Tag Archives: trade

The Thirst for Commodities: loans-for-oil deals

china latin america

China’s demand for commodities has entrenched Latin America’s position as a supplier of raw materials. The country guzzles oil from Venezuela and Ecuador, copper from Chile, soyabeans from Argentina, and iron ore from Brazil—with which it signed a corn-import deal on April 8th.   Chinese lending to the region also has a strong flavour of natural resources. Data are patchy, but according to new figures from the China-Latin America Finance Database, a joint effort between the Inter-American Dialogue, a think-tank, and Boston University, China committed almost $100 billion to Latin America between 2005 and 2013 (see chart). The biggest dollops by far have come from the China Development Bank (CDB). These sums are meaningful. Chinese lenders committed some $15 billion last year; the World Bank $5.2 billion in fiscal year 2013; foreign commercial banks lent an estimated $17 billion.

More than half of China’s lending to Latin America has been swallowed by Venezuela, which pays much of the loan back from the proceeds of long-term oil sales to China. Ecuador has struck similar deals, as has Petrobras, Brazil’s state-controlled oil firm, which negotiated a $10 billion credit line from CDB in 2009.

Such loan-for-oil arrangements suit the Chinese, and not simply because they help secure long-term energy supplies. They also reduce the risk of lending to less creditworthy countries like Venezuela and Argentina. Money from oil sales is deposited in the oil firm’s Chinese account, from where payments can be directly siphoned.  It is no surprise that Chinese money is welcome in places where financial markets are wary. Ecuador, which defaulted on its debts in 2008, has used Chinese loans both to fill in holes in its budget and to re-establish a record of repayment in advance of trying to tap bond markets again.

But Chinese credit has its attractions in other economies, too. It often makes sense for countries to diversify sources of lending. Loans can open the door to direct investment. And as Kevin Gallagher of Boston University points out, the Chinese banks operate in largely different sectors to the multilaterals. Of the money China has lent in the region since 2005, 85% has gone to infrastructure, energy and mining. Borrowers may have to spend a proportion of their loan on Chinese goods in return; some observers worry about the laxer environmental standards of Chinese banks. But the main thing is that money is available. Expect the loan figures to rise.

Chinese lending to Latin America: Flexible friends, Economist,  Apr. 12, 2014, at 27

Trade Wars: the Partnerships

tpp protest

The American administration is serious about its goal of realising the Trans-Pacific Partnership (TPP) this year (2013), a free-trade agreement bringing together a dozen countries, two-fifths of the world economy and one-third of all trade.Since it also involves Australia, Canada, Chile, Mexico, Peru, Singapore and Vietnam, this is ambitious… But  the secrecy that cloaks the TPP talks, fuel the anxieties of anti-globalisation protesters worldwide. They see a plot to impose American standards and products on an unwitting and unwilling world…

Each of the 12 countries [that participate in the negotiations] wants its own exemptions, known as “carve-outs” in the jargon. Vietnam resists rules that have the effect of forcing textile manufacturers to buy yarn from other TPP members rather than non-members (ie, China). Australia objects to “investor-state dispute-settlement” provisions, which it sees as a threat to the government’s ability to stand up to multinationals. In many countries politicians have expressed concern about new intellectual-property protections. And everywhere, the lack of transparency in the talks feeds conspiracy theories.

Nor is the TPP the only trade game in Asia. Also (and not coincidentally) in Brunei this week there were talks on the Regional Comprehensive Economic Partnership. The RCEP groups the ten members of the Association of South-East Asian Nations with Australia, China, India, Japan, New Zealand and South Korea. Seen as of lower “quality” than the TPP, the RCEP might for that reason have better prospects. But it is at a very early stage….

With provisions that seem aimed at ensuring China’s exclusion, many still see the TPP as the trade-policy arm of America’s strategic “pivot” to Asia. China has said it is “studying” the TPP. But for now, its involvement in the RCEP makes the two pacts look like rivals. America is trying to design a trade regime which China will eventually have to join—rather than getting to set its own rules as its clout increases. It is an ambition worth a few takeaway dinners; but not one susceptible to a quick fix.

