morales’ presidency – despite serious political turmoil (including a violent secessionist movement), some bursts of inflation, and considerable nationalizations and other government policy changes (such as withdrawing from the World Bank’s international arbitration panel [ICSID] ) that are seen as terribly “business unfriendly” by international corporations and the business press.  But Bolivia piled up more reserves than even China (relative to its GDP), and nobody doubts the government’s ability to maintain the domestic currency at or near its current exchange rate.

The International Monetary Fund (IMF) has provided a “Flexible Credit Line” (FCL) of reserves that is not borrowed, but is available, to approved countries. Because the United States controls IMF policy in developing countries, the only three countries approved for the FCL have been Mexico, Colombia, and Poland – three countries with right-wing governments (Álvaro Uribe was president in Colombia at the time) that Washington considers strategic allies. Mexico has access to a hefty $47.3 billion that it has not needed to tap.

China has $3.8 trillion in reserves and would barely notice the money that would be necessary to finance a similar credit line for Argentina and Venezuela. In fact, China would most likely be better off even if the money were borrowed. Argentina’s dollar-denominated foreign public debt is only about 8 percent of GDP; this means that it would never make sense to default on such a small debt.  Venezuela is also at low risk for sovereign default, with $90 billion in annual oil revenue and the world’s largest oil reserves. Currently, China has the bulk of its reserves in U.S. Treasury securities, which are virtually certain to lose value in the near future as long-term interest rates rise in the U.S.

China has a big foreign policy interest in stabilizing Latin America.  Unlike the U.S., which is a global hegemon with hundreds of military bases around the world, China has no foreign military bases and no empire. With the U.S. “pivoting” toward Asia, supporting militarism in Japan, and seeking to maintain military dominance in East Asia, China’s main interest is in the further development of a multi-polar world and a greater role for the United Nations, developing countries, and international law and diplomacy in international relations. Latin America, and especially South America, has become independent of Washington in the past 15 years and has a strong political interest in these same issues, with deep historical roots.

By the best measures of China’s GDP (i.e. purchasing power parity), the Chinese economy is already bigger than that of the U.S.; and even at its current, slower rate of growth it will more than double over the next decade. As Yan Xuetong has argued, China is beginning a new foreign policy path in which it will form alliances as it did not do in the past.  Although these alliances will primarily be closer to home, most of Latin America is a naturally ally not only because of its increasing trade and commercial relations with China, but because of its common interest in an international political order that favors respect for national sovereignty and independence over unilateral intervention and military force. On the other side, Washington would like to get rid of all of the left governments in the region and return to a world of “limited sovereignty” there that it maintained 20 years ago.  It is well worth China’s efforts – which could be made at little or no cost — to help maintain stability in the region.

See article on original website

  1. February 3, 2014 at 3:21 pm

    So, basically, the reason behind the most recent devaluation in Venezuela (from 6.30 to 11.30, almost 100%) and the 50% + inflation is because people are “being deluded by the media”? Not because the Venezuelan government is printing money like crazy without no backup whatsoever?

  2. Nika
    February 25, 2014 at 9:59 pm

    What do you think would happen if China will stop buying US securities?

  3. February 26, 2014 at 7:44 pm

    Mark Weisbrot it all sounds theoretically correct, I am Venezuelan and with post graduate degrees in Venezuela and other foreign Universities (just so you know I have some brain). In regards to Venezuela, how do you bloom the economy by destroying the private sector? (I am not repeating tales, my family owns business and it has been nearly impossible the last 14 years and we are always up to date with all of the gov requirements). How do you bloom an economy by placing people without knowledge of the job just because they support certain political ideas! That is why the infrastructure and engeneering of many of our oil plants, electric plants and all else is in decay, because the people doing the job do not know what they are doing, some have even caught on fire and are not functioning anymore. Why block the exchange of currency if it hurst the investment and trade inside and outside the country? People are poorer today in Venezuela than ever thanks to the Goverment. I see that today you are celebrating Chavez legacy, shame on you if you think Venezuelans really support his legacy. It seems like just like the goverment your eyes and ears are blinded and you know not a thing about reality but only wonderland. In order for you to speak with authority about the matter please pack your luggage and go live amongst the common people in Venezuela, otherwise do not speak about what you do not know. Venezuelas chavista way is not the right way.

  4. February 26, 2014 at 7:46 pm

    Ahhh by the way, the media that is not telling the truth is the one controlled by the Venezuelan goverment itself. Blood running down the streets, gunshots from the national guards agains the people, and people starving does not equal to me to their message that it all is good and peaceful.

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