China Used
Foreign-Exchange
Reserves In Diplomatic
Deal with Costa Rica
By Andrew Batson, Wall
Street Journal
BEIJING – China secretly
agreed to use its
foreign-exchange
reserves to buy us$300
million in bonds from
Costa Rica as part of a
deal that enticed the
Latin American nation to
switch diplomatic
recognition to Beijing
away from Taiwan,
newly-published
government documents
show.
The documents provide
rare evidence that China
has used its us$1.81
trillion in official
reserves, the world's
largest such store, for
explicitly political
purposes as well as
financial ones. The
documents describing the
deal were released by
the Costa Rican
government on an
official Web site this
past week after a court
challenge by local
newspaper La Nación,
which published accounts
of their contents.
According to the
documents, China's State
Administration of
Foreign Exchange in
January purchased us$150
million of the U.S.
dollar bonds, which pay
2% annual interest, and
will purchase another
us$150 million in
January 2009.
The politically-driven
investment by SAFE, as
the foreign-exchange
agency is known, could
lead to a backlash just
as it becomes an
increasingly active
player in international
stock markets. It could
also undercut efforts by
the China Investment
Corp., a sovereign
investment fund that is
run separately from
SAFE, to be welcomed as
a global investor that
pursues only financial
returns.
The negotiations that
led to the Costa Rica
purchase are part of a
long tradition of
"checkbook diplomacy"
practiced by diplomatic
rivals China and Taiwan.
China considers
self-governed Taiwan
part of its territory
and demands that its
diplomatic partners
sever official ties with
the island.
Most of the handful of
countries that keep
diplomatic ties with
Taiwan are poor
developing nations to
which it gives aid. But
China's growing economic
might has in recent
years allowed it to
outmaneuver Taiwan and
convince many countries
to change their ties.
Costa Rica switched its
diplomatic recognition
to Beijing in June 2007.
The impoverished African
nation of Malawi
followed in December.
Costa Rican Vice
President Laura
Chinchilla has defended
the deal with China,
saying "We believe the
country received only
positive news with the
establishment of this
relationship," according
to a statement by her
foreign ministry on
Wednesday. She noted
China's commercial
promise and its support
for Costa Rica in
international forums
like the United Nations.
On its Web site, Costa
Rica's foreign ministry
published copies of an
agreement between the
two governments that was
signed in Beijing on
June 1, 2007, as well as
several subsequent
letters. China is to
give Costa Rica another
$130 million in direct
economic aid that will
not be repaid, in
addition to the
two-stage bond purchase.
In a statement Friday,
China's foreign ministry
did not contest the
validity of the Costa
Rican documents. "China
provides assistance to
the Costa Rican
government within its
means. The goal is to
help Costa Rica's
economic and social
development," the
statement said.
SAFE doesn't publicly
discuss its investments
and took steps to ensure
this deal would also be
secret. In an
English-language letter
dated Jan. 2, 2008, a
SAFE official named Fang
Shangpu wrote to the
Costa Rican finance
ministry setting out
terms of the bond deal,
including a request that
Costa Rica "shall take
necessary measures to
prevent the disclosure
of the financial terms
of this operation and of
SAFE as a purchaser of
the bonds." On Jan. 7,
finance minister
Guillermo Zuniga replied
in a letter saying "It
is a pleasure for me to
confirm that these
suggestions are
acceptable to us."
Costa Rica also
published a letter by
foreign ministry
official Edgar Ugalde,
confirming that SAFE's
first investment of
us$150 million took
place on Jan. 23, 2008.
Asked to comment, the
State Administration of
Foreign Exchange said
"the investment in Costa
Rica government bonds is
a normal investment
activity for foreign
exchange reserves,"
noting that it owns
bonds issued by many
other governments.
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