Agriculture, Bonds, Commodities, Currencies, Emerging Markets, Energy, Frontier Markets

Argentina’s Growing Dependency On Beijing

By Martin De Angelis


Cash-strapped Argentina relies on China for everything from currency swaps to investments in nuclear infrastructure. Moreover, Argentina’s primary exports and sources of state funding are and will stay bound to the Chinese demand.

After the 2001 financial crisis and the emergence of the Kirchner’s administration in 2003, Argentina has tried to avoid the Breton Woods credit system and find alternative ways of financing its economic endeavors.

A decade ago, the austral nation’s FX reserves were at a historical minimum and its financial risk stood at record heights. Yet, propelled by the strong backwinds of international commodities, Argentina found an unexpected source of hard currency incomes that has oxygenated its economy: China.

A thriving Chinese economy boosted international demand for food, particularly agricultural products such as soy oilseeds and derivatives. Nearly 62% of all soy exports end up in Chinese ports – 65 out a 101 billion USD market.

Argentina’s favorable geography and climate grant some of the most fertile arable land on the globe, allowing soy to yield outstanding profits. The extraordinary benefits of agriculture reactivated the local economy over the last decade and half, allowing the government to improve its financial health out of domestic and external surplus, known as ‘Twin Surplus’. By having a positive internal budget as well a trade surplus, the nation could sustain and increase its public spending while having an excess of hard currency.

However, this economic model, which endured from 2002 onwards, has faded away over the last two or three years. Mounting inflation paired with a growing energy deficit and currency restriction have dragged the domestic economy into a spiral of stagflation.

State finances drastically deteriorated as energy and subsidies expenditures skyrocketed. Argentina’s internal tax collection plunged out of slower domestic activity, resulting in a 6-7 % of GDP primary budget deficit. An artificially positive trade balance is the last pillar to bear the whole weight of the Argentine state.

Caught in the Chinese Economic Orbit

After a prolonged confrontation against the Breton Woods schemes, unsettling expropriations, and heavy financial controls, Argentina’s investment profile looks grim before the eyes of many foreign capitals. But the risk-averse Chinese government enthusiastically granted several credit lines for Argentina – approximately 20 billion USD – hoping to clamp the Latin American nation to the Asian economy.

As a soft-diplomacy spearhead, Beijing has unapologetically financed Kirchner’s ambitions by offering long-term loans for Chinese companies. Such financial investments have helped to root China into Argentina’s economy for at least the next decade.

Behind the goodwill of the Communist giant, there is the geopolitical intention of securing two key strategic resources: food and energy. This is because the majority of Chinese-financed investments are related to transport and infrastructure.

Beijing’s intention is to improve the logistics and energy of Argentina, allowing resources to be efficiently exported back to Asia. One of the most explicit examples is the Chinese credit for financing the revamp of ‘Belgrano Cargas,’ the biggest freight railways consortium of Argentina, which runs over 10,000 km and connects most of the agricultural nods to the country’s Atlantic ports.

This railway consortium was nationalized in 2013. With the help of 2.6 Billion USD in funding from Beijing to rebuild tracks and import rolling material from China, the railways are expected to reduce Argentina’s transport costs by 72%. Last year, Xi Jinping expressed interest to finance a 1.3 billion USD project for a bi-oceanic corridor underneath the Andes mountains, expecting to connect Argentina with the Pacific shore.

Moreover, China is simultaneously betting on Argentinean energy infrastructure on multiple, seemingly opposed fronts: shale, hydroelectric, and nuclear. Despite being counter-intuitive at a first glance, Beijing’s strategy is well planned – it is looking to develop the extractable oil and gas resources for export back to China, while generating a technological and investment dependency for the financing and maintenance of two hydroelectric dams and a pair of nuclear reactors. This way, China would keep a firm hand over the Argentine energy sector while securing itself as a major trade partner.

Other signs of the Beijing gravitas over Buenos Aires are recent military agreements that have been signed. The most iconic is the agreement for the first Chinese Satellite space station outside its territory, built and operated by the People’s Liberation Army in the Argentine Patagonia.

Looking to keep Argentina’s economy afloat and away from western funding, China has granted Buenos Aires with expedited currency swaps for up to 11 billion USD. This will help to replenish Argentina’s dwindling 30 billion USD central bank reserves amidst protracted disputes with vulture funds.

China sees Argentina as a nation rich in natural resources, yet financially weak. Such conditions would allow the development of complex financial and technological mechanisms to make Argentina increasingly more dependent upon Beijing, securing China a privileged position.

Yet, despite all the effort, China’s main intention with Argentina will still be to capitalize on the country’s agricultural capacity. The top three soy exporters are the US, Brazil and Argentina – the US has nearly reached its arable horizon, and Brazil’s only remaining options for expansion involve risky moves that could further deforestation of the Amazon rainforest.

Argentina, however, still hasn’t reached even half of its potentially arable land for soy crops. This could turn out to be more of a curse than a blessing, further deepening the nation’s reliance on agricultural exports to China in the foreseeable future.

It will be challenging for any future administration in Buenos Aires to undo the complex financial and investment knot that China has placed around the Argentine economy. The financial and commercial logic of dependency between the two countries is likely to extend for at least the next decade.

Courtesy of Global Risk Insights, © 2015 Global Risk Insights
Global Risk Insights (GRI) provides expert analysis on political events impacting business, investment, and economic climates worldwide.


One thought on “Argentina’s Growing Dependency On Beijing

  1. Not only China. Argentina has been also flirting with Russia.


    Posted by ETFalpha | May 21, 2015, 10:23 am

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