Import Substitution, only without the “Substitution” bit

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Haier and Haier
Haier and Haier
Haier and Haier

Reuters’ has this intriguing investigative piece on the weird dynamics of Chinese investment in Venezuela.

The way this seems to work is:

  1. A Chinese company announces it’s going to build a shiny new plant to produce a given product in Venezuela
  2. The Venezuelan and Chinese governments both dump a bunch of money into the project
  3. The factory never gets built, or is built and operates at a fraction of the initially announced scale
  4. The Chinese company ends up importing the same product it had initially said it would make locally from China into Venezuela

It’s a pattern that’s been repeated over and over again. Witness:

China, on the other hand, has won a steady supply of oil for its economy and lucrative contracts for its companies to export goods to Venezuela, sometimes in the shadow of China-backed factories meant to produce those very goods locally, a Reuters review of dozens of official Venezuelan documents found.

Bus-maker Yutong sold $353 million worth of buses upon agreeing in 2013 to help build a factory, which today consists of a patch of cleared land dotted with construction equipment.

Heavy machinery firm XCMG closed an export order of $745 million after agreeing in 2011 to help build a local facility, the location of which has not been determined.

Venezuelan state oil company PDVSA bought dozens of drilling rigs from China despite having built a rig production facility through a joint venture with a subsidiary of Chinese oil giant CNPC. The facility is not producing rigs, according to workers.

What we have here a kind of Import Substitution strategy, but without the substitution bit.

Why does it happen?

Well, it doesn’t seem to make sense. And if there’s one thing I’ve learned over the last 12 years is that when something in Venezuela doesn’t seem to make sense, you follow the cheap dollars. I’m going to go out on a limb and guess approving the Venezuelan-factory was a needed step in obtaining cheap dollars for the Chinese companies involved: cheap dollars they could use to import stuff they made in China into Venezuela and make a royal killing.

 

1 COMMENT

    • 1.6 billion yuan is like 250 million dollars. That does not ease the cash crunch, these guys can go thru that in one day. My bet: Its never going to happen, but it shows the Chinese are not ready to save Venezuela.

      • Your argument is correct. But the quoted amount is 10bn CNH, which is roughly 1.6 bn USD. Still peanuts next to VENZ’s financing needs for this year.

        Best regards!

        • I read again and it says clearly:

          “With the state-owned oil producer effectively shut out of the bond market with yields exceeding 20 percent, the company has hired Moscow-based Gazprombank JSC to arrange the sale of as much as $1.6 billion of yuan-denominated notes.”

          Where do you get the Yuan 10 billion from?

      • I believe I read on your blog somewhere that oil exports to the PRC are down to less than 280K bbl/day. The Chinese are going to become annoyed at some point.

  1. I think this dynamic was also outlined in the book Bumeran Chavez.This is a much more perverse sort of neocolonialism than anything that could be claimed for the USA-Venezuela relationship.

    • When Hugo Chavez believed that the Chinese would give Venezuela more advantageous terms than did the Evil Empire, he was deluding himself. He forgot that China has been an empire for several thousand years.

  2. Venezuelans are fascinated by the promise of epic megaprojects , that dazzle the imagination with their proyected magnificence , they are asssummed to be magically easy to acomplish , they are announced with great fanfare providing everyone with a grand time and then after a while they are forgotten and abandoned . One feature of Chavismo has always been this love of promised gradiosity . the Chinese have observed this penchant of people with a primitive mentality and have used it to dupe the regime to enter into deals where the building of a grand factory or project is offered and then quietly abandoned and substituted for the unending sale of the imported items the project was supposed to build .

    Chavez was specially seduced by this type of gimmick and his followers are no different . In earlier times pimitive aborigines were offered trinkets and glass beads and maybe some bottles of firewater in exchange for their lands and rivers and mineral riches. Now their descendants are offered grand projects which are never built but which allow the aborigines to become the slavish consumers of the things which their cunning friends want them to buy!!

  3. Back in high school or something like that (maybe it was Saturday morning cartoons), we learned about “mercantilism”. Isn’t this a form of mercantilism at work?

  4. These Chinese Macro-EggFooWong Guisos are right up there with Derwick’s Multi Billion used or phantom power plants.. Galactic Scams from another dimension. (Alek-Boyd’s page, apparently blocked here)

  5. I suggest you all read what is happening in Guyana, your neighbour , you know the one with the Essequibo controversy.
    The new government is doing audits of the previous one and exposing what went on. Multiply that 500x or more and you will see what corrupt individuals can do.

  6. A friend of my family grew up in Maracay and he’s presently the South American rep for a giant Chinese shoe company. Lives over there now. He claims the corruption in China is thick as the Yangtze in flood. He suspects that all of the Chinese-Ven factory plans were simply frauds to get cash out of China and into Ven hands where the picarros from both sides could divvy it up. Thinking only the Ven caudillos are on the take is to vastly underestimate the Chinito. Venezuela has no exclusive on thievery. Normally one could just go to the accounting and get some idea about where the Yin all went. Find the financial statement for any of those factories and I’ll buy you a burger.

    JL

  7. China is basically robbing Venezuela. They buy oil, and for the dollars they pay for said oil they also export stuff to Venezuela at prefferential terms. Venezuela ends up paying twice for the luxury of importing sub-par Chinese junk.

  8. Part of the “junk” they are importing include oil rigs. One of my immediate family members is working on one and it only works half the time – and the Chinese won’t send spare parts (for many reasons) so the whole thing is basically held together with bailing wire and spit.

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