COMMENTARY
The Chinese Communist Party (CCP)’s influence in Latin America is facing new pressure.
Countries are rethinking military deals, economic partnerships, and their strategic alliances amid growing U.S.-China tensions.
The development of the Panama Canal is just one sign of a bigger geopolitical shift playing out across Latin America this year.
Panama’s recent decision to end nearly 3 decades of Chinese-linked port contracts marked one of the biggest blows to China.
It signals a broader push by some countries to reassess the CCP’s role in critical infrastructure.
Taking a look at Argentina, the country moved forward with a deal to purchase U.S. fighter jets instead of a Chinese-made alternative.
Meanwhile, Peru signalled interest in closer defence ties with the U.S..
Economic shifts are also underway.
Some Latin American countries are turning towards Western or international financial institutions (IFIs) and reducing their debt tied to China’s Belt and Road Initiative (BRI).
The BRI is an initiative by Chinese leader Xi Jinping to develop global infrastructure with trading partners and seen by experts to gain leverage in developing countries.
Argentina has faced acute debt issues with China and has been renegotiating or winding down reliance on Chinese financing in recent years. Chinese lending is not as large or as central as it once was and Argentina has increased engagement with the International Monetary Fund (IMF) and Western capital markets to stabilize its economy.
Brazil continues to access Western multilateral finance and private capital, while Chinese involvement today is more commercial and project-specific rather than broad-based government lending.
Ecuador has historically borrowed extensively from China but recent patterns show that Chinese state lending has slowed and renegotiations of terms are ongoing. The country has also engaged Western institutions like the IMF for financial support.
Both Chile and Mexico’s connection with the CCP has been through trade and investment. Recently, these countries have imposed tariffs or regulatory measures to manage Chinese imports, which reflects economic balancing.
Peru and Colombia prefer Western capital markets and IFIs. Chinese financing exists but is not central to the countries’ public finance strategy.
Bolivia’s newer economic policy is less ideological aligned with China and is increasingly open to Western finance, private capital and IFIs. Chinese financing is no longer its first resort.
Debt Traps under BRIs
The BRI loans by China are typically huge, resulting in repayment difficulties where some countries have surrendered or risk surrendering the asset as a form of repayment.
The St Andrews Economist argues that the CCP uses “debt-trap diplomacy” to gain influence over a country’s policies, strategic assets (like ports), or diplomatic alignment when it faces debt repayment difficulties.
The Hambantota port is one such debt-trap where the Sri Lanka government had to hand over a 99-year lease on the port to China as it struggles to repay the loans.
The BRI loans have long repayment terms and higher interests than other lenders.
Another argument of “debt-trap diplomacy” is that the loan contracts with China are often not publicly disclosed or clearly reported, making it harder to assess real risk and repayment costs, unlike loans from the IMF or the World Bank.
Countries in Southeast Asia, Asian and African regions have experienced massive debt problems that limit economic flexibility and create fiscal stress.
Laos has one of the highest debt burdens relative to its GDP after debt levels soared amid the China–Laos railway. Laos is widely recognized as high risk of debt stress, posing serious risk on its ability to service the debt.
“China has leveraged the large debt owed by developing countries to achieve its geopolitical goals is often shrouded in secrecy, which may hide the accurate scale of the problem globally and increase the Western superpowers’ concerns about China’s influence,” the St Andrews Economist said.
Pakistan is one of China’s largest BRI borrowers under the China–Pakistan Economic Corridor (CPEC).
“In March, Beijing, which is pursuing a USD 60 billion China-Pakistan Economic Corridor (CPEC) rolled over a USD two billion loan for Pakistan, one of several such rollovers in the last few years,” according to a report by the Business Standard.
In 2018, then Malaysian Prime Minister Mahathir Mohamad shelved or cancelled several major China-linked infrastructure projects, including the East Coast Rail Link (ECRL) and two gas pipelines because they were seen as too expensive and a potential strain on Malaysia’s finances.
The Whoosh high-speed rail was launched in October 2023 as a flagship BRI project in Indonesia.
According to The Economy, the project was financed largely by Chinese loans (75 per cent) after Indonesia in 2015 rejected Japan’s offer of a 0.1% interest loan with a sovereign guarantee in favour of China’s 2% interest loan that required no government backing. “But construction costs ballooned from $5.6 billion to $7.4 billion, driving up debt service burdens. Annual interest payments alone now reach about $120 million.”
Thailand has moved to reduce exposure to Chinese debt through renegotiation. It reduced Chinese capital participation ahead of approving Phase 2 of its Bangkok–Laos–Kunming rail project in February last year.
Malaysia restructured its East Coast Rail Link (ECRL) project to cut China’s stake, agreeing to split losses equally. Former Prime Minister Mahathir Mohamad in 2018 had threatened to cancel the project over corruption allegations tied to the previous administration’s deal with the CCP.
Kyrgyzstan faces growing debt pressure as the country owes a large portion of its public debt to China. It faces difficulties meeting repayments as infrastructure projects have yet to generate returns.
“The mounting financial pressure has also raised concerns that the country may have to hand over lucrative assets if it fails to meet its repayment obligations,” according to a report by RadioFreeEurope.
Zambia and Ghana both defaulted in 2020.
Twelve African nations, including Kenya, are currently facing similar debt distress.
“Kenya’s so-called “Railway to Nowhere”—abandoned mid-construction in a cornfield after Chinese funding dried up—has come to epitomize the perils of overreliance on Beijing’s credit,” The Economy added.