Trade, Partnership and Politics, Economist, Aug. 24, 2013, at 40

China and Australia: the coal and iron trade

Western Australia iron ore mining. Image from wikipedia

China’s demand for iron and coal has helped to turn it into Australia’s biggest trading partner and to keep Australia more economically robust than most other rich countries. But in some parts of the country the new relationship with China came as a reminder of the unwelcome side-effects of the boom… Chinese trade not only helped Australia survive the global downturn. It has also boosted the currency’s strength, and made it harder for manufacturers to find markets for their exports. The problem is unevenly distributed around the country. South Australia has suffered the greatest pain: in no other state does manufacturing account for such a big share of the economy…. Five years ago, Mitsubishi closed its plant in Adelaide. Australia’s remaining carmakers, Holden, Ford and Toyota, have shed jobs steadily since then. Australians are buying imported cars more cheaply than ever, especially from Japan; their dollar has risen by 26% against the yen since October.  Even wine, South Australia’s third-biggest export, has suffered: exports in fiscal 2012 dropped in value by A$62m ($65m), or 2%. Codan, an electronics company based in Adelaide, has done better. By making many high-tech products in Malaysia, it has been able to protect itself from the strong Aussie dollar.

The Australian dollar: Resources boomerang, Economist, Apr. 20, 2013, at 44

Big and Rich: the US-EU Trade

Beef suet raw beef or mutton fat.  It is used to make tallow. Tallow is used to make biodiesel.

The guns of the long transatlantic beef war are silenced. Last year the European Union more than doubled its quota of American beef imports (so long as it is not treated with hormones) and America removed punitive duties on imports of Roquefort cheese. The Americans should soon ease a ban on beef imports imposed in 1997 to prevent the spread of mad cow disease. In November the EU accepted the American practice of decontaminating meat with lactic acid. A final skirmish, over American beef fat, could soon be settled through plans to allow imports of tallow for biodiesel (but not for cosmetics).

After decades of trade rows and lawsuits, the truce is meant to clear the air for an ambitious transatlantic free-trade deal. EU officials speak of creating “something approaching a transatlantic single market in goods”. Even a less grand pact could help to re-energise struggling economies on both sides of the Atlantic. It could also help America and Europe to set international trade rules in the face of a fast-rising China.

Big business wants a deal. Trade unions and greens are no longer so worried about a race to the bottom. The ever-protectionist French and Italians are on board. And yet there is genuine wariness, particularly on the American side. The report of a high-level group that is expected to recommend the start of talks has been delayed. Perhaps, think some, President Barack Obama is trying to squeeze concessions out of the Europeans; or, Europeans worry, he cares more about a transpacific deal?….American officials say they want to ensure that any negotiation is both unusually ambitious and unusually fast. The deal, they say, has to be done “on one tank of gas”, by which they mean in the next two years. Neither side wants a repeat of the moribund Doha round, now in its 12th year.

America and the EU make up the world’s biggest and richest trading partnership, accounting for about half of global GDP and one-third of trade. They are the biggest investors in each others’ economies. But this very closeness makes progress harder. Easy deals have mostly been done; what is left is complicated. Tariffs are low (below 3% on average, though higher on farm products) but non-tariff barriers abound. Many have to do with consumers, public health, the environment or national security. Governments are not usually elected to compromise on such matters.

One European aim is to open up America’s public-procurement market, which is more protected than Europe’s; one reason is that the federal government cannot force states to open tenders to foreign bidders. Another is to dismantle restrictions on services, which represent the lion’s share of output but a relatively small part of exports. European airlines cannot take over American carriers or carry passengers between American cities. Similar restrictions apply to coastal shipping under the 1920 Jones Act. Yet the EU market in services also remains fragmented. A transatlantic deal could spur further integration. Other difficulties include France’s insistence on the “cultural exception” to protect French-language audio-visual products, and the EU’s wish for America to respect hundreds of “geographical indications” on everything from Parmesan cheese to French wines.

For some officials, the biggest prize and the hardest brainteaser will be greater “regulatory convergence”, ie, to get both sides to move towards common rules, or at least regulations that are close enough that each can accept the other’s. There could be big savings if, say, pharmaceutical firms did not have to submit new drugs to two sets of safety tests. The EU has tried to pursue global standards for decades, often acrimoniously, by relying on supranational bodies. Yet across the Atlantic, successive dialogues between regulators have yielded little. The Transatlantic Economic Council was created in 2007 to increase political pressure. Rather than trying to redesign past rules, attention has shifted to new technologies such as electric cars and nanotechnology. Even so, after a year of negotiation on electric cars, one forlorn American official moans that “we have a common standard on the plug.”

Any trade deal will have to be broad to maximise the possible trade-offs. And it will, inevitably, have to address the minor but contentious subject of agriculture. Congressional leaders in America will not support a deal that excludes farming, to which European officials retort that the best way to kill one would be for America to ignore consumers’ fears of “Frankenfoods”, such as hormone-treated beef and genetically modified crops. Part of the answer is to have clear labelling and let consumers choose what they want to buy.

