Dragons and Tigers and Pandas, oh my!

If we look at the Fondo Chino from the Chinese side, we might just understand why China keeps lending to Venezuela, while everyone else has stopped.

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Nothing gets Venezuelan economists’ juices flowing quite like the Fondo Conjunto Chino Venezolano (FCCV). From a Venezuelan point of view, the why’s and wherefore’s of the Fondo are easy enough to figure out: Venezuela is into it because it’s cheap credit, way cheaper than any of the alternatives we have access to. But have you ever wondered, what’s in it for China? If Fondo Chino is such an obviously good deal for Venezuela, why does China keep the party going?

Let’s start with a factoid that pretty much defines the Fund: there are no public figures on the actual amount of petroleum shipped by Venezuela to China under the agreement. ZERO. Nobody outside of Miraflores knows for sure how much oil we are diverting away daily from the cash market. Save for a removal of mandatory minimum requirements negotiated over a year ago between Beijing and Caracas, the single most important variable in the Republic’s external accounts remains an elusive wild-card for both Wall Street and locals alike.

It’s hard to make sense of the opacity until you grasp that, more than a financial instrument, FCCV is a complex diplomatic structure bringing the Chines and Venezuelan governments together. It’s when you go through the institutional set-up that you realize just how deeply entwined the two states are in the Fondo.

Briefly, it works like this:

  1. Bandes and China Development Bank (CDB) sign loan agreements, on terms between 2 and 10 years, denominated both in USD and CNY and with remarkably soft financial conditions.
  2. This process has been typically done by Tranches (A,B,C; each one rolled over every time it’s repaid) except for the USD 20Bn Long-Term Heavy Fund.
  3. FONDEN brings the Joint to the Fund, so to speak: the parafiscal entity performs non-redeemable ‘contributions’ to the agreements to account for the Venezuelan part, alongside the Chinese money loaned by CDB.
  4. As Guille rightly noted, the loans are payable via oil shipments sent by PDVSA and received by the China National Petroleum Corporation (CNPC) – on a fixed schedule but with somewhat flexible volume requirements.
  5. The shipped oil is then traded at “market rates” (emphasis on quotation marks), the proceeds of which are then deposited in major onshore Chinese banks on so-called “collection accounts” that hold the cash inflows from oil sales (a part of which is held as provision for the next interest payments, and the rest is free for PDVSA to withdraw for its own uses).
  6. At the other end of the cycle, the money that Venezuela receives on the loans is directed to “Development Projects” picked mostly by the National Development and Reform Comission (NDRC) of China, with the Venezuelan Ministry of Planning and the Vice Presidency having a limited say on the matter.
  7. All-in-all, the resources of the Fondo Chino end up spent in three main uses: Chinese goods and services (Think anything between Orinoco Sedans and the blocks of Misión Vivienda buildings rising inside Fuerte Tiuna); the second one is used in Venezuelan projects (some of the biggest local beneficiaries of the Fund have been Corpoelec, Metro de Caracas and the incipient Instituto de Ferrocarriles del Estado); and the remaining allocation is left for the Executive branch to administer discretionally, mostly for FX policy purposes. The weight assigned to each of these uses is both an unknown variable to outsiders, and a hot issue during the negotiation of every Tranche.

There is, in other words, a LOT of bureaucracy and many, many stakeholders involved, especially on the Chinese side. There’s also a lot of money (USD 57 Billion forked over by the CDB since 2007… and counting), and several key power groups, each with its own quota of the Fund and a lot of individual authority on its assignment. When seen and understood this way, I think it’s a bit naïve to consider the faults of FCCV as solely arising from the characters currently administering it.

The FCCV is essentially a long-term bet on owning as much of Venezuelan petroleum as possible, Soft Power style. 

Guillermo says that “it’s the lack of transparency, rather the fact of the financing facility, that the opposition should be pressing the government on”. I think the financing facility has incentivized every party involved in it to grab a big tajada and share it with its cronies. Let’s not forget that China has a notorious corruption epidemic of its own – even if their leadership seems, in strong contrast to ours, to be genuinely committed to fighting it. Whatever Xi Jinping’s hopes may be, it’s easy to conclude that the Fondo itself has turned a somewhat sensible idea for geopolitical cooperation into a toxic well of Moral Hazard, shot through with imperialistic intentions.

These are the two key aspects of the Fund that, IMHO, are keeping the money flowing.

with the regular lenders of last resort shunned for political reasons, Venezuela is looking to Beijing as the only one who can save us in this dark hour.

The Fund creates a textbook type of information asymmetry: in the early days of the agreement, when the relationship between both nations was just starting to take form, and no ‘projects-only’ provisions were in place, the Venezuelan government (the risk-taking party) went on a crazy spending binge with the resources of the first Tranches, caring very little about the sustainability of using borrowed money for current spending and in detriment to the credit risk assumed by the Chinese Development Bank (the risk-bearing party).

