Double Handshake

Zhou Xiaochuan, the head of China’s central bank, has been one of the headline-grabbers from the Inter-American Development Bank (IDB) summit, which is wrapping up today in Medellin, Colombia. Zhou was the new guy at the meeting; China only became a member of the IDB in January, shelling out a US$350 million loan to join.

Zhou swallowed his butterflies and made his first address at the meeting, duly talking about the “huge potential” in China-Latin American trade and cooperation and reeled off some eye-catching statistics: 30% annual growth in bilateral trade since 2001, from US$15 billion to US$140 billion.

Earlier in the week, Zhou made waves by voicing his concerns about the US dollar’s supremacy as the global currency, proposing that the International Monetary Fund consider adopting a basket of currencies to replace it as “super-sovereign reserve currency.” Barack Obama didn’t warm to the idea, but US Secretary Treasury Timothy Geither seemed to. Presumably Zhou and Geither had a bit of time to discuss it further in the de-Pablo Escobar-ed setting.

As if to drive his point home, Zhou announced a US$10 billion currency swap (that is, US$10 billion-worth of yuan and pesos) between his country and Argentina at the IDB meeting. It is the first currency swap between China and a Latin American country. Argentina has an election coming up on June 28, and having the extra funds will give them a measure of security in controlling the peso’s value.

Argentina’s central bank president, Martin Redrado, was quick to point out that the deal is a contingency plan; the country doesn’t need it at the moment. And, another asterisk behind the deal:

“The fact that China represents such a small share of Argentina’s total trade (less than 12 percent) suggests limited impact on FX, but is an important political gimmick at this time (convertibility will remain an issue),” RBS wrote in a research note issued on Tuesday.

Gimmick or no, Zhou proved that even in an international setting like the IDB summit, China will look for ways to extend its reach (and currency priorities).

Image: China Daily

Xinhua reports that Vice Premier Wang Qishan met with the president of the Inter-American Bank (IDB) Luis Alberto Moreno on Wednesday for vows of trans-Pacific economic cooperation. There’s nothing particularly exciting Moreno’s visit to Beijing, but this seems like a nice occasion to mention China’s joining the IDB last month and why it did so.

The Inter-American Development Bank is one of the largest sources of financing for developing countries in Latin America and the Caribbean. Twenty-one member countries raise funds by selling bonds to the 26 member countries eligible for taking out loans. According to Wikipedia’s explanation, the IDB differs from the World Bank or the Asian Development Bank in that the developing countries are the major shareholders in the IDB, which gives them more control in decisions made by the bank. The bank is financing about 600 projects at present, and has lent out US$10 billion in the last 12 months.

China forked out US$350 million to join the IDB with something like a 1% stake in the bank – an expensive proposition. By contrast, the US has about a 30% stake in the bank, and as mentioned above, the developing countries themselves have a combined majority stake. The figure pales in comparison to, say, China’s US$3 billion investment in a steel factory in Rio de Janeiro, but this is a different kind of investment. In joining the IDB, China is spending hundreds of millions of dollars to join an organization that it will have very little say in, and whose socially conscious projects have less direct benefit for Chinese businesses.

Certainly, China is no stranger to goodwill gestures in the developing world, but its joining the IDB is in a different league, I think. This is not quite a PR play for more market access, nor is it strictly a business deal. What it signifies is China seeking to become a real stakeholder in Latin America, rather simply a trade partner. Yes, when developing countries have functioning infrastructures and healthy citizens, this will boost Chinese trade in the long-term. But, in the short-term this move is more of an expensive profile-raiser, an influence-booster for China.

All of this somewhat complicates China’s usual foreign investment image as a business-before-human-rights, commodities-obsessed nation as well. The easiest thing for China to do in Latin America would be for it to continue to finance specific projects that directly benefit Chinese businesses. If China’s only interest in Latin America was soy beans, oil, copper and iron, why not find a way to please only the countries that are providing them?