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The Future of the Sino-Venezuelan Relationship: Make or Break?

The Future of the Sino-Venezuelan Relationship: Make or Break?

. 7 min read

With the largest oil reserves in the world, Venezuela is a country that has undergone many changes since the 20th century. The nation went from being the wealthiest per capita country in South America during the OPEC oil embargo of 1973 to having a hyperinflation rate close to 10 million percent in 2019. Venezuela’s modern history revolves around their oil industry, dating back to the discovery of rich reserves in 1922. In just seven years, the country was producing 137 million barrels per year. At the time, it made them the second largest oil producer in the world.

Such large growth does not go unnoticed by global superpowers. Major nations have become involved in Venezuela as a result. One of these countries is China, the world's largest importer of oil. Venezuela's relationship with China grew with President Hugo Chavez’s rise to power in 1998. Throughout his presidency, the two countries worked together to establish mutually beneficial projects that helped the Latin American country in exchange for its abundant natural resources.

These projects have required a large amount of capital. Since 2007, China has invested around US$67 billion into Venezuela. Compared to the rest of Latin America, this is more than 40 percent of Chinese investment in the continent.

Graph displaying Chinese foreign investment in South America. “Top 5 Chinese Loan Recipients in Latin America and the Caribbean” by IAD China-Latin America Finance Database.

Apart from its oil supply, China saw Venezuela as an open market for engineering projects and arms deals. During the inception of the current Sino-Venezuelan relationship, Chinese companies would compete for large infrastructure projects, such as Latin America’s first high-speed railway. Most of these projects ceased with the downfall of the Venezuelan economy. However, China is still Venezuela’s second largest seller of arms.

Its location also makes it a prime spot for exerting influence over the continent. Its proximity to the United States means that China’s involvement symbolizes a concern for the North American superpower, which has historically sought to establish itself as a dominating foreign influence in Latin America through its many interventions during the Cold War years.

Although the relationship between China and Venezuela seemed to work successfully, many things changed with the death of President Chavez in 2013 and the collapse of oil prices in 2016. During this time, the country’s total output of oil decreased by 25 percent. The World Bank has placed Venezuela’s government effectiveness in the 2.4 percentile of countries while its corruption percentile is 3.85. Currently, 96 percent of the Venezuelan population lives under the poverty line. The high hopes China had for the Latin American country fell with the collapse of Venezuela’s economy. Recent studies predict that the country still owes China around US$20 billion.

Given the large risks that China is currently facing with Venezuela, different entities question China’s future plans with the country. There are different theories for why the Asian giant is still so heavily involved in the Latin American nation.

Shared Political Ideology

During Chavez’s presidency, many were quick to question if the new alliance between the two countries were based on shared political ideologies. Both governments have greatly authoritarian views that differ from most American countries. China claims that the partnership “did not have an ideological purpose, and was not designed to confront third parties nor to affect Venezuela's relations with any other country.” Meanwhile, Chavez would emphasize that Venezuela’s political relations with foreign nations were based on their negative relations with the United States. If it is the case that the relationship between the two countries is based on their political ideas, it would seem important for China to protect Venezuela from a collapse.

Future Plans with Venezuela

Another possible driver is China’s future geopolitical plans within the nation and the continent. When relationships with the Latin American country first began, China was still establishing its presence in the developing world. Venezuela was the start of China’s investments in the region, which grew from US$12 billion in 2000 to US$300 billion in 2019. Venezuela also supported China through various multilateral organizations. There has been a large exchange of services between the two countries, ranging from military training to communication satellites.  

The dynamics of the relationship has changed since the early 2000s. Under authoritarian President Nicolas Maduro, the Venezuelan government is now seen by many countries as corrupt and inefficient. China’s alliance with the nation is hurting the reputation that it has strived to develop. China still plans to be a leader in the South American economy, given its large investment plans in the region. If China is to continue its relationship with Venezuela, they will have to do so without directly supporting the regime itself. This lack of support must be made public, which could have detrimental effects on the current contracts with Venezuela and the relationship between China and its allies. Due to these externalities, it seems unlikely that the Asian country will take such action. However, this approach could bring support from most Latin American countries in which China has investments, given that most of Latin America supports President Juan Guaido and the democratic resistance. Even with the current change in the relationship, state-owned Petroleos de Venezuela still has China as its second largest customer.

Stakes are Too High to Leave

There is reason to believe that China feels it is too involved with Venezuela. With its large outstanding loan, China could be focused more on getting its payments back than strengthening its diplomatic relations. When economic models for Venezuela changed in 2016, China cut off all its lines of credit with the nation. Venezuela’s drop in oil production and the drop in oil prices also make it harder for China to trust Venezuela with its payment. In response to the changing economic state of the Latin American country, the Asian giant has revealed existing communication channels with Venezuela’s opposition party to ensure debt payments. Ultimately, China has to decide if Venezuela’s debt is more valuable to them than their shared political philosophy.

Venezuelan crude oil production by year and World price of crude oil per year. “Venezuela: From Oil Boom to Bust” by the Federal Reserve Bank of St. Louis; U.S. Energy Information Administration. 

Steps Forward

Despite China’s current goals in Venezuela, the Asian nation remains in a suboptimal position. While they have a strong incentive to help rebuild Venezuela’s economy in the form of repayments, doing so would not be a simple task. China would have to invest even more of its capital into the nation while also ensuring that corruption does not deplete the value of Chinese investments. Some estimates state that an investment of US$150 billion over the next 10 years will be necessary to get Venezuela back to past levels of oil production . Most of the capital will have to come from foreign investments. If China wants to ensure their payments, they would have to further help the Latin American country. This kind of initiative would increase tensions with the US, given the direct opposition that the US maintains to the current Venezuelan regime.

China could also aid the opposition in Venezuela if they promise to repay its loans. This carries precautions on its own, given that Chinese allies like Russia and Cuba have a substantial incentive to stay active in the region. These incentives come in the form of military deals with Venezuela. These countries would also not be able to be as involved in the region as they currently are if a new government takes over. If China were to support the opposition, it would negatively affect its relationship with current allies.

There would be great ideological tensions within China itself if it supported the democratic opposition, given the communist and authoritarian philosophy of its own government. Supporting a democratic government would be seen as largely hypocritical by the rest of the world. Even though China’s administration is greatly different from that of Venezuela, the shared basis in which their governments stand leaves China almost unable to support a democratic administration. If China were to support the Venezuelan resistance, it would not look good for the Asian country and what it stands for. China could try to make it clear that their sole interest is the debt, although they would have to do so very carefully.

China could also forgive its loan with Venezuela and move on with its geopolitical strategies. This approach would prevent further rising tensions with the US coming from involvement the South American country. The downside is the precedent that it sets. China is involved in risky investments with developing countries through their Belt and Road Initiative. If it allows one of its investments to default, it would make it easier for another country to do the same. This has the potential to disrupt their initiative, given that not all developing economies are able to pay their loans. This is part of the reason why investments in these regions are seen as high-risk. If China’s investments begin to default, the country will lose capital and its reputational power as leading the developing world. The Asian giant will have to decide if helping Venezuela is worth the potential sacrifice that it may bring to their political agenda.

Regardless of China’s decision, there will be consequences that will impact countries both directly and indirectly. It is important for the Asian giant to think of how they want the world to see them and what relationships they value most. Given its larger global strategies, China will also need to assess what it is willing to sacrifice in order to become the most influential power in the developing world.