The China connection

Welcome! And please, give me back my wallet.

Welcome! And please, give me back my wallet.

Over at Foreign Policy’s Transitions blog (apologies, but you need to log in to read the piece), I take a break from my vacation to discuss the link between last week’s devaluation and Elías Jaua’s ill-fated trip to China:

In the last few weeks, reports have surfaced that the Chinese, the main underwriters of last year´s enormous fiscal deficit, are growing frustrated with their Venezuelan counterparts; they are in no mood to continue lending to the government, and felt that Venezuela sacrificed productive investments for cheap pre-electoral spending. In spite of this, reports surfaced that Venezuela is asking China for more cash.

Last week, newly-appointed Foreign Minister Elías Jaua traveled to Beijing, returning with a vague statement that the Chinese ratified their interest “in continuing to cooperate with Venezuela” and that President Xi Jinping sent “a hug” to Hugo Chávez.

Too bad, because he wasn’t sent to Beijing to fetch “hugs.” What Jaua did not say is that he failed to secure new funding from China — and this may have triggered the move to devalue.

As I have already argued, Venezuela is like a Ponzi scheme: Continued returns to lenders rely on getting fresh new funding. Once the funding dries up, the losses begin to accumulate.

After last week’s devaluation, it looks like the loss is borne on the backs of ordinary Venezuelans, who woke up earning less and paying more for practically everything.

44 thoughts on “The China connection

    • Genial. Chavistas que no creen en la discrecionalidad, en la burocracia, en el modelo en que todo se importa, pero igual votan por Chavez. Disociados…

      • I get an irresistible urge to laugh and cry at the same time when, at the 3rd page of that “Aporrea” link, user “Venezuela Bella” claims why the government doesn’t “control or eliminate” the parallel dollar… and then another user replies that the government is not able to do that because it doesn’t have the full control over “the media and economic powers”, supporting his “explanation” on a completely wrong retelling of the “Panic of 1907″…

        It is really sad the “economic lasagna” these guys have in their heads, and none of the leaders they pay attention to are able to help them out of their hole…

        • none of the leaders they pay attention to are able to help them out of their hole…

          Their leaders have absolutely no intention of setting straight these poor little chickadees. Power bases are made and expanded on the bases of delusion and on the backs of ignorance.

          • Eeep! That sounded almost Marxist! If only you’d thrown in something about the ownership of capital and exploitation of the workers.

            Give the Chavista leadership credit: when they say they are pursuing a Marxist model, they are…just one wherein they pick and choose the parts of Marxism that work for them and the others they can use to mislead their “followers”.

            After all, if you read Marx with a certain mindset, it gives you a pretty good idea how to control the masses.

        • Because the fact they have forbidden to blame the government or any person in it directly, they blame the paralel dollars or just say its not fair. And better yet, “ojalá la sufrieran los ricos” “ojalá los ricos” “los ricos esto” …It makes me wanna burst with laughter too

    • From your link Mayke, somebody named Internet-era sez: “Y mientras tanto, en el country club… Se destapan las botellas de champaña, !pongan la música maestro! !este país es de nosotros no joda, los amos del valle! Nosotros somos Mendoza, Vollmer, Botti, Capriles, Fernandez, Machado, Zuloaga, Rommer y esos tierruos que se jodan… ¡Que comience la música maestro! ”

      Ejjeeee, mira Internet-era, y donde vive Cabello? Y estos no saben la cantidad de Chavistosos que se han mudado para el country? Demoliendo casas y reconstruyendolas con todo gracias al dinero de todos los Venezolanos! Conchale vale brutos es poco, como se les pasa ese detalle caballero. Ahhh no leo mas!

  1. Lo que me da risa es que los Bolisarnas están engorilados porque fue Maduro el que les metió la yuca y no He Who Shall Not Be Named.
    Ho ho ho. cómo gozo…

  2. Chavez treats the Chinese as kindred communists who will welcome and support a communist Venezuela. Unfortunately for Chavez, the Chinese are most interested in making money and could care less about Venezuela politics. This is not a kissy-kissy, huggy-huggy relationship to spread global socialism. It is about profits.

    • Yes it is about profits, but it is also about keeping governments in place which are friendly to Chinese interests. Chavez and Venezuela are the linchpins to all left~wing politics in Central and South America, Cuba included. If the government in Venezuela changes, the domino effect throughout South America could be staggering. The Chinese know this. They would surely not let a pro Chinese government in Venezuela collapse over the question of a few billion dollars. This is a chess game being played at the highest levels.

    • Which made me wonder how China has became more capitalist than ever… clearly they are not going to emulate the mistakes made by URSS, where they end up bailing up pretty much every country they screwed with their political vision.

