The China connection

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...

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.