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.

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.

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