Bloomberg Businessweek

Global Economicshttp://www.businessweek.com/articles/2014-12-12/with-oil-prices-falling-venezuela-needs-china-more-than-ever

By Peter Wilson December 12, 2014

Venezuelan President Nicols Maduro had a Plan B in the event the Organization of Petroleum Exporting Countries declined to backhis countrys proposal to cut output to boost prices.

The day after OPECs Nov. 27 decision to maintain production at current levels, a move that drove oil prices to new lows, a somber-looking Maduro went on national television to tell the Venezuelan people he was dispatching Finance Minister Rodolfo Marco Torres toBeijing. Torres spent the first week of December in China, during which he tweeted photos of his meetings with Chinese officials andbankers.

The late Hugo Chvez cozied up to China as part of his drive to curb U.S. influence in the Americas. Maduro, like his predecessor, hasrelied on Beijing to underwrite Venezuelas flagging socialist revolution and finance the countrys gaping fiscal deficits (this yearsshortfall could amount to 15 percent of gross domestic product). Without loans from the Chinese, Maduros government might not havebeen able to weather a deep economic crisis. Under his watch, Venezuelans have had to put up with massive shortages of basic goods,the worlds highest inflation rate, and a steep currency devaluation.

Beijing has so far been happy to oblige Maduro. Since 2007, China has advanced Venezuela about $46 billion in loans repayable in oil, ofwhich about $20 billion has been repaid. The latest loan agreement was in July, when Chinese President Xi Jinping visited the countryand pledged $5.69 billion in credits.

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Now Maduro needs more. The price of Venezuelas market basket of crude and petroleum products is now skirting $60 a barrel. Manyanalysts estimate that the Maduro government needs a price of $120 a barrel to avoid cutting back or postponing spending commitments.

Maduro would like the Chinese to bail him out, says Risa Grais-Tarnow, an analyst with the Eurasia Group. I think the Chinese willhave no problems in renewing existing lines of credit. However, they may not be willing to give Venezuela more funds.

Beijings largesse has come at a price. Chinese goods are flooding the Venezuelan market, as many Chinese credits are tied to the importof products and services. The low-priced imports are squeezing local companies.

Chinese cars are now the best-selling models in Venezuela, largely because Ford (F), General Motors (GM), and Toyota (TM) have beenforced to shut their assembly lines in Venezuela because they cannot buy dollars to pay for shipments of auto parts.

Home appliances now come largely from China, as do many telephones and computers. Chinese construction companies are buildingpublic housing and other infrastructural projects, while the two countries have dozens of joint ventures under study. Venezuela has alsohad to buy three Chinese communications satellites, although the need is questionable given the countrys other problems.

Not all Venezuelans welcome Chinas growing influence. I dont know why they are bringing in Chinese construction workers to buildapartments for us, says Geraldo Lopez, a 27-year-old bricklayer in the central industrial city of La Victoria. We dont have enoughwork for ourselves, yet theyre giving these contracts to Chinese companies who dont employ us.

Beijings imports of Venezuelan oil and petroleum products, mostly fuel oil, have soared in the past eight years. From just 50,000 bbl/dayin 2006, they now total 540,000 bbl/day, according to oil ministry officials. About two-thirds of the exports are believed to be loanrepayments (the terms of the credits have never been released). Many analysts suspect that state oil company Petrleos de Venezuela(PDVSA) gives Beijing a discount to cover shipping.

PDVSA receives no money for the oil it sends to China, which has contributed to cash-flow problems. The company had been forced toincrease its borrowing to cover costs: Its debt is up more than 10-fold in the past seven years, to more than $40 billion, and that excludesloans extended by the central bank. The situation has hamstrung PDVSAs ability to invest in oil projects, so even as Maduro boasts thatVenezuela has the largest crude reserves in the world, actual production continues to decline. PDVSA doesnt receive anything fromexports to China. And that means it just doesnt have the money to grow production, says Fernando Snchez, who is vice president ofthe Venezuelan Society of Petroleum Engineers.

With output falling, PDVSA has had to cut exports to the U.S.which for decades has been the primary market for Venezuelancrudeso it has enough for the Chinese. In 2006, Venezuela exported an average of 1.42 million barrels of crude and petroleum productsdaily to the U.S., according to the U.S. Department of Energy. For the first nine months of this year, exports averaged 800,000 bbl/day.And if Maduro makes good on his promise to boost exports to China to 1 million bbl/day in the following years, further reductions in U.Sshipments are a given.

China is starting to recognize the danger of becoming overextended to Maduro, whose popularity is in freefall. The Chinese have to beworried about Maduros falling support, says Vanessa Neumann, a senior fellow at the Foreign Policy Research Institute. They knowthat Maduro staying in power is their best bet to being repaid.

Dagong Global Credit Rating, one of Chinas four credit rating companies, downgraded Venezuelas debt earlier this year, citing thepossibility of increased political instability. According to the results of an early November poll published in the Venezuelan daily ElUniversal, Maduros approval rating has dipped to 24.5. Only 22 percent of those surveyed want the president, whom Chvez handpickedas his successor, to complete his term of office, which ends in 2019.

China and Venezuela entered into a special relationship well over a decade ago with one set of assumptions about what each would get,and now, as Venezuelas crisis deepens, both sides are rethinking the value of what theyve created, says Matt Ferchen, who is theresident scholar at the CarnegieTsinghua Center for Global Policy, where he runs the China & the Developing World Program.

Wilson is a special correspondent based in Caracas.

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