Venezuela counts on aid from China during financial crisis

Updated: 2014-11-24 05:22

By PAUL WELITZKIN in New York(China Daily Latin America)

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Venezuela is entering the third year of an economic crisis as slumping oil prices threaten to hamper the South American country's ability to make payments on its foreign debt.

In September, rating agency Standard & Poor's lowered the country's credit rating, citing a persistent economic slowdown. As Venezuelan President Nicolas Maduro grapples with chronic shortages of consumer goods and the world's highest inflation rate at 63 percent, he has turned to China for help.

Maduro said last week that a $4 billion loan from China would be added to the country's international reserves. Venezuela's Central Bank said the reserves had fallen to an 11-year low of $19.4 billion on Nov 14.

The loan came from what is called the China Fund, which was created in 2008. It has pumped billions of dollars into state projects in Venezuela. The loans are repaid by Venezuela shipping 524,000 barrels of crude oil to China per day.

"The previous Venezuelan president, Hugo Chavez, was an admirer of China and its political system, so there were ideological reasons for closeness in the relationship," said Harold Trinkunas, senior fellow and director of the Latin America Initiative at the Brookings Institution in Washington.

Chinese companies have been involved in many major development projects in Venezuela, often built with the assistance of China's technicians. China has loaned $45 billion to Venezuela, so China has an interest in maintaining a good relationship with Venezuela to ensure the full repayment of the loans, according to Trinkunas.

"The principal market for Venezuelan oil has been in the US," said Luis Zambrano, an economics professor at the Universidad Central de Venezuela. "Because of shale boom in the US, there is less demand for Venezuelan oil.

Oil has always been the basis on which Chinese loans were repaid. The oil used to repay the loans is pegged to international prices for heavy crude. Since the price has fallen this means that either Venezuela has to export an increased amount of oil to China to compensate for lower prices or it can negotiate for a slower repayment rate."

"There have been some reports that China has been willing to offer Venezuela some flexibility in the terms of repayment of its loans so that Venezuela does not have to divert additional oil to repay China's loans," said Triunkas.

Zambrano said that Venezuela imports goods and services from China so that "represents another reason why the two are and probably will remain close," he said.

Oil was and remains Venezuela's top economic asset. Chavez encouraged Chinese participation in Venezuela's oil development.

Triunkas said the new oil fields available for development in Venezuela in the Orinoco belt contain ultra-heavy crude which requires new technology and additional costs to extract. In addition, he said Venezuela's oil industry is more accustomed to working with US and European oil companies, which might be a barrier to cooperation between China and Venezuela.