The too-big-to-fail CDB, in turn, has been de-facto bailed out by the Chinese Central Bank at least once, no doubt hurt by its multi-billion-fold exposure to the highest credit risk in the world. And to close the circle, Venezuela is now in full-blown balance-of-payments distress, and with the regular lenders of last resort shunned for political reasons, the country is looking to Beijing as the only one who can save them in this dark hour.

Can China really let Venezuela fail, given this dynamic? A secular view and some common sense suggests Beijing won’t do it. Oil markets may not be as richly valued today as they were during last decade’s bull market, but Venezuela still has the biggest proven reserves in the world, and that matters a lot in the long run of a planet with limited alternatives to fossil fuels as a primary source of energy. Which brings up my second issue with the FCCV: it’s essentially a long-term bet on owning as much of Venezuelan petroleum as possible, Soft Power style.

Guy Olivier Faure, a leading scholar of International Negotiation theory, coined three Chinese ‘Negotiation Counterparts’: The Pandas (cooperative, good negotiators, trusting of foreigners; they aim for playing win-win on their business); the Dragons (complicated, unpredictable; highly ambitious and quite unrealistic; risk-takers who are surprisingly pleasant to work with); and the Tigers (the predators who see you as their prey; playing win-lose and doing it with no morals; the end justifies the means for them and they like to smile before killing you).

It’s uncanny how these profiles fit to several different faces the Chinese have shown to Venezuela over the eight years of the Fund. Sometimes they seem to be so Panda, so freakin’ pana that you get hooked on the easy cash; sometimes, their bet on Venezuela seems so oversized, that they start to look like a crazy dragon. And very rarely, the Tiger flashes a smile at its prey before his attack, showing that the only thing they really care about is the nation’s oil riches.

13 COMMENTS

  1. An excellent post! What is fascinating here is that the Chinese appear NOT to be stepping-in and giving the Bolivarians some sound economic advice, e.g. Raise the gas prices. Stop spending the government’s money like a drunken sailor on a Saturday night in Cape Town. Stop confiscating private companies which are the only functioning sector of the economy. Common sense stuff. I recall about a year ago they, the Chinese, pulled Arreaza aside in Beijing and showed him how a real free trade zone works. “See! this how we do it! …and we’re still called communists! Get it?” Arreaza’s eyes glazed over. The Chinese do indeed have a lot invested in Venezuela, but they appear not to care when it comes to proffering their advice. I think they are as stupefied by the insanity of it all as are the rest of us. It is very confusing.

    • Well, if you think about it (I have given that a lot of thought actually) it seems that the more troubles at home, the more Vzla depends on Chinese money to survive. And in this scenario, gues who’s gonna have increasingly the upper hand in negotiations?? 🙂 True Tiger moves there

      • So if that is the case …. how would china react to a different government? not chavizta of course.
        How the new non chavizta goverment will deal with them and the fondo?
        Can a new national assembly dominated by opposition finally look into the dark areas of the fund and revoke it if they consider it too risky for the nation?

        • Hypothetically, a competent government would still need some heavy cash injections to perform course corrections and in that scenario, Chinese money may still look a hell of a lot more attractive than other loans with harsher strings attached.

  2. Interesting and enjoyable article Daniel!
    But as far as I know there are actual numbers of the oil shipments to China, roughly 300.000 m/bd. According to PDVSA informe de gestión 2014.
    Not to miss the point. I can clearly see what you mean, you were pretty clear.
    However looking things from a different perspective more than soft power we could say that China is using a soft balancing strategy against US. Foreign Policy and that Venezuela is being use to that purpose.
    We both know that China is more dependent on coal than oil, and that in the next decade China will look forward to cleaner energy. As far as I can see Venezuelan oil is not as important as we want to believe..I mean could be use for stock, for resell..but for direct use I doubt it. Iran, Saudi Arabia and the -Stan countries of central Asia have a geographical advantage over venezuelan oil. (not to mention the jewel of the crown: Angola)
    China has been famous since the 90′ for its going out policy, offering great credit deals in exchange of some raw materials in Africa, where governments are far trickier than the Bolivarian one (we are getting close though). And it has always show those three characters you mention to its new friends.
    Venezuela, at least from my chinese point of view, it’s a great deal because it means trouble – to whichever extent we are called to believe- to the United State who is still pretty sure the hegemon in the American region and who is going through an identity crisis and credibility crisis (although the TPP treaty gives us a glimpse of who is still the “big daddy”) That’s why I’d talk of soft balancing instead of soft power..it has been years since the Chinese have tried to compete with USA soft power which its still have its perks. It’s easier to frustrate your adversary than to compete with him. China has a great capacity to do this, it has the money it has the credibility to do so at least while your adversary is being despise by the country you put the money on. It’s not pretty exciting having to deal with a narcostate in a time when you are being criticize for the big failures in your drug enforcement policies. Chinese are pretty good at creating frustrating situations.
    It’s true, China has been a combination of panda, tiger and dragon many to Venezuela, but I’m having hard time to believe that oil plays the central role..Yes Venezuela has the biggest reserve in the Hugo Chavez Faja. But so far nothing as come from it but shame. Wanna bet to the long future..go for it. Wanna use it as a levarage for the future, to extort, or to do whatever you believe is necessary, good. It will depend on the next administration -if there’s going to be something different from chavismo – to know how to cope with that. After all our politicians keep saying that Venezuela is the greatest country in the world..it would be just great to show that sometime in the future.