    • I am deeply sorry about my escathological language in here. Nothing personal though, they call us escuakas, escuálidos, majunches, disociados on a daily basis. I live in Venezuela, so it becomes rather personal.
      Besides that, I think is a wonderful way of calling them…
      Regarding your cliché, “estamos como estamos” porque hemos sido gobernados por Adecos desde el 58. Gobiernitos de izquierda de una u otra calaña. No te parece suficientemente acusador el que las medidas de este régimen (disculpe usted mi excesivo término) sean exactamente las mismas que todos, TODOS, los gobiernos “cleptocráticos” de la “ranchocracia” han tomado a lo largo de los años. Financiar sus déficits y corrupción con el bolsillos de todos nosotros. Con una muy salvada excepción, el segundo mandato del Sr. Carlos Andres Pérez.
      Estamos como estamos porque los Adecos tienen una enorme capacidad para mimetizarse en un sinfin de vainas.
      Estamos como estamos porque Capriles dice que no hubo fraude. Y no es que yo crea en un fraude, este país está suficientemente lleno de excremento como para pensar que algo como el chavismo es una “imposibilidad histórica”. Pero el tema del ventajismo y del uso de los dinero públicos para financiar la campaña del “mono” (Sí, es un mono de mierda!) fue descarado y nauseabundo como para que tú salgas casi antes del CNE a decir “mosca con los que gritan foul play!”
      Estamos como estamos porque Colombia quebró a todos los nángaras a plomo limpio y nosotros los integramos a la “ranchocracia”.
      Hazme el favor y no me hagas arrechar más de los que estoy…
      Regards

      • ¿Y por qué le iba a hacer yo un favor? Su respuesta confirma mis peores temores sobre un sector, afortunadamente pequeño, de la población opositora, que no es lo mismo que las organizaciones opositoras.

              • Why would I?The whole point of my first comment was to illustrate how defrauded Chavistas feel.
                Cal had a point by implying maybe (that’s what I understood) that this was not one more post where Venezuelans engage on escathological debate. But going forward and implying that just because of that you’d be even worse than Chavistas was a bit too much comeflorismo. JCTT had already reply very well. Why would someone understand my point and others not?
                Then to go to google and check on someone and do what he did is really over the top. Who is the extremist here?
                Nevermind. Funny thing I call boliperros the chavistas and he gets offended.

            • Not quite! But thanks for letting me know there is another Mayke Santos. There is also a Dj with the same name. Good try anyway.

              • Dear Anti-Troll:

                Should it really matter who he is and/or where he posts if his comments make a valid or well-argued point and contribute to the discussion?

                Doesn’t denouncing him as a troll more or less continue the polarizational curse that afflicts Venezuela? If you exclude one side of the table from talks, the other becomes an nothing but echos of affirmation and reinforcement of an already held view.

                I haven’t agreed with everything I’ve seen him write, but at least he is more or less reasonable.

                Things won’t change until everyone can sit down together and have a civil discussion without the invective. This is part of the curse of “progress” in Venezuela.

            • http://www.google.co.ve/search?q=Mayke+Santos&domains=aporrea.org&sitesearch=aporrea.org

              Well aside for the name, both characters are totally different (trolling?? I don’t know)… the one in the link is a totally wrecked commie, that if I read correctly that character wanted the expropriation of a very functional and productive cacao farm, only because it was managed by a foreign national, a British guy, and he’s selling the crops “apparently” only to the Britons, because god forbids that he seeks to sell his crops with the best prices he can find, never mind that the good man had created some jobs, and is giving our Cacao good reputation, a reputation that could well be used to help the other farmers around to sell their crops in Europe.

              But no, that is irrelevant for this kind of wrecked people, for them they must screw the guy that is making money.

              So for this kind of wrecked people, sure this kind of nicknames are in order.

              • “Well aside for the name, both characters are totally different”

                Another term for ‘split personality’ is ‘dissociative identity disorder’ :)

        • Que cara de tabla por no decir que pajúo, vienes a hablar de sectores bla bla bla seguro venías por lo de la disociación y el odio. Y cada epíteto que los “Bolivarianos” le ponen a la oposicion, ¿que? Es usted un hipócrita de quinta categoría

      • Estoy con Mayke en esto, porque lo peor que hay ahora es la ideologia del “estado dame todo”, que es la base de todo este desastre, una ideologia instaurado por comeflores izquierdistas cuya unica ambicion es la de hacerse con el poder para convertirse en especie de Robin Hood moderno.

