Edelmina Flores thanks God and Hugo Chávez for her apartment in a new housing complex in the Venezuelan president’s home state of Barinas. She might also want to thank the Chinese government. Since 2007, the China Development Bank has lent Venezuela $42.5 billion, backed by revenue from Venezuelan crude. That sum accounts for nearly a quarter of the bank’s overseas loans. At least $12 billion was promised in the past 15 months, when stagnant oil output and higher borrowing costs among major emerging markets made raising capital more expensive.
The money has provided a crucial boost for Chávez, who despite a battle with cancer is running for a third term. Most polls show Chávez leading Henrique Capriles Radonski, the opposition coalition candidate, on the eve of the Oct. 7 ballot, but not dominating as in 2006, when he won 63 percent of the vote. To woo constituents, the Chávez government has finished more than 250,000 houses since last year. In the past 12 months, government spending has risen 30 percent, according to Bank of America Merrill Lynch (BAC), fueling growth of 5.4 percent in the second quarter.
Venezuela pays off the loans with oil, the size of its payments depending on the price of crude. Currently, servicing debt consumes about 200,000 of the 640,000 barrels a day that Venezuela sends China. Apart from nailing down a steady source of oil, Beijing benefits in other ways. Flores’s apartment is one of 5,360 units being built two miles outside the Barinas state capital by Citic Construction, a subsidiary of China’s largest conglomerate. Citic is in talks with state oil company Petróleos de Venezuela (PDVSA) to acquire a stake in the Petropiar Chevron-PDVSA joint venture in the Orinoco Belt, the source of Venezuela’s heavy crude.
Chinese companies are filling pent-up demand for everything from cars to televisions as currency and import restrictions lead to supply shortages. Since 2010, Chávez’s government has purchased 3 million air conditioners, televisions, and other appliances from Qingdao Haier. The loans go toward importing cars made by Wuhu-based Chery Automobile, too.
Chávez said this month that he’s seeking another credit line. “We’re thinking about 2013,” he told reporters on Sept. 11. “I sent Hu Jintao a letter, and the teams are already working on it,” he said, referring to the outgoing Chinese president. Venezuela pays no more than 6 percent interest on its loans from China, vs. the 12 percent it pays for bonds issued in the capital markets, Oil Minister Rafael Ramirez told Caracas daily El Nacional. While the government and PDVSA sold a record $17.5 billion of dollar-denominated debt in 2011, so far this year PDVSA has issued just $3 billion.
The oil-for-loans program in Venezuela stands out for its size, but China uses the same model in Russia, Ghana, and other countries. Ecuadorean President Rafael Correa, a Chávez ally, has secured oil-backed loans from China since 2009 worth $7.3 billion, about a third of his government’s budget, according to the country’s Finance Ministry.
The U.S., which buys 9.7 percent of its oil from Venezuela, has been largely silent about China’s outreach. Rising production in Brazil and Canada would help make up for any potential shortfall in supply to the U.S., and much of the oil acquired by China is resold in Venezuela, says a U.S. government official who declined to be named because he isn’t authorized to discuss policy publicly.
If oil prices tumble and the cost of servicing the loans jumps, Chávez’s spending boom may come to an end. Morgan Stanley (MS) said in a report this month that Venezuela may default on its debt as early as the second half of 2013 unless Chávez takes action to shore up the nation’s “increasingly fragile” finances.
Oil production is 22 percent lower than it was when Chávez took power in 1999, according to statistics published annually by BP. Since PDVSA has put off investments in its facilities to fund social programs instead, reviving output won’t be easy—and Chávez will still owe China oil as payment for the loans. Still, that dilemma won’t materialize until long after Debora Gutierrez casts her vote on Oct. 7. The retired sales clerk says she wasn’t a Chávez supporter when he first took office. At that point “no one had given me anything.” Sitting on her bed in a government-provided apartment built by Citic in Barinas, she says she has no doubts about whom she’ll support: “Here in the housing project there’s a fanaticism for Chávez.”
The bottom line: China has lent Venezuela $42.5 billion, charging 6 percent interest, half what the country must pay international bondholders.
