Why China Gives $5 Billion Loan to Venezuela?

Venezuelan President Nicolas Maduro announced China has granted his government a $5-billion loan to boost oil output in the recession-hit OPEC state. Venezuela plans to pay back the $5 billion loan from China, its largest creditor, in oil shipments.

Venezuela is overwhelmingly dependent on oil for its economy, and the countryal, ready in a precarious economic situation, has been hit especially hard by the dramatic drop in oil prices that began last year. Oil makes up 96 percent of the country’s foreign income. The country’s international reserves hit 12-year lows this month as the economy suffers a recession, high inflation and shortages of basic goods. The government had fiscal pressures even before the collapse of oil prices. With oil down afrom $97 a barrel in April 2014 to $44 per barrel today, it is facing a veritable economic and financial crisis.

China has become Venezuela’s principal financier over the last decade. In exchange for tens of billions of dollars in loans, Venezuela sends around 700,000 barrels per day of oil to China. Since 2007, China has provided over $50 billion in loans to Venezuela in so-called oil-for-loan deals. That means the loan is repaid in the form of oil and gas shipments from Venezuela to China, which has helped Chinese companies expand into Venezuelan markets amid chronic shortages of consumer goods there. That financing has been especially crucial for Caracas since last year’s oil market rout, which aggravated the country’s severe economic crisis.

Oil prices are down around 60 percent since their peak in 2014, largely because of a surge in global oil production and waning demand in China. The price of Brent crude oil, was trading at $49.06 a barrel Wednesday morning, when the U.S. benchmark was trading at $44.68 a barrel. It is not hard to see the economic advantage to China from the deal. Growth in China’s oil imports has been slowing down. Imported oil is increasingly stored in emergency reserves rather than being consumed. This will guarantee China a steady supply of low cost oil long after global crude prices rise.