Monday, February 28, 2011

Is the Chinese Government the Biggest Sucker of All Time?

Not only have they loaned over a trillion to the U.S., but the are the major creditor of Venezuela. Economist magazine explains that situation:
The chief cause of Venezuela’s travails has been Mr Chávez’s pillaging of PDVSA, the state oil firm. He has packed it with loyalists, starved it of investment and used it for social spending, cutting its output from 3.3m barrels per day (b/d) in 1998 to around 2.25m b/d, according to industry estimates. Of that, some 1m b/d is sold at subsidised prices at home or to regional allies, leaving just 1.25m b/d for full-price exports.

Meanwhile, the president’s hostility to business has devastated the rest of the economy. He has nationalised hundreds of companies and trumped up charges against their owners, causing much of Venezuela’s private sector to shut up shop and flee. As a result, the country has seen vast capital flight, and must import many goods that it used to produce. Non-oil exports have ground to a halt: petroleum now accounts for 92% of its dollar intake.
Would you loan money to a country in this shape? Yet, Economist tells us:
Mr Chávez’s main short-term solution has been borrowing. Since 2008 China has lent Venezuela $12 billion and is being repaid in oil shipments, cutting PDVSA’s annual revenues by a further 20%. The government’s opaque accounting makes it impossible to know how it has used the money. Net public debt rose from 14% of GDP in 2008 to 29% last year, and the Economist Intelligence Unit, our sister company, expects it to reach 35% in 2011. The country cannot continue borrowing at today’s rates: PDVSA’s latest dollar-denominated bonds pay a 12.75% coupon.
Even if China is making very short-term loans, the situation is clear Venezuela is headed toward bankruptcy (or hyper inflation)and China will get stuck at the end. Not to the tune they will get stuck with U.S. debt, but still stuck.


  1. China's on the treadmill to hell and the insanity of China's existing structural problems overshadows the stupidity of lending money to a country that bleeds investment and is eating its seed capital.

    From my understanding of China, despite all of the freedoms in opening shops, packaging food, and producing consumer goods, the footprint of government on big industrial and commercial capital projects is huge. Any bridge, rail, building, road, and port has the hands of the government in it, and on these matters the provincial governments - not the central government - are the primary force. The placement of the Hangzhou Bay Bridge, for example, has all the fingerprints of a Zhejiang-Shanghai political rivalry rather than economic considerations.

    Furthermore, the provincial governments represent some large moneyed interest. The coastal provincial governments primarily advocate the export industry with some level of emphasis on real estate. The inland provincial governments primarily advocate the real estate industry.

    The economic interests between the two parties are heavily aligned. The provincial governments derive a big sum of funding from land sales of rural plots to developers. To sustain that funding and cities have to be ever expanding and real estate must be in a state of constant boom. At this point, real estate is divorced from market fundamentals and the provincial cities are cannibalizing each other for population.

    China has some seriously scary dynamics going on, but it's hard to bet against them without being concerned that the bubble might get even bigger before it pops. For example, I thought the place was a bubble in 2007, but that didn't stop me from betting on China indirectly through Australia, Canada, and Brazil. I've closed those positions already.

    I'm just scared that when the market goes to hell in China, the government might be forced into some unprecedented stupidity.

  2. Loans by China to Western hemisphere countries along the non-US axis carry an embedded optionality--namely a U.N. vote. With Brazil leaving the security council at the end of the year, China will want Venezuela or Bolivia to fill the spot. Hence, the $250 million Christmas present to Bolivia for "satellites". One could make the case they overpaid with respect to Venezuela, though the repayment in barrels of oil strikes me as a tad ingenious for a central planner. No default hedge, but at least an inflation hedge.