China-Venezuela relations: The Ties that Bind?

Dr. Scott MacDonald's picture

Chinese government officials and businesses must be rethinking their commitment to Venezuela. Although the Latin American country holds the largest proven oil reserves in the world, it remains questionable if PDVSA, the state-owned oil company, has the ability to repay the debts it has incurred in past years. The Venezuelan economy has been hard hit by the collapse in international energy prices, with real GDP expected to shrink by 10 percent this year and another 6 percent in 2016. Inflation is heading toward 200 percent and government economic policy remains highly inept. The country’s politics are highly polarized. Indeed, the December 6th elections were marked by a resounding victory for the democratic opposition and a bloody nose for the highly unpopular and corrupt administration of President Nicolas Maduro. Unfortunately, China is heavily invested in Venezuela. Moreover, not long ago, at the January meeting between China and the Community of Latin American and Caribbean States (CELAC), it was announced with great fanfare that Beijing had agreed to invest more than $20 billion in Venezuela to help it overcome an economic slump resulting from falling oil prices. China had earlier extended credit to Venezuela, much of it linked to oil sales. Since January 2015, oil has continued to fall - now trading under $40 a barrel with some analysts expecting it to bottom in the $20s. In January, President Xi Jinping described Maduro as “an old and good friend of the Chinese people.” He also stated: “It can be said that the development of China-Venezuela relations and win-win positive cooperation have been raised to a new level.” Almost a year later, Maduro looks more like a millstone and China must be wondering what is going to happen to the credit its extended the sinking oil giant as well as its investments there.