HONG KONG – The threat of Venezuela defaulting on Chinese debt is putting pressure on Beijing to reassess how easily it doles out money to commodity-dependent nations, especially those in Africa.

As low oil prices ravage Venezuela’s economy and embattled leader Nicolas Maduro seeks better terms on Chinese loans, China is paying greater attention to things like fiscal stability and political risk in overseas lending. Increasing such scrutiny could complicate President Xi Jinping’s pledge to spread $60-billion in aid across Africa over the next three years, much of it preferential loans and state-backed investments in countries heavily reliant on resource exports and prone to instability.

"What we learned from the Venezuelan case is that China should be more cautious and sophisticated about its overseas lending and investment," said Xue Li, director of international strategy at the state-run Chinese Academy of Social Sciences’s Institute of World Economics and Politics. “Compared to Latin America, Africa holds greater strategic significance for China and there’d be more at stake if things go wrong.”

More than $86-billion of loans sent to sub-Saharan Africa between 2000 and 2014 helped China build enormous diplomatic clout and secure raw materials to fuel its economic boom. The Venezuelan collapse has underscored the dangers to that financing model, even as Xi pushes to accelerate Chinese investment around the globe.

Being more selective with lending would make it harder for China to use aid to bolster its geopolitical position. Placing stricter conditions on countries that get assistance would be a departure from the no-strings-attached approach that’s made China an attractive alternative to Western benefactors and underpinned resource-backed deals in places such as Angola, Ghana, Sudan, as well as Venezuela.

Many of those countries have been hit hard by the global decline in raw material prices as China’s own economy slows. While the Bloomberg Commodity Index has recovered since the start of the year, prices remain at 15-year lows. A barrel of oil is trading around $48, less than half of what crude cost in 2014.

Take Angola. Like Venezuela, the African petrostate faces more difficulty paying off debt, much of it from China. It was the region’s largest recipient of Chinese loans between 2000 and 2014, getting $21.2-billion, according to an April report by the China-Africa Research Initiative at Johns Hopkins University. In October, the country announced another $6-billion in borrowing from China to support various projects.

Rating Cut

Meanwhile, Moody’s cut Angola’s credit rating two notches to B1 and lowered its outlook to negative in April, citing the oil-price slump. The International Monetary Fund has offered Angola a $4.5-billion loan and assistance restructuring its state-owned oil company. Add to that political uncertainty: President Jose Eduardo dos Santos may be setting up his-billionaire daughter, Isabel, as a possible leader after his planned retirement in two years.

Kenya, Ghana and Mozambique have all turned to the IMF for emergency support as falling commodity prices put government finances under strain. Nigeria, which lost its status as Africa’s top oil producer to Angola this year amid militant attacks, is facing recession and the government is struggling to pay salaries. China wrote down a $5 million loan to Mozambique in June.

Facing such pressures, China has begun to demand greater financial transparency and responsibility from recipient nations, said  Lin Boqiang, the director of Xiamen University’s energy economics research center and an adviser to the National Energy Administration of China. The message is that China’s shouldn’t squander the world’s largest stockpile of foreign reserves.

"China’s more experienced now," Lin said. "It now considers a risk index when making funding decisions. It’s more careful about the terms of loans, asset evaluation of investment projects, and also political security of the recipient countries, because much uncertainty stems from unstable politics."
Expanding Commitments

Outwardly, China’s commitments in Africa continue to expand. Xi promised a new era of cooperation while announcing the $60-billion program during his tour in December. Nigerian President  Muhammadu Buhari returned from a trip to Beijing in April with a $6-billion loan and a currency swap deal.

Republic of Congo President Denis Sassou Nguesso will head to China on Monday on a trip to "focus on cooperation between the two countries," the official Xinhua News Agency reported. The country has been the sixth-biggest recipient of Chinese loans, according to the CARI report.

But China has grown more cautious behind the scenes, said one former Chinese diplomat stationed in Africa who now works at a state-backed research institution. It’s increasingly withdrawing money and workers because of financial and security risks, although such moves are not publicized, said the former diplomat, who asked to not be named because he wasn’t authorized to discuss the matter.
Risk Assessments

“There must be boundaries, beyond which operations should halt," said Xue, of the Chinese Academy of Social Sciences. "It’s necessary to carry out regular risk assessments to ensure overall economic balance."

Another lesson underscored by Venezuela has been China’s reliance on incumbent regimes to maintain its relationships. Should the opposition succeed in efforts to recall Maduro or defeat him at the polls, China could find itself relying on an unfamiliar government to repay at least $65-billion in loans.

Hedging against the prospect of political change by establishing ties with a wider range of political players raises its own awkward questions. It could clash with China’s oft-stated desire to stay out of the internal affairs of nations.

"Any overt involvement in proposing or imposing economic, let alone political, restructuring in any of these countries -- whether unilaterally or as part of an agreement with other countries or international financial institutions -- would be a major break from previous Chinese policies and precedent," said Matt Ferchen, head of the China and the Developing World Program at the Carnegie–Tsinghua Center for Global Policy in Beijing.

"But it’s hard to see how China can avoid such involvement, if it is to avoid serious economic and, even diplomatic, losses," he said.