An article recently in the Argentine journal La Politica confirmed the collapse of talks between the Argentine government and Chinese financiers to help fund $21.6 billion in hydroelectric facilities to be built on the Santa Cruz river. This failure in negotiations is significant since it is one of the first times a Chinese denial of a major loan request by a “strategic partner” has been made public.

Even more importantly, however, the events leading up to the present failure provides important insights regarding how the Chinese style of maintaining a relationship with a partner nation and exercising its influence differs from that of the West. The story, which connects Presidential diplomacy to multi-billion dollar deals over manufactured goods, soy oil, trains, and hydropower, illustrates the nuances, contradictions and complexity of Chinese engagement in Latin America and the Caribbean, and how the Chinese are learning to use their unique type of ‘soft power’ in the region.

The present article is not a story about the Chinese “behaving badly,” but rather, about how it manages a relationship when it does not feel its partner has lived up to its commitments. The story illustrates the Chinese use of informal channels and indirect pressures, rather than public conditions and demands, to achieve their objectives. It shows the Chinese conducting business and international relations in a way that, at once, seeks to "save face" for their partner, while also making their ire felt in powerful, yet subtle ways when they themselves are made to “lose face.”

Finally, this article is a reminder that the dynamics of the China-Latin America engagement is a function of people and human relationships, rather than the interactions between countries or companies.

The present story arguably begins in 2010 as the government of Cristina Fernandez passed an increasing number of legal measures to protect local businessmen by imposing “anti-dumping” penalties on low-priced Chinese manufactured goods which were flooding into the Argentine market, even while earning ever greater revenue from exporting soy oil and other basic agricultural products to the PRC.

In April 2010, in an action officially unrelated to Argentine measures against Chinese manufactured goods, the PRC announced that it would no longer accept Argentine soy oil, due to a previously overlooked level of contamination that it now deemed unacceptable. The potential loss in tax revenue to the Argentine government by the measure was estimated at $600 million per year.

The Argentine government tried multiple channels to persuade the Chinese government to resume acceptance of soy oil shipments, without success, leading to a hastily arranged state visit to the PRC by Argentine President Cristina in July, after having unexpectedly cancelled her prior visit (much to the chagrin of the Chinese) just six months prior.

In traditional Chinese style, with subtlety and saving face for both sides, there was no official mention of the disputes regarding Chinese manufactured goods or Argentine soy in the official agenda. Rather, in the PRC President Fernandez announced an enormous new business opportunity for Chinese companies, resolving the impasse between the two countries by moving in a completely new direction, albeit one very costly for the Argentine government: Argentina would make a major investment in the modernization of its railroad infrastructure, including the country's principal network weaving the country together with its neighbors: the Belgrano-Cargas system. Chinese banks would fund the majority of the $10 billion in new work, while Chinese companies would receive the majority of the construction work, and the contracts for railcars and engines.

Behind the scenes, the key beneficiary of the deal, other than the Chinese, was arguably Franco Macri, with a long history of partnering with Chinese on Argentine investment projects from electronics manufacturing facilities and a Urea plant in Tierra del Fuego, to a contemplated automotive facility. In a remarkable “win-win-win” scenario, it was one of Mr. Macri's companies (in conjunction it is believed with Chinese partners), which held the concession for the Belgrano-Cargas rail system which would benefit from the massive rail modernization investment from the Argentine government, while Chinese banks would benefit from the financing, and Chinese companies would benefit from the construction work and associated engine and railcar sales.

The Chinese appear to have complied with their side of the informal deal...Approximately a month after the visit of President Fernandez to the PRC, Chinese authorities quietly resumed acceptance of soy oil shipments. Yet the Argentine government arguably never kept its side of the deal as the Belgrano-Cargas project became delayed within the Argentine political system.

It was against the backdrop of this incomplete commitment that Chinese Prime Minister Wen Jiabao visited Argentina in June 2012. Graciously, without any mention to the two year delay in implementation of the deal, or the informal quid pro quo behind it, Premier Wen publicly announced an increase in the size of the PRC loan and seemingly a reinvigorated commitment to the project by both sides.

Such a public commitment was a significant investment of prestige by Premier Wen. In this context, the move against the concession holder of the Belgrano-Cargass rail network by the Fernandez government, coming just weeks after Premier Wen’s visit and public commitment to project, arguably caused a significant loss of face for the Chinese, and for the Premier personally. Compounding the problem, the charges of corruption and impropriety brought by the government against Mr. Macri’s consortium in the affair was an affront to one of China’s most trusted allies in Argentina.

The difficulties over Belgrano-Cargass did not, however prevent other Chinese companies from pursuing major projects on other fronts. Over the course of 2013, the Chinese company Sinohydro entered the bidding for, and emerged as the likely candidate to build two enormous, but long-postponed hydroelectric projects along the Santa Cruz River: the Nestor Kirchner hydroelectric facility in Condor Cliff, and the Jorge Cepernic hydroelectric facility in La Barrancosa. When finished, the new facilities would provide 5,246 Gigawatts of electrical capacity, representing 4.7 percent of all installed electrical capacity in the country. The understanding, of course, was that with the award of the project to Sinohydro, the majority of the $21.6 billion project would be financed by Chinese banks.

The Chinese may have had enough with the current Argentine government.

In his previously mentioned statement carried by La Politica, Franco Macri clearly provides an authoritative first-person account that the negotiations have failed, yet his explanation for the Chinese rejection (that the Argentine government had not spent the last $10 billion credit line made available to them), can be interpreted various ways. Mr. Macri arguably has ample motive to link the Argentine government's new problems to their past mistreatment of his own business interests in Belgrano Cargass. On the Chinese side, the project may or may not actually be dead; the Chinese may simply be using the current critical moment to pressure the Argentine government to move forward more swiftly on all of the projects involving Chinese companies. On the other hand, the Chinese may also have had enough with the current Argentine government, and may be backing away from engagement with the Christina regime, albeit in a face saving way.

An interesting comparison exists between the present Argentine case, and that of Venezuela, where the PRC initially denied a loan request from that country’s socialist government during its contested political transition. Following the consolidation of power by the new Venezuelan President Nicholas Maduro, the Chinese refused to provide the new government with a $10 billion no-strings-attached loan that it was reportedly requesting to help with its deepening liquidity crisis, but instead, agreed to give it $5 billion, tightly tied to specific new projects for Chinese firms.

Between Argentina and Venezuela, two lessons can be drawn: (1) "face" in all Chinese political negotiations. A high-profile ‘Yes’ coming out of an official interaction may actually be a ‘No.” A high-profile ‘No.’ suggests that interactions have truly gone badly. (2) The Chinese are willing to accept high amounts of political risk and mismanagement in the use of their money, but are not willing to accept mistreatment or betrayal at senior levels by the leadership of countries to which they are providing significant financial, investment, and trade benefits. For this reason, the Argentine case provides a glimpse into possible Latin American futures. Argentina is not the first state in the region to accept tens of billions of dollars of loans and investment from the Chinese while moving away from Western institutions. It is simply the first to do so, and also treat the Chinese badly. The Chinese response will be instructive.


Evan Ellis
About The Author Evan Ellis [Full Bio]
Dr. R. Evan Ellis is Research Professor with the U.S. Army War College Strategic Studies Institute and author of over 80 works on Latin American security issues, including his new book, "China on the Ground in Latin America.”

China on the Ground in Latin America

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