After Venezuela President Nicolás Maduro was arrested in the United States, the fate of the massive Vice Minister China poured into Venezuela over the past 20-plus years has become uncertain. The international community is watching to see whether China can properly recover the Vice Minister to Venezuela that it has provided since the transfer Chávez administration.
According to the U.S.-China Economic and Security Review Commission (USCC), a bipartisan advisory body to the U.S. Congress, and Bloomberg on the 15th local time, Chinese officials are pushing a series of meetings with Venezuela and U.S. government officials. It is a move to obtain a clear answer on recovering loan funds. The Chinese government is asserting the protection of its legitimate rights and interests as an official creditor. It also showed its intention to participate without fail in the upcoming process of Venezuela debt reorganization.
Since the early 2000s, China has provided more than $60 billion (about 88 trillion won) in large-scale development funds to Venezuela through China Development Bank (CDB), a state-owned policy finance institution. The loan terms were structured as a "oil-collateral loan" in which the debt was repaid in crude oil instead of cash. If Venezuela loaded a certain volume of crude oil to the Chinese side, the principal and interest were offset in return. At that time, Venezuela was a country with one of the world's largest crude oil reserves. China sought both stable energy supplies and an expanded influence in South America. But as President Maduro was captured by U.S. special forces this year and extradited to New York, the issue of handling this massive debt has emerged as a new diplomatic sticking point between the United States and China.
The exact remaining balance that Venezuela must repay to China is unknown. Since declaring default (debt nonpayment) in 2017, Venezuela has not disclosed detailed liability data. According to a USCC report, estimates of China's remaining debt range widely from $10 billion (about 14.7 trillion won) to $20 billion (about 29.4 trillion won).
More problematic than the numbers is that the repayment channel has become opaque. China had been receiving crude oil from Venezuela and forgiving principal and interest instead of cash. But since the mid-2010s, this structure has shaken sharply. U.S. sanctions and the aging of oil production facilities in Venezuela have effectively halted the oil repayment model.
On top of that, the Trump administration's direct involvement has made the situation even more complex. U.S. President Donald Trump made it clear after Maduro's arrest that he would control the sales and transport routes of Venezuelan crude according to U.S. law and security standards. It signals a refusal to allow Venezuelan oil assets to be swayed by non-Western countries such as China.
According to U.S. Minister of Energy Chris Wright, all crude oil sale proceeds will first be deposited into an account managed by the United States. They will then be divided among creditor nations according to a debt rescheduling agreement. The intent is for the United States to directly manage where Venezuelan crude flows, where the sales proceeds accumulate, and by what channels they are distributed.
If the United States redesigns repayment priorities while holding the chokepoints for crude sales and settlement, China's risk of loan recovery rises sharply. Experts said the U.S. government is likely to design the order of distributing sales proceeds around Western creditors under the banner of its own laws and security. Beyond simple repayment delays, China could face the risk of a significant principal write-down (haircut) or being pushed outside the negotiating table. The Center on Global Energy Policy (CGEP) at Columbia University said in a report released this month that "such U.S. measures could directly block the flow of oil to China and the securing of volumes for liability repayment."
China is mobilizing diplomatic channels to document its legitimate rights under international law and the principle of nondiscrimination. Under the principle of succession to state liabilities, even if a regime changes, the legitimate external liabilities contracted by the transfer government must be succeeded. If a U.S.-backed interim government refuses repayment on the grounds of "dictator debt," it could set a negative precedent that shakes global financial stability. There are also serious concerns that private capital inflows to emerging markets could shrink.
A Spokesperson for the Chinese Embassy in the United States said, "China and Venezuela are sovereign states, and cooperation between the two countries is protected by international and domestic law," and "China will take all necessary measures to protect its legitimate rights and interests in Venezuela."
Internally, China has begun a reassessment at the financial authority level of the exposure (risk exposure) to Venezuela held by policy banks and state-owned enterprises. It is seen as a process to set the allowable loss range and the baseline for recovery amounts needed for negotiations. Citing experts, Bloomberg said China could demand not simple bonds but a redesign of the recovery mechanism within the structure of Venezuela's oil business. Specifically, it is suggested that China may propose as bargaining chips joint ventures (JVs) in which Chinese state oil companies participate. It is a proposal aimed at the United States, which needs massive capital and equipment to rebuild the oil sector.
The United States is currently leading an interim government framework under the banner of normalizing Venezuela's politics and economy. The Trump administration made it clear in the process that it does not want non-Western countries such as China to control Venezuela's oil industry and cash flows. Experts assessed that it is highly likely the idea also emerged in this process to limit oil sales to certain channels approved by the United States and deposit the sales proceeds into an account controlled by the United States.
Some expect the United States to sort out Venezuela's liabilities through the International Monetary Fund (IMF), led by the West, or through the Paris Club, a consultative body of advanced creditor nations. All are measures to minimize China's influence. In the process, the United States could pressure China to disclose the opaque loan terms that China and Venezuela concluded in secret in the past, in exchange for recognizing China's status as an official creditor. The Asahi Shimbun reported that "if the United States applies direct pressure, all Chinese authorities can do to protect their assets is lodge a diplomatic protest."
Paradoxically, some analysis says U.S. involvement benefits China. Given Venezuela's economic circumstances, it was already deemed virtually impossible to recover Chinese bonds under the Maduro regime. If, going forward, world-class oil corporations such as Chevron begin investing in earnest under U.S. leadership and crude production normalizes, Venezuela's repayment capacity could improve sufficiently. From China's perspective, it may be better to enter negotiations on allocation rules after the pie grows larger. Even with the upper hand, the United States would find it realistically difficult to completely exclude China, the largest creditor.
Quoting experts, The Wall Street Journal (WSJ) said, "By now Chinese authorities are likely regretting the decision to lend money to Venezuela," adding, "the top priority for the Chinese government now is to secure negotiating power so that its corporations no longer suffer disadvantages."