On the Brink, Argentina Asks China for More Money

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China is throwing its financial and economic weight around in the emerging markets. It’s funding and building all kinds of infrastructure projects, power plants, mines, dams, and what not, often under dubious conditions and with imported Chinese labor. This isn’t a free gift, but a combination of a resource grab, shrewd financial investment, export policy, and influence grab. China is becoming a world player.

In Argentina, China plays an even larger role. Argentina can’t cheaply borrow money long-term because of its history of defaults and its cavalier attitude about inflation that have wiped out bondholders for generations. And it has a history of forced “pesofication,” most recently last week of dollar-denominated mutual funds.

Lending to Argentina has been a losing proposition. Investing in it has been fraught with risks. It’s rich in resources but has a history of nationalizing foreign companies that invested to produce these resources.

So the country is permanently out of money and has been lumbering through various bouts of financial, economic, and social trouble.

But China opened yuan swap lines with Argentina. Chinese companies are building dams, railroads, and nuclear power plants. In return, with borrowed Chinese money, Argentina imports all kinds of equipment from China including entire trains, in a country where other imports, such as smartphones, due to strict currency controls and dollar shortages, are scarce and expensive.

General elections are coming up this month, and the government wants to get through its tenure without running out of money and without another default and if at all possible without a balance-of-payments crisis.

But its foreign exchange reserves are thinning, especially in dollars, which is what the country needs the most to deal with its debts, cover the cost of its imports, and prop up its peso.

Of the $33 billion in reserves, $10.7 billion is in currencies other than dollars, primarily $9.5 billion in Chinese yuan credits. It also owes $8.1 billion in payments for imports. Which reduces the accessible reserves to a paltry $14 billion. Now Argentina had to make a bond payment of nearly $5 billion. And here is what happened next:

By Bianca Fernet, The Bubble:

Yesterday, Argentina’s Central Bank paid US$4.741 billion to holders of the matured Boden 15 bond.  The Central Bank suffered its biggest loss since 2006, with reserves falling to US$27.713 billion. Of the total payment, roughly US$4 billion, or nearly the entire amount, left the country to pay foreign bondholders.

Central Bank President Alejandro Vanoli flew to Lima on Monday night to attend a meeting for Central Bank presidents, where he is confirmed to be meeting with representatives of the People’s Bank of China. The subject of those meetings? To increase the currency swap line from China.

In less than a year, Argentina has all but exhausted the roughly US$11 billion dollar-equivalent swap line with China. This foreign currency credit now makes up approximately 25% of Argentina’s reserves, and the government is looking to increase this amount even though Chinese Yuan can only be used to import goods from China — not to pay dollar-denominated debt or import from other countries.

The Embassy of China confirmed to Cronista that talks to increase the US$11 billion dollar equivalent limit were underway. By Bianca Fernet, The Bubble

So the yuan gains “Staggering Momentum as Major Currency,” according to SWIFT. It comes out of the hide of other currencies, though not the usual suspect. Read… Not the “Death of the Dollar” but “Death of the Euro?”

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  10 comments for “On the Brink, Argentina Asks China for More Money

  1. Jonathan Vause
    October 7, 2015 at 3:46 pm

    ‘This isn’t a free gift, but a combination of a resource grab, shrewd financial investment, export policy, and influence grab. China is becoming a world player.’
    I wouldn’t necessarily describe lending huge sums of money to the Argentinian government as a ‘shrewd investment’ (although there’s no doubt about the other three). The problem with lending to emerging markets in general has always been getting your money back, especially when the prices of commodities are at the bottom of the cycle. we’ll see if China does any better than the rest of the world, but I’ll be surprised

    • NotSoSure
      October 7, 2015 at 4:14 pm

      As I mentioned below. The money will not matter eventually since Chinese companies get to learn how to apply their skill. It’s like going to school.

      Not a new model. See the book “How Asia Works” by Joe Studwell. This is like Japan and South Korea.

  2. NotSoSure
    October 7, 2015 at 4:12 pm

    It’s all funny money anyway. Meanwhile Chinese companies are benefiting from the learning curve.

  3. Nick Kelly
    October 7, 2015 at 8:33 pm

    Given the serious situation China is in, you have to wonder how much value is being extended to Argentina. So Argentina is getting a train. What is the market demand for Chinese trains? Smart phones are different- an Apple rip- off is probably a bonus in Argy, if it works.

    How does China classify the Argentine debt? Does it form part of China’s reserves- which are supposed to be huge but not big enough to stop China selling US treasuries presumably for the US$.

    It will be interesting to see what happens if Argy tries to stiff China. Maybe they’ll have to remind China of the Monroe Doctrine.

    • Roddy6667
      October 8, 2015 at 6:46 am

      If Argentina can’t repay the loans, China will just get more deals in agriculture, mining, etc. They won’t lose.
      China is making mutually beneficially deals. America is bombing countries.

  4. Petunia
    October 8, 2015 at 9:42 am

    For Argentina’s people the Chinese swap deal is better than holding dollar reserves which are guaranteed to be stolen by the govt over time. The Chinese swap forces imports to come in that ultimately increase the standard of living for the Argentine people. It also increases employment in Argentina because they have to send stuff back to China. Basically, it’s hard to steal a train, and the Argentinians get to ride a nice new train to produce stuff for China.

    • Nick Kelly
      October 9, 2015 at 1:11 am

      Surely the swap will be state- to- state. The Argentine govt can steal whatever portion they want. Maybe I’m not understanding you correctly but it sounds like you are saying that individual Argentines can deal directly with Chinese entities.

      Having read a bit about Argentina’s history, where a one time prosperous nation became a serial defaulter, the simplest solution is to adopt good government.
      This means for one thing that Buenos Aires province ( a province as well as a city) it is not viable for half the work force to work for the government, supposedly administering the other half who must actually provide all goods and services.

      • Petunia
        October 9, 2015 at 11:14 am

        The Chinese credits can only be used to pay for Chinese production. When a cargo of Chinese goods enters an Argentine port there is only so much of it the govt can steal without somebody noticing. The goods tend to enter the economy. In return the Argentinian people must produce goods and services to pay for the Chinese credits. Overall the Argentinian people will benefit more from this trade than an IMF loan which will just be stolen outright. Having said this I still think the Chinese will be stiffed in the end, but a lot of Argentinians will land up with better washers, dryers, and refrigerators than they had before.

  5. robt
    October 8, 2015 at 10:05 am

    I believe some time ago the reserves of the Central Bank were incorporated into the foreign reserves of Argentina to beef them up for the headlines. So you may mean the 27.7 billion are Argentina’s foreign reserves, inclusive of the CB, not the reserves of the CB.

  6. October 8, 2015 at 5:18 pm

    I just don’t see how this is going to work out well for China.

Comments are closed.