March 21, 2018 / 4:05 AM / in 3 months

China stays on the sidelines as Venezuela spirals downward

CARACAS/BEIJING (Reuters) - China is likely to extend an agreement providing crisis-stricken Venezuela with favorable loans repayment terms but will not lend fresh funds to President Nicolas Maduro’s government, according to sources in Caracas and Beijing familiar with the situation.

FILE PHOTO: China's President Xi Jinping (L) and Venezuela's President Nicolas Maduro shake hands during a signing ceremony in Caracas July 21, 2014. REUTERS/Carlos Garcia Rawlins/File Photo

During a decade, China plowed more than $50 billion into the OPEC member’s coffers through oil-for-loan agreements that helped Beijing secure energy supplies for its fast-growing economy while bolstering an anti-Washington ally in Latin America.

But the flow of cash halted nearly three years ago when Venezuela asked for a change of payment terms when a fall in oil prices and declining crude output pushed its state-led economy into a hyperinflationary collapse.

Though unwilling to throw Venezuela a financial lifeline, the state-run China Development Bank (CDB) will likely extend next month a grace period begun in 2016 that allows Venezuela to make only interest payments on its loans, the sources said.

However, China has ignored several requests for new funding.

“Given Venezuela’s falling oil production, it’s natural for Chinese banks not to renew loans,” said one Chinese oil industry source who asked not to be identified.

A second oil industry source, asked if the conditions would be tightened, cited a Chinese proverb, saying China would not “drop stones on somebody who has fallen into a well.”

Venezuela still owes China $19.3 billion, according to one Venezuelan finance industry source who has tracked the information via contacts in both countries.

Some $10.4 billion of that is owed under the $20 billion Large Volume Long Term fund signed in 2010. A further $8.4 billion remains outstanding under the Joint China Venezuela Fund via three tranches of $4 billion to $5 billion each, according to the source.

China’s policy is not to lend new funds until old loans have been paid off - which cannot happen under the interest-only scheme created in April 2016 because the outstanding balance does not change.

CDB President Zheng Zhijie, asked by Reuters if the bank was having second thoughts about financing Venezuela given its situation, said: “We’ve done our assessment of its political and economic situation. We’re just monitoring now.”

However, one Beijing-based diplomatic source familiar with Chinese thinking on Venezuela said China increasingly sees Maduro as similar to former Zimbabwe President Robert Mugabe, who was pushed out after 40 years in power that dragged his once-prosperous country into hyperinflation and economic crisis.

China would have no concern about abandoning Maduro as it did Mugabe when he was ousted, the source said, but does not expect China to take an active role in pushing him out.

“China looks at Venezuela as another Zimbabwe: a poor return on its investment,” he said.

FILE PHOTO: China's President Xi Jinping (R) speaks with Venezuela's President Nicolas Maduro in front of a statue of Venezuela's late president Hugo Chavez during a ceremony in Caracas July 21, 2014. REUTERS/Carlos Garcia Rawlins/File Photo

CHINA EYES ‘PRAGMATIC COOPERATION’

Venezuela’s Information Ministry did not reply to a request for comment.

China’s Foreign Ministry said in a statement that bilateral cooperation was proceeding smoothly at present, adding that: “China will continue to carry out pragmatic cooperation with Venezuela.”

Prominent Chinese ratings agency Dagong Global Credit Rating Co in November put Venezuela’s sovereign debt on negative watch in a scathing review that warned of high default risks on bonds, which are not linked to financing arrangements with Beijing.

“Venezuela lacks the ability to create wealth on its own while debt repayment sources are highly fragile, thus a low solvency,” Dagong wrote.

Sanctions levied by the government of U.S. President Donald Trump have left Venezuela unable to refinance its crippling debt burden and left it struggling to import basic goods such as food.

Beijing has also declined to renew financing to state oil company PDVSA that is tied to oil industry investment, according to Venezuelan finance industry sources, in contrast to other loans that are used for a broader range of expenditures.

PDVSA in December paid off a $1.5 billion loan that it received in 2014, but was unable to renew it. The loan is paid off in cash rather than in oil, which made it less attractive, the source said.

Venezuela has in recent months proposed different arrangements under which China would put in new cash, including renewing part of the $20 billion Large Volume Fund, according to Venezuelan finance industry sources.

Those requests have been ignored, the sources said.

But despite China’s discontent, halting the grace period would have little practical benefit because it would most likely lead Caracas to get behind on payments - something it has done in the past.

In order to enforce its claims, China would have to open a cumbersome commercial dispute and engage in an unfriendly process of forcibly collecting on the loans, embarrassing a government that it actively supported for years.

Venezuela as of last year had fallen behind on oil shipments to China as well as Russia, another ally that has been providing financing, according to internal documents seen by Reuters.

(This story has been refiled to correct lead paragraph to say “providing” not “proving”)

Reporting by Corina Pons in Caracas and Chen Aizhu in Beijing; Additional reporting by Ben Blanchard in Beijing, and Brian Ellsworth in Caracas; Editing by Lisa Shumaker

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