Big loss of face for China over Venezuela

China has always been big on prestige and ceremony, so the Inter-American Development Bank's cancelation Friday of a major 60th-anniversary conference scheduled to open with lots of razzmatazz in a few days was a pretty significant blow.  In Asia, that's known as "losing face." 

According to Reuters:

WASHINGTON (Reuters) — The Inter-American Development Bank on Friday called off next week's meeting of its 48 member countries in China after Beijing refused to allow a representative of Venezuelan opposition leader Juan Guaido to attend, two sources with knowledge of the decision said.

The sources said the decision was made in Washington on Friday at a meeting of the executive board of the IADB, Latin America's largest development lender, after China refused to change its position.

What, again, was the stupidity that triggered this event?  Denying a visa to respected Harvard economist Ricardo Hausmann, a Venezuelan who was appointed by Venezuela's acting president, Juan Guaidó (what's this "opposition leader" crap from Reuters? Guaidó is the president, and Nicolás Maduro is the dictator — this isn't hard to understand), to represent Venezuela at the multilateral forum.

Now, normally, IADB isn't the most exciting forum for anyone to think about, but it's the largest lender of money to the hemisphere, doling out billions in development aid to build highways and bridges and issue loans to small businesses to clean the place up.  It does a pretty good job and hasn't been involved in any notable scandals.  IADB is run by a board of at least 48 nations that contribute to its large capital base, with the U.S. an important player.  In reality, it's basically run by the Colombians, the real good ones who helped make Colombia a desirable country to live in under the presidency of Alvaro Uribe, with respected Colombian diplomat Luis Moreno at the helm.

A place like that is real important to China to have a finger in, and so the Chinese joined the multilateral lender, too, shoveling out a $350-million capital donation to get a seat in 2009.  Their donation was actually piddly compared to some of the others such as the U.S., which has a 30% shareholding stake.  When China joined, it apparently bought into a less- than 1% stake, according to IADB.  It was good enough for a board seat, however, and China may have since contributed more.

I went to the big 50th IADB anniversary conference in Medellín and enjoyed meeting many of the top IADB officials, who seemed like conservatives to me, as well as members of the Colombian cabinet, and on my own, the biggest captains of Colombia's industries, as a member of the press.  IADB featured Bill Clinton as its keynote speaker, and he spoke like the hardest-core anti-drug warrior I've ever heard.  (Clinton was actually good.)  The IADB anniversary conference was impressive — and it's likely that the China-hosted event was to be even more impressive, because China was presenting its heft to a large part of the world that it would like to retain influence in.

But somehow, they sure as heck weren't going to issue a visa to Venezuela's Hausmann...and now they've lost the conference.  No dancing girls with whirling ribbons.  All those catering orders canceled.  Rents for rooms lost.  What a mess.

What it shows is that the nations of the Americas, who dominate that board, are presenting a unified front against the Maduro dictatorship, and either China plays ball or no dancing girls.  They mean what they say when they say Guaidó is the only legitimate president of Venezuela, which they were one of the first to do back in February.  That works, a good bank must be a lender of integrity, and this was the collective decision of the shareholding members.

China didn't respect that board consensus, and it had warnings about the potential cancelation of the conference for it, too — and the Chinese still didn't issue the visa, apparently calculating that the IADB and U.S. warnings were paper tigers, because nobody'd cancel at this late date, would he? 

They chose poorly.  Now they're trying to paper it over by claiming they had "no responsibility" for the cancelation.  Laughable.

But it's actually more than just canceling the visa of a placeholder representative.  It's Hausmann they wanted to keep out, and that's very, very significant in itself.

I mentioned that Hausmann was respectable — and prominent, with an extremely sound grasp of economics, and having dealt with him myself, he's also very nice.

Hausmann got his name in the news a few years ago because in writing about Venezuela's economic ruin — here is his powerful 2014 essay — he called on Venezuela to default on its international debts, which, as I recall, moved the markets because, coming from him, it was a bombshell.  Here is his opener:

The fact that President Nicolás Maduro's administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude.  It is a signal of its moral bankruptcy.

Hausmann's reasoning was absolutely sound, too — by defaulting, the country would effectively be declaring bankruptcy (which of course it is) and be able to use whatever money it was taking in to feed its people.  It's nasty-sounding as a solution, and we all know how sovereign defaults went over in places such as Argentina and Ecuador, but it made no sense for Venezuela to be paying off all its international lenders while its people at home were starving . He was perfectly right.

China is one of those nations on the bondholder and loan side.  Hausmann has effectively advocated stiffing it.

And that loan strategy, to get these Latin socialist states on the hook so that they can never dig out, is a key element of China's strategy on Latin America.  I blogged about that hereherehere, and here.

Hausmann on the board of IADB is an important choice, because he's a signal indicator that Venezuela is going to be looking at Venezuela's interests before taking out any multilateral loans, at a minimum, to ensure that the locals won't be starving as the loans are paid back.  IADB thought it better to have this guy in than out, and it shows they are all on the same page.

But from IADB's perspective as a bank, it was also stupid of China to deny this guy a visa.  Venezuela represents big business for the Chinese to start planning for, given that (to paraphrase economist Herb Stein) anything that can't go on won't.  China attempting to shut Hausmann out (they also offered to deny Maduro's man a visa to "depoliticize" the conference) was bad for IADB business, given that Venezuela may well become their biggest customer.  Bad business choice, China.

If China can't go along with the consensus at IADB, quite hypocritically, by the way, given its claims to fealty to the consensus in international forums, then sending it a message through the canceled conference is the right way to teach a lesson.

It also raises the question of why the heck it's on the board there anyway.  It can't go along with the consensus, and it's getting these countries in hock to the point that they can't dig out, something that makes the Chinese a malevolent competitor to the IADB mission.

If anything, IADB was being mild and gentle in canceling the conference.  It actually should kick China out.  Refund the Chinese their money and send them on their way.  In denying Hausmann a visa, they've shown they can't play nice.  And after that, point at them.  Nothing like some loss of face for an obnoxious Asian giant.

Image credit: World Economic Forum via FlickrCC BY-SA 2.0.

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