Excerpt from Transatlantic trading, Economist, Feb. 2, 2013, at 44

A Continent for Sale through Queensway

According to The Economist,

Angola…is a partner in a syndicate founded by well-connected Cantonese entrepreneurs who, with their African partners, have taken control of one of China’s most important trade channels. Operating out of offices in Hong Kong’s Queensway, the syndicate calls itself China International Fund or China Sonangol. Over the past seven years it has signed contracts worth billions of dollars for oil, minerals and diamonds from Africa.

These deals are shrouded in secrecy. However, they appear to grant the Queensway syndicate remarkably profitable terms. If that is right, then they would be depriving some of the world’s poorest people of desperately needed wealth. Because the syndicate has done deals with the regimes in strife-torn places, such as Zimbabwe and Guinea, it may also have indirectly helped sustain violent conflicts…

The syndicate is built on links forged during the cold war. It is largely the creation of a man known as Sam Pa. Though he uses several names, he was born Xu Jinghua. After attending a Soviet academy in Baku four decades ago, say people who have looked into his career, he traded with Angola during its civil war, which lasted from 1975 to 2002 and over the years was a proxy battleground for several outside powers, including China, America, Cuba, the Soviet Union and South Africa. Mr Pa is a private and rarely photographed person. His name appears in few syndicate documents. He is believed to exert control through Veronica Fung, who may be a member of his family. She controls 70% of a core company, Newbright International. The two frequently travel in Africa, using the syndicate’s fleet of Airbus jets. They are said sometimes to bypass customs.

Mr Pa has several Chinese partners, according to a 2009 American congressional report. The daughter of a Chinese general, Lo Fong Hung, married to Wang Xiangfei, a well-connected banker, controls 30% of Newbright. Mrs Lo is the public face of China International Fund and China Sonangol. She is listed as a director of dozens of interconnected companies. The business’s operations were initially entrusted to the head of a privatised engineering firm from the mainland, Wu Yang. Later, African partners took over.

Although the Queensway syndicate has sometimes been suspected of being an arm of the Chinese government, there is little evidence of that. Indeed, it has often been the butt of criticism from Chinese officials. More likely it was set up to take advantage of a new strategy by the Chinese government, known as the “going out” policy. In 2002, after decades of commercial isolation, China started encouraging entrepreneurs to venture abroad. Short of contacts, Mr Pa teamed up with Hélder Bataglia, a Portuguese trader who had grown up in Angola and had links to Latin America. Together in 2004 they visited Néstor Kirchner, the president of Argentina, and Hugo Chávez, the president of Venezuela. Mr Chávez welcomed them on his weekly television show “Aló Presidente”, where Mr Pa grandiloquently declared: “This is an historic day because we are taking part in your programme.”…..

In late 2004 Mr Pa travelled to Angola. He knew President José Eduardo dos Santos, having first met him as a student in Baku and later traded with his guerrilla army. Mr Pa’s new partner, Mr Bataglia, also knew the guerrillas from having supplied them with food during the civil war. They were joined by a third trader, Pierre Falcone, a French Algerian who has long enjoyed close links with the Angolan elite and particularly the president.

Together the men persuaded the Angolan elite to channel their fast-expanding oil exports to China through a new joint venture, called China Sonangol. Mr Vicente, boss of Angola’s Sonangol, became its chairman. Contracts, signed in 2005, gave the company the right to export Angolan oil and act as middleman between Sonangol and Sinopec, one of China’s oil majors.

China Sonangol threw itself into the business, according to Angolan oil ministry records and applications for bank loans backed by oil shipments. The official statistics are incomplete, but good sources have concluded that almost all of China’s imports of oil from Angola—worth more than $20 billion last year—come from China Sonangol. By contrast, China’s state-owned oil companies have no direct interest in Angolan oilfields, one of their two biggest sources of crude. Their names do not show up on the map of concessions.

By 2009 the syndicate was trading a lot of Angolan oil and decided to expand to other African countries. Mr Vicente, both head of the Angolan state oil company and of China Sonangol, flew to Guinea in 2009 to arrange a deal for the syndicate. One of the people he met was Mahmoud Thiam, Guinea’s minister of mines, whose government had come to power the same year in a coup. Mr Thiam is an American citizen who studied at Cornell University and had previously worked as a Wall Street banker at Merrill Lynch and UBS.

