Monday, September 17, 2018

Paul Dobson — Venezuela’s Maduro Secures $5bn Chinese Loan & Joins Beijing’s New Silk Road Initiative

Venezuelan President Nicolas Maduro returned to Caracas Monday upon concluding a four-day visit to the People’s Republic of China, which saw the two countries sign twenty-eight bilateral agreements, including a new US $5 billion Chinese loan and joint plans for a fourth satellite, in addition to strengthening political ties....
“I have had to overcome economic sanction measures by the US and Europe, who persecute Venezuelan bank accounts, kidnap billions of dollars in international accounts and block commerce,” Maduro told Chinese state TV....
Venezuelanalysis
Venezuela’s Maduro Secures $5bn Chinese Loan & Joins Beijing’s New Silk Road Initiative
Paul Dobson

8 comments:

Noah Way said...

Uh oh.

gene kalin said...

Interesting that China is loaning in USD.

Tom Hickey said...

Interesting that China is loaning in USD.

Not really. The USD is the reserve currency for international settlement and Venezuela imports a lot of goods, the balance of which needs to be settled in USD.

gene kalin said...

OK. Why don't they lend in RMB, money they can create out of thin air. And then let Venezuela worry about the conversion to USD?

Tom Hickey said...

Why don't they lend in RMB, money they can create out of thin air. And then let Venezuela worry about the conversion to USD?

They have a currency peg. If China lends in USD and the borrower exchanges RMB for USD, it depresses the value of the RMB. And China has a surplus of USD.

gene kalin said...

If China lends in RMB not USD.

Then they convert to USD. This small amount would reduce the value of RMB? And even then wouldn't China still like that?

Sure they may have a surplus of USD. But they always have unlimited RMB.

Tom Hickey said...

While China issues their own currency and dropped peg to the USD formally in 2005. But they are sensitive to RMB volatility for two reasons.

First, they are attempting to make RMB recognized and used as a global reserve currency. So they limit the amount of RMB that leaves the country, assuming that it will be exchanged, putting downward pressure on the currency and increasing currency volatility, which decreases its attractiveness as a reserve currency.

Secondly, they have been under attack by the US for "currency manipulation" by letting the USD/RMB rate shift in a way that the US argue favors China in trade by making Chinese goods cheaper than they should be relative to US goods.

This control of RMB is true also of Chinese people that have RMB accounts who would prefer to exchange RMB for USD. It's called limiting capital flight, even though the currency never leaves its currency zone.

Because the USD is the global reserve currency used in most international settlement the currency zone of the USD is actually global. This is called 'dollar hegemony." At Bretton Woods the USD was made convertible into gold at fixed rate for international exchange transactions, making the USD the global reserve currency. Then the US "arrange" that oil would only be transacted in USD. So when Nixon closed the gold window and the world acquiesced, the USD became ersatz gold for international settlement.

The USD is the unit of international exchange. Other currencies fluctuate round the USD. To maintain stability, central banks assume they have to keep volatility wrt the USD at a minimum. Countries that peg to the USD, especially though running a currency board make a commitment to do this. China does it by controlling RMB flows internationally.

China is especially sensitive to this now that Trump is attacking them for not defending the peg strongly enough and allowing RMB to depreciated against the USD. Regardless of whether true or significant, that is apparently the thinking of the leadership.

If Venezuela were chiefly buying Chinese goods invoiced in RMB, I assume that China would make loans in RMB. As it is doing with other countries.

I don't know the thinking on the PBOC on this since they have not declared it to my knowledge. But given their behavior, this seems to be the likely explanation. So in effect, they are still running a peg, sort of, that is, voluntarily controlling the relative value of their currency. And the US is bitching that they are not doing a good enough job with it. While the US has not formally charge China with currency manipulation, Trump has been threatening. This puts China in a bind with the IMF, when it is trying to have RMB recognized as a global currency.

BTW, the PBOC has a new honcho and he is a Western economist heavy into mathematical econ. No telling what he well do.

And even though a currency sovereign after floating the RUB, Russia cb head is also in the Western mode of thinking about economics and central banking, and so not taking complete advantage of it, instead jacking up rates to "defend the value RUB" and reduce volatility.

gene kalin said...

Excellent and thank you!