China Becomes Global Lender Of Last Resort With Bailout Of World's Most Indebted Oil Company

Over the course of last month we variously described the Asian Infrastructure Investment Bank as an attempt by Beijing to deal a decisive blow to the post-World War II global economic order by undermining US-dominated multinational institutions, as an attempt to usher in a new era characterized by yuan hegemony, and as an effort to cement China’s regional influence via the implicit establishment of a sino-Monroe Doctrine.

With that in mind, we find it somewhat ironic that the China Development Bank (which isn’t the same as the AIIB but which we think might offer some clues as the how the new venture will be run under Beijing’s control), is set to provide $3.5 billion in financing to Brazil’s deeply indebted Petrobras (PBR). The new funding comes 6 years after a $10 billion oil export deal between the company and China and just days after Brazil signed up as a founding member of the AIIB. 

More, via WSJ:

Brazil’s state-run Petroleo Brasileiro SA said on Wednesday it signed a $3.5 billion financing deal with the China Development Bank, highlighting the oil giant’s deteriorating financial condition in the wake of a vast corruption scandal as well as China’s growing ties to Latin America.

Petrobras didn’t provide any details of the deal, which is part of a cooperation agreement to be implemented this year and in 2016. But the transaction deepens the Brazilian government’s relationship with its largest trading partner and fellow BRIC country.

The Asian giant has provided similar assistance to countries like Ecuador, Venezuela and Argentina, helping those countries deal with falling global oil prices and their own debt problems.

“China again is…lending to state-owned companies that cannot access the market,” said Adriano Pires, an energy expert with the Brazilian Center of Infrastructure in Rio de Janeiro.

China has extended more than $100 billion in credit to Latin America since 2005, according to figures from Boston University’s Global Economic Governance Initiative. In January, Chinese President Xi Jinping said China’s foreign investment in Latin America would hit $250 billion over the next decade.

At the risk of extrapolating too much, it appears as though Beijing isn’t opposed to throwing billions behind serving as a lender of last resort and we can’t help but wonder if the new round of Petrobras financing is indicative of where China will steer initial AIIB funding — that is, into oil and Latin America. What’s interesting (and very ironic given how we’ve characterized the AIIB), is that it appears Beijing may look to channel the bank’s lending straight into Washington’s backyard, effectively slighting the original Monroe Doctrine even as China tacitly implements its own take on an official policy of regional influence and control. 

Meanwhile, US allies continue to fall in line with France, Italy, and Israel set to jump on the bandwagon. Here’s more via Reuters:

Prime Minister Benjamin Netanyahu has signed a letter of application for Israel to join the China-led Asian Infrastructure Investment Bank (AIIB), the Israeli Foreign Ministry said on Wednesday.

More than 40 countries, including Australia, South Korea, Britain, France, Germany and Italy, have said they would sign up to the AIIB, with Japan and the United States the two notable absentees.

In a statement on its website, the Foreign Ministry said Israel's AIIB membership would open up opportunities to integrate Israeli companies into infrastructure projects it financed.

Israeli companies are increasingly turning to Asia to capture a boom in demand for their technology, as the government urges them to diversify export markets in response to Europe's rising anti-Semitism and potential trade sanctions.

And just like the ADB, the IMF isn’t intent on undermining the new institution. Via Bloomberg: 

The Asian Infrastructure Investment Bank is welcomed as long as it commits to cooperation and efficient operations, China Business News cites IMF Managing Director Christine Lagarde in an interview.

AIIB is a wake-up call for countries that don’t agree with IMF’s quota system: Lagarde

China’s IMF quota should match the size of its economy, Lagarde says

Yuan becoming SDR currency is a matter of time: Lagarde says

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We’ll close with the following quote from US Under Secretary Of State for Economic Growth, Energy, and the Environment:

 “We hope that the governance of that institution and the environmental impacts are going to be done in way that’s consistent with what other multilateral development banks are doing. We don’t have any concern, in theory, about the development of an Asian infrastructure bank.”

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Moon Kil Woong 7 years ago Contributor's comment

China pretty much has highlighted that this bank will be not a Asian global investment bank but a way for it to secure resources and garner influence. A truly Asian bank would have multiple interests from multiple Asian countries and be focused on investment rather than securing assets and power. Even so, many welcome the cash flow from the hoard of dollars and reserves China has been amassing thanks to the US's inability to create anything close to a balanced budget and the US' dependence on Chinese goods to keep inflation down.

Ferdinand E. Banks 7 years ago Contributor's comment

"Europe's Rising anti-Semitism" you say, which doesn't happen to be true. Interviews with the former lawyer (Lagarde) turned (or appointed) super-duper economic analysis virtuoso. "Undermining U.S. dominated multi-national institutions." And so on and so forth as I occasionally say in my brilliant lectures when I run out of patience..

And why not. We had the tanks, artillery and complete mastery of the skies, and yet they stopped our advance in Korea. I knew then that the worm had turned, although I didn't know why. I know now though, and it's pretty sad.