With Mr Thiam’s support, the syndicate won the chance to become a partner in a new national mining company. This would control the state’s share of existing projects and, much more important, gain control of future projects in what is a relatively undeveloped mineral territory. Guinea contains the world’s largest reserves of bauxite and its largest untapped reserves of high-grade iron ore. Under a contract signed by Mr Vicente, the syndicate got an 85% share in a venture called the African Development Corporation. The government received the other 15%. The venture won exclusive rights to new mineral concessions in Guinea, including the right to negotiate oil-production contracts in the Gulf of Guinea. In return, the syndicate promised to invest “up to $7 billion” in housing, transport and public utilities, according to the government of Guinea (GDP $4.5 billion).

Ultimately this deal foundered on a Guinean election, but at the time the Queensway syndicate was so pleased that it reportedly gave Guinea’s military ruler a helicopter as a present. Mr Thiam began to travel with representatives for the syndicate—though in a response to our questions (and as the only person to reply to us) he says he was representing the Guinean government’s shareholding in the joint venture and he denies ever having become one of its employees. Mr Thiam went to Madagascar for the negotiation of a deal modelled on the one he made on Guinea’s behalf. Simultaneously, he carried on as mines minister for another year.

Around the same time, Zimbabwe also caught the syndicate’s eye. Mr Pa met Happyton Bonyongwe, the head of the Central Intelligence Organisation (CIO), the country’s notorious secret police, which helps to keep Robert Mugabe in power. Mr Pa’s plane frequently showed up at the Harare airport and he bought properties in the capital, including the 20-storey Livingstone House. His two original partners, Mrs Fong and Mrs Lo, became directors in a new company, called Sino-Zimbabwe Development Limited, which received rights to extract oil and gas, and to mine gold, platinum and chromium. In return, the company publicly promised to build railways, airports and public housing. These pledges were valued at $8 billion by Mr Mugabe’s government.

By 2009 the Queensway syndicate spanned the globe from Tanzania and Côte d’Ivoire to Russia and North Korea and on to Indonesia, Malaysia and America. It had bought the JPMorgan Chase building at 23 Wall Street in New York.

Nobody should begrudge an entrepreneur commercial success. And China needs the raw materials that the Queensway syndicate can supply. However, there are three worries about the syndicate’s conduct.  The first is personal gain. The terms under which China Sonangol buys oil from Angola have never been made public. However, several informed observers say that the syndicate gets the oil from the Angolan state at a low price that was fixed in 2005 and sells it on to China at today’s market prices. The price at which the contract was fixed is confidential, but Brent crude stood at just under $55 a barrel in 2005; today it is trading above $100.

In return for Angolan oil, the syndicate promised to build infrastructure, including low-cost housing, public water-mains, hydroelectric plants, cross-country roads and railways, according to the government. The country desperately needs such things, to be sure. But their value is unlikely to exceed several billion dollars. That looks like a poor deal for the Angolan people.

In Angola accusations of personal enrichment percolate up towards the top of the state structure. In 2006 the head of the external intelligence service, General Fernando Miala, alleged that $2 billion of Chinese money intended for infrastructure projects had disappeared. He claimed that the funds had been transferred to private accounts in Hong Kong by senior officials, though without naming people mentioned in this article. The general was swiftly sacked, tried and imprisoned (he may, however, now be about to make a comeback to government).

Parts of the Angola-China oil trade appear to be contaminated by conflicts of interest. The Angolan president’s son is said to be a director of China Sonangol, the main trading partner of the state oil company. The Economist’s requests for comment to the companies went unanswered. As well as running both the state oil company and its main customer, Mr Vicente is a director of private shell companies linked to the syndicate. Although these may exist for tax purposes, a report on foreign corruption, prepared last year by the American Senate, reveals that Sonangol was deemed so corrupt in 2003 that Citibank closed all its accounts. The report also says that Mr Vicente personally owns 5% of Sonangol’s house bank which has assets worth $8.2 billion. According to the IMF and the World Bank, billions of dollars have disappeared from Sonangol’s accounts. At one point, Sonangol awarded Mr Vicente a 1% ownership stake in the company he chairs. He was forced to give it back after a public outcry in Angola.

In Guinea criticism is focused on the former mines minister. An unpublished 2009 WikiLeaks cable quotes an American mining executive, whose company stood to lose business in Guinea because of the syndicate, complaining that Mr Thiam has “personally benefited from promoting [the] China International Fund”. Mr Thiam denies this. As a former Wall Street banker, he already had money before he returned to the country of his birth.

The second complaint about the Queensway syndicate is that in Africa it has failed to meet many of the obligations it took on to win mining licences. Zimbabwe is still awaiting even a fraction of its promised infrastructure. Guinea never received the 100 public buses that were meant to arrive within 45 days of the 2009 deal.