        Alli estan los mismos izquierdistas que se les perdonaron un sinfin de crimenes, golpes de estados, subversion, sabotajes etc. Ahora quieren la cabeza de Simonovis, Afiuni, Forero, prisioneros de la politica, quiren sus cabezas en bandeja de plata como retribucion.

        Vamos a seguir con el comeflorismo de que estos ladrones salen por los votos? Sin siquiera exigir condiciones minimas, exigir un CNE equilibrado? Que hayan reglas claras y un ambiente equilibrado, y de pasan lo tildan a uno de radical.

  3. And so we see the continued financing of the government heading well off the main venues of the regular market and deeper into the extra-market sources. Does anyone else notice the trend?

    Its like driving off the highway and on to a unkept but paved road that goes into the jungle eventually turning into a dirt path. The next step is to just head directly into the jungle. The problem is that the farther you go, the harder it is to get back.

    I’d like to point out that everyone talks about the quality of the financing vis-a-vis the interest rates that Venezuela is always forced to shell out. I know that Messrs. Nagel and Toro like to call it, as most everybody else does, “credit card rates”. This is fair. I would, however, like to point out one other critical factor that is overlooked more often than not: the quality of the financiers.

    I’m not referring to Venny who is a bond holder and Venezuelan and posts in defense of the bonds. Nor am I pointing to any other pensioner/holder of the bonds that lives in Venezuela or abroad and relies on the bonds as part of their income. I’m thinking directly of the larger institutional holders (both governmental -China, Russia- and financial). I’ve mentioned this previously, and I’ll point it out again: there is a migration to lower “quality” folk holding the debt instruments and despite the devaluation which temporarily favors the bond holders and has helped the recent rally, that trend will continue due to the unsustainability and unrealistic policies of the Venezuelan government.

    Some of it is return-chasing. This is logical. There is also, however, a darker aspect to those that are waiting for an implosion and the signs are there that it is coming. Ask yourself this: if floating more bond issues starts to become unfeasible because of the actual accounting and transparency and you begin to seek “deals” with other sovereign nations at nominally lower interest rates but far higher transaction costs that boost the real interest rate, where do you go when they cut off the flow of financing?

    The deeper the financing goes into the jungle, the harder it is to see and even worse, the more likely one is to be bitten by jackals..

    • good analogy. the path is running out, there are food shortages, the flashlight only works periodically, half of the party has dengue, and the other half of the party is more interested in finding a business opportunities with the FARC…

      • Even worse, many in your party are zombies and cannibals! When your back is turned, they will expropriate you, eat your brains out and leave a rotting carcass behind for the carrion beetles. They will say it was justified because you were hoarding a big brain to eat, and they were starving (Never mind the fact in doing so they killed the person who could identify what plants were safe to eat). My suggestion, jump ship and join a group which is not headed into a Donner party type disaster.

          • Yes, it is a good show!

            Very OT, but I made an interesting discovery the other day when cleaning out the cupboard, a very old Polar brand Jelly, actually made in Venezuela. Not sure the age so i wouldn’t dream of eating it, but I know for sure I have not seen anything made in Venezuela in a supermarket for ages here in the US.

  4. I believe Venezuela is facing a similar situation to that of Greece: it is applying austerity measures due to a shortage of currency. Venezuela appears to be spewing more dollars than it receives. Otherwise why such desperation in aquiring long term debt?
    So I ask any economists in this forum: what happens if Venezuela can’t access any international financing? Would the country’s finances stay in shape without brutal cuts in Cadivi assignments or without eating up its reserves?

    • Short version: No. Not under the current terms of trade and economic policies. Should it be able to do so? Yes, but the leeching of funds through a thousand corrupt cuts and inefficient pet products don’t work so well. The only thing keeping it all together is the relatively high price of oil…and that so long as it remains up.

      The long version will go like something thus:

      Venezuela still has a bit to go before it dries up regular financing. I think they are avoiding it because it looks rather bad given the recent runup they’ve had issuing bonds over the last 2-3 years. Instead, they opt for less transparent transactional relationships that they can keep off the “official” books and give the statistics they toss out a bit of legitimacy.

      I think we can all agree that the current situation is unsustainable and eventually it will get ugly. A big red flag, for me at any rate, is the extra-market financing through China and Russia that seems to be in the offing on a more or less permanent basis. These deals become pretty muddled and I have had a hard time tracking down full details. I’m not sure anyone outside of the foreign ministry and Ramirez and his mates have the total picture. As you might imagine, though, the oil is likely (heavily) discounted. They are, in effect, selling future revenue streams for money today, which admittedly could describe most debt, but this is securitized by actual products versus the bonds which are secured (beyond legal intervention) in effect by a promise. The more they need the government needs the money, the more nefarious the deals, the heavier the discount and the greater the obscurity of the details.

