Panama’s location, canal link and banking sector make it a strategic partner for China as Beijing pursues its Belt and Road Initiative.

Few regions have enjoyed more benefits from China’s Belt and Road Initiative than Latin America. From railways to bridges to transmission lines, China’s heavy investment in infrastructure is transforming local economies and earning it significant influence as the region’s biggest creditor. But it’s China’s investment in Panama that could yield the biggest strategic gains for Beijing.

A crucial land bridge between North and South America, coastlines along both the Caribbean Sea and Pacific Ocean and a vital canal linking both make Panama attractive from a geographical perspective. And as China increases its investment in the country’s offshore banking sector, this tiny Central American country could emerge as an important financial hub for the region.

So far, Panamanians are enthusiastic partners, hoping China’s investment can reinvigorate Panama’s economy. During the recent presidential campaign, none of the seven candidates questioned the decision by outgoing President Juan Carlos Varela’s decision to cut diplomatic ties with Taiwan and fully embrace Beijing.

“Since Panama gained control of the canal, the country has come to better understand how to financially exploit the importance of its geographical position,” says Rodolfo Sabonge, the director of Panama’s maritime chamber. “We have an urgent goal of improving our competitiveness as a global logistics hub.”

Photo: Panamá President Juan Carlos Varela

Panama’s has long been a beneficiary of Chinese investment. Panama’s previous recognition of Taipei didn’t prevent Chinese firms from operating or investing in the country. Even before Varela announced his plans to deepen ties with China, a Chinese company was building Panama’s largest convention center. Chinese firms had also begun construction on a cruise ship terminal and a $1.4 billion bridge over the Panama Canal.

The new bridge will carry tracks for the third line of the Panama Metro, linking the city’s center to the residential districts to the west of the canal. Two Chinese proposals were among the four finalists for the tender. Meanwhile, China Electrical Power and Equipment (CEPE) is one of two firms qualified to win a $520 million electrical transmission project for the country’s underserved Caribbean coast.

But Panama’s recognition of Beijing allows it to participate in China’s Belt and Road Initiative, a trillion-dollar global infrastructure plan, and to become one of the Asian giant’s most important hubs for trade and investment in the Western Hemisphere.

“China is the second-largest user of the canal after the United States, the establishment of relations with Beijing was long overdue,” says Rodrigo Noriega, a Panama City based political analyst.

Since the formalization of diplomatic ties, the two countries have signed over 30 bilateral agreements on such issues as maritime transport and financial regulation. The two also established the first China Air flights to Panama. Panama could soon become among the largest recipients of Chinese investment on a per capita basis.

In December 2018, President Xi Jinping became the first Chinese head of state to visit Panama. He was accompanied by an entourage of executives from dozens of companies in the country’s construction, telecommunications and financial sectors. 

The most high-profile project is a proposed $4.1 billion high speed train linking the capital with David, a city of 150,000 inhabitants close to the western border with Costa Rica. In March, China Railway Design Corporation presented a $16 million feasibility study for the project—a cost fully absorbed by the firm.

Among future projects being discussed is a highway along the Caribbean coast and another stretching into Colombia that would unite the two strands of the Pan-American Highway. China Harbour Engineering inquired about the possibility of studying construction of a second upgrade to the canal.

Panama was even ready to issue a $500 million renminbi-denominated “Panda bond.” But the issuance stalled, apparently over diplomatic issues.

Like Varela, incoming President Laurentino Cortizo, who takes office in July, supports the partnership with China and has vowed to improve the economy through investment in infrastructure.

Chinese banks have shown strong interest in establishing offices in Panama, not only to serve the local market but to act as a hub for the rest of Latin America

Ricardo Fernandez, director, Panamanian Superintendency of Banks

He inherits a country with strong fundamentals for future economic growth. Under Varela, annual GDP growth slowed to an average of 5.5%, still among the highest in the region. The fiscal deficit fell from 4% of GDP to 2%, and in 2018 foreign direct investment hit a record $5.6 billion.

Perhaps most important, changes to banking and offshore company registration allowed the country to be removed from international money laundering watch lists. This followed the fallout from the 2015 Panama Papers scandal in which 11.5 million leaked documents disclosed financial improprieties by wealthy individuals.

Still, the scandal has taken a toll. Deposits and profits have stagnated in the country’s international banking sector, which accounts for 8% of GDP.

That could change with Beijing’s increased investment and a coming free trade agreement that will allow Chinese banks to expand their footprint in the country. In April, the Bank of China, which has operated in the country for 30 years, opened a branch in downtown Panama City. The Export-Import Bank of China and China Development Bank are applying for banking licenses. The number of Chinese language signs in banks is a telling sign of Beijing’s influence.

“Chinese banks have shown strong interest in establishing offices in Panama, not only to serve the local market but to act as a hub for the rest of Latin America,” says Ricardo Fernandez, director of the Panamanian Superintendency of Banks (SBP). “Compliance in the sector has improved, we use the dollar and we have excellent connectivity across the region.”

More banking options are critical to Chinese companies looking to expand operations. Already, they are the largest users of the Free Trade Zone (FTZ) in the Caribbean port of Colón, from which Chinese goods are distributed to ports on the eastern seaboard of the US, as well as Latin America and the Caribbean.

Photo: China President Xi Jinping

For example, Chinese telecom giant Huawei, blacklisted by the US over security concerns, established a regional electronics distribution center in the free trade zone in December 2015. It now has plans to assemble products at the facility. Meanwhile, investment company Shanghai Gorgeous is spending $1.8 billion to upgrade the nearby Panama Colon Container Port and the Martano gas-fired electrical plant.

China’s investment in Panama has its share of critics. Some question the need for some of the recently announced projects. “There is a sense in the business community that Varela rushed things, and that we need to more carefully consider the infrastructure and financial agreements with China,” says political analyst Noriega.

For example, critics have raised questions about the proposed high-speed rail linking Panama City to David. Cortizo has said he will review the project and its finances. “The train to the west would be nice to have, but it’s not a priority,” says Noriega. “The priorities are water, education, health and agriculture projects.”

In April, the National Authority of Public Services ordered Etesa, the state-run transmission company firm, to explain the need for a fourth transmission line, which runs through the sparsely inhabited Caribbean coast.

The Panamanian-Chinese relationship is also likely to attract close attention from the US State Department as concerns grow that China could undermine US influence in the region.

“I believe that Varela went into his China deal with good intentions for Panama, but the breakneck speed with which deals have been struck and [the way Chinese] bids for future projects have been pursued indicate to me that he is not driving the train,” says John Freeley, a former US ambassador to Panama.

How Cortizo deals with the Chinese could become the defining issue of his presidency.