The situation in Angola is more complicated, though also disappointing. Chinese contractors have built some housing and railway lines and the projects were at first financed by the syndicate. Signs saying “China International Fund” appeared on construction sites. But in recent years they have been replaced by those of other Chinese companies. According to Western diplomats and Chinese businessmen, the syndicate stopped paying bills for more than eight months in 2007. All work stopped, 2,000 Angolan day labourers were fired on the Benguela railway project and only a Chinese cook remained on duty. Western diplomats suspected the syndicate was banking on being bailed out by the Angolan government, which had staked its legitimacy on infrastructure development. Soon enough, the government issued treasury bonds worth $3.5 billion to finance the projects. Subcontractors are now paid directly by the Angolan state.   Six years after the syndicate arrived more than 90% of the residents of the capital, Luanda, remain without running water. Meanwhile, the syndicate has continued to prosper.

The third complaint against the Queensway syndicate is that its cash props up certain political leaders and thereby fuels violent conflicts. For instance, in Guinea the syndicate came to the rescue of the junta. In September 2009 government men went on the rampage, raping women by the score and massacring more than 150 protesters in a sports stadium, which triggered EU and African Union sanctions. A month later, the syndicate signed its minerals deal, transferring $100m to the cash-strapped junta. Bashir Bah, a member of the opposition, condemned the deal. “First of all it is immoral, and second of all it is illegal,” he said.

The deal caused outrage even inside the government. The prime minister, Kabine Komara, a relatively powerless figure, protested about ministers’ conduct to other officials. A memo from the prime minister’s office, dated November 26th and leaked to Global Witness, declared: “The council of ministers did not discuss or bring up the question of creating a national mining company. What’s more it is not acceptable that a foreign company could become a shareholder in such a company, as it would grant the company, ipso facto, the ownership of all the current and future wealth of the country.” Mr Thiam denies any knowledge of Mr Komara’s complaint.

According to international institutions, the military leaders, who backed Mr Thiam, needed the syndicate’s money if they were to hold on to power. A World Bank official told Western diplomats the junta would “sell the country short on mining revenues and tell the international donors to get lost”. The junta eventually fell and, following elections last year, the minerals deal is now in limbo.

In Zimbabwe the situation is even more egregious. The finance minister, an opposition member of the governing coalition, has blocked extra funding for the CIO, presumably because it backs Mr Mugabe. And yet, it is suddenly flush with cash. In recent months it has reportedly doubled the salaries of agents, acquired hundreds of new off-road vehicles and trained thousands of militiamen who are now in a position to intimidate voters during next year’s elections. Several sources who have looked at the deal concluded that the money came from Mr Pa. They say he struck a side deal with the CIO that gives him access to Zimbabwe’s vast diamond wealth—controlled in part by the CIO. The diamonds were for some years banned from reaching international markets because of global industry prohibitions over violence routinely inflicted on Zimbabwean miners. Yet, Mr Pa is said to buy them and apparently makes payments directly to the CIO, bypassing government coffers.

Little is certain about China Sonangol and China International Fund. Our repeated questions to the companies and their representatives went unanswered. The documents and witnesses we tracked down around the world paint an incomplete picture. But they raise questions of immense public interest.

Oversight of the Queensway syndicate’s businesses is almost non-existent. A decade ago Mr Vicente forbade foreign oil companies in Angola to publish even routine data, on threat of ejection. Since then Sonangol has published some information on its operations. But oil contracts are treated as state secrets. Revenues from deals with the syndicate go to an opaque agency controlled by the president whose accounts are off-limits even to government ministers. Although Sonangol scores reasonably for some criteria, such as revenue, in rankings by Transparency International and Revenue Watch, two lobbies for corporate openness, it still receives bottom rankings for safeguards against corruption.

The syndicate itself is even more opaque. Who ultimately benefits by how much from the lucrative deals is not clear from public records. The syndicate’s corporate structure is fiendishly complex. Individual companies are not vertically integrated—it is not a group in the usual sense. There is no holding company, though the same people keep cropping up as directors in the records of affiliated companies, which are often owned by shell companies registered in lightly regulated tax shelters. Final beneficial ownership is impossible for an outsider to establish.

All this means that the syndicate taints China’s “going out” policy, a cornerstone of the country’s rise in recent years. When the policy works, African resources are swapped for aid, commercial financing and payments in kind such as public infrastructure. But with the syndicate, billions of dollars meant for schools, roads and hospitals have apparently ended up in private accounts. Rather than fixing Africa’s lack of infrastructure, Chinese entrepreneurs and Africa’s governing elites look as if they are conspiring to use the development model as a pretext for plunder.

Excerpts, China International Fund: The Queensway syndicate and the Africa trade, Economist,Aug. 13, 2011, at 21.