Despite Poor Optics, China-Argentina Deals Reflect Both Sides' Pragmatism.
By Sean Goforth, Sept. 23, 2014, Briefing
In July, just days before a New York court ruling put Argentina in default on a $539 million payment to creditors, Argentine President Cristina Fernandez de Kirchner signed an agreement with Chinese President Xi Jinping whereby China would loan Argentina $11 billion worth of yuan, which the latter could use to either bolster its currency reserves or pay for imported Chinese goods. The first installment of $1 billion is expected by year’s end, according to the Buenos Aires daily La Nacion. The currency swap deal, as well as a secretive deal for a Chinese satellite-tracking station in Argentina, have drawn criticism from some quarters in Argentina and raised suspicion about China’s motives.
According to the Argentine government, the swap arrangement will go to bolstering the country’s reserves of hard currency, which Argentina needs badly. Back in January, the Fernandez government ended an unofficial program, known as “the clamp,” that aimed to prop up the peso by restricting access to dollars. Argentines rushed to cash in the national currency for dollars, forcing the central bank to deplete its dollar reserves. Since then, as shop owners have marked up prices to account for the falling buying power of the peso, inflation has soared—the latest estimates have prices on track to rise 30-40 percent in 2014.
Knock-on effects are hastening the economy’s descent. Soybean farmers have opted to hoard part of their crop instead of selling it in worthless pesos. Meanwhile, beef exports have slumped due to government controls meant to ensure that the country’s working class can still afford the nightly steak that many Argentines regard as a birthright. Given the slumping peso and declines in export revenue, Argentina’s foreign reserves have dwindled to an eight-year low in recent months.
However, critics of Cristina Fernandez were quick to dismiss any notion that a Chinese loan would bring relief to the cash-strapped country. Carlos Melconian, an economist and prominent opposition figure, called the idea of a Chinese bailout “an absolute fantasy.” He went on to state that conducting trade in yuan would only serve to “mask the import of Chinese machines and equipment.” It’s a charge with merit, as the balance of trade between the countries tilts heavily in China’s favor, to the tune of $5.4 billion in 2013, thanks to strong machine exports.
Also raising alarm in some quarters is the announcement earlier this month that China is installing a satellite tracking station in Argentina. Already several hundred workers are at the station’s construction site in Patagonia, even though Argentina’s Congress has yet to authorize the accord. More suspicious still, MercoPress reports that congressmen are forbidden from disclosing several clauses in the deal.
Yet, despite the poor optics of the currency deal and the satellite lease, the recent agreements are the next steps in a bilateral relationship that has warmed in recent years, if at Beijing’s pace. Because Beijing prioritized its foreign relations with Latin America through most of the past decade on the basis of who could provide the most oil and iron ore, Venezuela and Brazil figured highly into China’s Latin America policy; Argentina did not.
Since 2010 though, Argentina has received more than $14 billion in Chinese loans, making it now the second-largest recipient in Latin America, after Venezuela, according to data compiled by the Inter-American Dialogue. Most of the loans have gone to railway projects, but China’s ultimate aim remains unclear. The loans could reflect Chinese interest in capitalizing on the shale boom, as geological surveys suggest that Argentina possesses some of the world’s largest deposits of shale gas. However, it may just be that the present multiyear glut in world energy supplies has soothed Beijing’s nerves about securing enough gas, thus allowing for investment abroad with a long-term goal of securing access to a wider array of commodities.
Meanwhile, China’s history of cooperation with Argentina in space and telecommunications has developed over the course of at least a decade. Last year, for instance, a Chinese rocket delivered a satellite sponsored by Argentina’s government into space, alongside one from Ecuador. A report by the U.S. Army Strategic Studies Institute chalks Argentina’s appeal up to its sophistication, relative to other developing countries, when it comes to space technology.
For China, the currency swap with Argentina is only the latest of 20 such agreements it has initiated in recent years. All of them have been with smaller countries, such as the United Arab Emirates and Nigeria, that are incapable of changing the yuan’s value, which China tightly controls. So despite the widespread perception that the “redback” will soon overtake the greenback as the world’s reserve currency, the fact is the yuan remains a relatively minor part of international exchange. In Europe, for example, the largest pool of yuan is held by Luxembourg, an anomaly that China’s central bank recently sought to rectify by offering to open clearing banks in Frankfurt and London in order to settle transactions in yuan. That announcement stoked speculation that a clearing bank in the Americas would be the next step in the gradual release of the yuan to the whims of the international market. Less than a month later, the currency agreement was signed with Argentina.
Given Argentina’s increasingly desperate economic situation, the timing of recent agreements with China naturally draws suspicion. Certainly not all concerns can be put to rest, thanks in no small part to the secrecy clauses contained in the lease agreement for the satellite station. But the larger reality is that the currency swap and space agreements mark the latest in a series of pragmatic, if incremental, moves by Beijing and Buenos Aires. That message will hardly surprise most China watchers, but in Argentina’s case it should be greeted as a welcome change.
Sean Goforth is an analyst at Wikistrat, a geostrategic consulting firm, and author of "Axis of Unity: Venezuela, Iran & the Threat to America" (Potomac Books, 2012).