    P.S
    I still believe that chinese soft power is still and arroz con mango..there’s a big stigma on the quality of anything that comes from China.

    sorry for the long post! You’re article just gave me a great stimulus.

  3. These are loans where:

    1. The ultimate destination of the funds is dermined by the borrower , naturally with a view to benefiting its own commercial and geopolitical interests , even if ultimately they dont represent the best interests of the borrowing country.

    2. They are paid mortgaging a sizable portion of Venezuelas future revenues from its oil exports (in an istantly convertible currency) so they are received by the lender and used by it to ensure the repayment of their loan (both that part which falls due on receipt of such payment and as is to fall due in the near future), Moreover loan disbursements to the borrower are conditional on certain ‘buffer’ amounts having accummulated in the Chinese accounts , these payments must be made within a 3 to 5 year period.

    3. The amount of actual money recieved by Pdvsa (acting on behalf of th govt) after the discounts taken by the Chinese at the banks is often less than it needs to cover its costs and pay the govt the heavy taxes that apply to such oil . This creates a financial imbalance in Pdvsa accounts which are covered thru BCV loans of local money , which BCV prints in its presses , pressuring local inflation .

    4. Corruption between Chinese companies and their Govt connected Venezuelan partners is rife and increases the costs of Projects beyond whats tolerable . Prices of Chinese goods and services are not always the best that an open market might offer . (to be fair sometimes they are within reason) .

    5. If all the money Venezuela owes to non chinese financial entities were to be replaced by typical chinese loans there probably would not be enough oil revenues to buy the essential imports which Venezuela needs simply to stay alive.

    6. By law chinese participation in the deposits it has an interest in cannot exceed 40% , Pdvsa makes the profitable production of these deposits a very heavy cost burden because of its ineficiencies and dysfunctional management . The kind of oil existing in these extra heavy crude deposits are worth a fraction of what deposits of conventional crudes are worth elsewhere in the world , in places like Iraq, Iran and Angola. Its not volumes that matter ,its their money making potential ….

    It wouldnt surprise me if the Chinese had contacted oppo figures and discussed how things might fare for them if the regime was toppled , they are very pragmatic and Mao has been dead and buried for a long time now….

  4. Corruption exists in all great financial powers. To believe otherwise is silly, and every once in a while a major European company is made to show it, held as an example as an exception, but yo no soy tan pendejo.

    We have to realize that, in politics, tajadas will be taken. What morality? There is no morality in negotiations, only credible assets to negotiate with and for. If they want a stake in our future, why the heck not?

    Who cares if China “owns” the future? This is Venezuelan MO, used to be the gringos. We aren’t strong or disciplined enough to be a superpower, we need to have tentacles in different places, and this seems like a good place from the article. The tiger shows its face when we act like prey, the dragon when we act like treasure and the panda when we act like pandas.

  5. You dont own anything here because national pride demands that formal ownership be retained by a state that doenst keep its promises, is terrible at paying its debts , is operationally totally disfunctional and corrupt, and basically doenst allow you to actually exploit and profit from the things you are supposed to own. The Chinese cant get the regime to allow it to exploit whatever assets it owns in the country so whats the good of presumably owning things that you cant profit from !!

    • I see here an argument against the government, which I agree with, and not against the fondo, which I don’t have any information yet that could bring me to agree.

  6. China’s motivation to make the loans will be woven from many strands. As others have said, the most obvious is secured access to huge hydrocarbon reserves, even if those reserves are expensive to extract. One other which I think needs to be more emphasized is China’s mercantilism: as mentioned above, a big part of its loans (nobody knows exactly how much) is tied to the purchase of Chinese products. China has got its foot in the Venezuelan door to sell its cars, electrical appliances and many other goods without the need for a full fight with western and Asian competitors in an open market. Distribution networks for these goods can then be extended step-by-step throughout South America. China is well known for taking the long view in its economic strategies, of which the Fondo Chino is clearly a part.

    • Spot on! I agree 100% with your view. I also think that securing a large buyer of chinese manufacturing goods is another key strategy the Chinese are developing with FCCV.

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