      Incidentally, you didn’t think they brought all those gold reserves back to support the national sovereignity, did you? Yup, those’ll be next on the block as more oil is spoken for beyond domestic consumption. By the way, has anybody actually checked up on the reserves and just how are they doing by the way? Oh yeah, ‘nother red flag.

      Much beyond that, and they will be literally selling the baby with the bathwater, as it were. See, there’s not a lot of options at that point. Sure, they could continue with factoring, but whatever stakes they have in outside projects, they will certainly liquidate…but by that point, they’ll be dunned by partners who have been effectively stiffed. As the noose tightens, the government will be faced with all sorts of tough decisions. Austerity, continued devaluation to pay its internal costs, getting every inkjet in every ministry rolling out currency, etc. The proverbial paquetazo. Only, it won’t be enough and inflation, a run on currency, not that there’s much left in the banks anyway, and a credit crunch will cause a pretty epic crisis as shortages due to declining imports (since suppliers have issues getting paid) and there’ll be social unrest (although, will it be statistically significant compared to ~20,000 murders a year?)

      The government will be forced to default on its bonds and be effectively cut off from all sorts of outside investment (too much risk) and credit (cf. Argentina circa 2001). The Venezeulan people( or equity investors, as I referred to them previously) will hold the ultimate trump card over the debt investors because of the sheer number of physical pitchforks and torches versus vague transoceanic legal threats.

      External assets will be seized, including oil leaving ports . But oh ho! The oil being loaded now belongs to the Chinese according to the new shipping terms and will be inviolate. Also, suddenly, bringing all that gold home seems like a good idea, except most of it has “disappeared”, probably thieves, saboteurs or a wily rabipelado *shrug*)The oil thing and deferring ownership/liability of outbound flows to the Chinese, however is pretty much locked up tight while the Chinese now have the country in a checkmate-situation as the only source of external financing – barring a repudiation. I’m sure right now without seeing a BOL, under incoterms, Venezuela is paying for all shipping costs and insurance and berthing, etc, as terms of their loans and thus carry all liability until it hits Ningbo or Dalian enroute to Zhenhai or whereever it goes. It’ll be interesting to find out if that changes…cuz it’ll pretty much indicate a default within 60-90 days.

      Dogs and cats living together. Mass hysteria. End of the fiscal world type stuff.

      Not playing Cassandra…just throwing out the likely endgame scenario if they don’t really get their crap together. Given their current disorganization and lack of leadership, it doan’ look none to promisin’. It might seem a bit exaggerated, but hey, if creditors can try to attach a silly sailboat a decade post facto… (http://www.nytimes.com/2012/10/19/world/americas/seizure-of-argentine-ship-forces-shake-up.html?_r=0), oil is certainly fair game.

      • there’ll be social unrest (although, will it be statistically significant compared to ~20,000 murders a year?)

        I find this interesting, not sure what to make of it, but it is a “something”

  5. Venezuela is not in the same position as Greece. greece cannot devalue its currency, and therefore cannot use a currency reform to increase exports and export earnings.

    • As we’ve all heard, the new rate doesn’t scratch currency demand through Cadivi or other sources (if any), so international financing facilties are still in need.

      • If the official rate of exchange allows massive profits for those getting dollars, the potential demand is for all intents and purposes infinite (it will never be met by the government).

  6. To me it’s a mystery that the country needs to issue financing to balance its accounts. Its debt continues expanding which only speaks of a deficitary nation (even though the current account shows a huge surplus). Every economist recriminates the growth in debt but nobody really discusses or explains what would occur if the country’s financing capacity disappears and under the same government. So, any experts?

    • The country might default on its debt. Check out the 2001 Argentine economic crisis to learn more about defaults.

  7. The chinese fund loans in themselves ( taking out the very hefty and invisible accompanying transaction costs) are much cheaper than the ordinary private bond market loans , Venezuela cant simply afford (lest desperation make it imperative) to continue issuing bonds into the market . That explains the regime’s effort at getting additional money from the Chinese . The Chinese however are no fools , they know that now that the regime is in a financial hole they will be able to demand much more before they disburse any money , moreover they will edge their risks by having paralel talks with the opposition (there is some hint of this in some of Capriles recent statesments) .I understand that the Chinese as part of their loan arrangements demand ‘legal assurances’ (in case of a regime change) which are as tough as any which Western private financiers normally demand as a condition for their lending . The whole ‘communist commrades in arms ‘ hog wash is simply a selling point for our ideologically crazed supreme leader , In actual fact they are commercially as tough as nails!!

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