By Irchiro Suzuki
A recent Harvard Business Review article reveals some facts about China as a global lender. China lends some 150 countries $1.5 trillion that is approximately and that surpasses official multi-lateral lenders such as the IMF and the World Bank. Debtor counties combined owed China 17% of their GDP in 2017, way up from 1% in 2005. Half of China’s loans to developing countries goes unreported as a proof of their opaqueness. The world as well as China have a lot of problems with the Chinese loans. To begin with, Chinese loans have been extended much more liberally without scrutinizing borrowers’ credit quality that multi-lateral institutions adhere to, and with scant consideration of human rights. For autocrats in the developing world, notably in Africa, China is a great lender who extends loans wIth an unmatched speed without questioning much. From the perspective of the commercial banking industry the developed world, China is a reckless lender who has expanded its loan portfolio fast for the purpose of increasing China’s influence in the developing world, not solely focused on profits. These borrowers’ economies boomed as China began to lend them fiercely earlier in this century. So borrowers were beneficiaries, up to a point. The borrowers’ economies were overwhelmingly commodities- based, be they in Latin America, Africa or the Middle East though not so much in East Asia. In the first decade of this century, China’s meteoric economic growth and its voracious appetite for raw materials drove up commodity prices sharply, creating a boom among commodity producers around the world, including some developed countries such as Canada, Australia and Norway. China’s wasteful fashion of consuming raw materials made their price hikes even starker. Some sub-Sahara countries that were struggling with a mountain of debts to the west entering the 21st century, were forgiven their liabilities to the developed world lenders. This debt forgiveness allowed them to borrow afresh, and China stepped in as a new aggressive lender. As debt forgiveness in sub-Sahara Africa shows, the developing world as a whole lacks a strong track record in managing their economies. If sub-Sahara Africa is truly unimpressive in this regard, Latin America, the Middle East and Central Asia are not significantly better. In general, they tend to borrow recklessly when commodity prices are booming and money is cheap, and lenders are fervently looking for willing borrowers. When good times are gone, however, they find themselves loaded with debts that they found difficult to pay back. As commodity prices boom subsides, so does their economic growth. This cycle of boom and bust has been repeated since the 19th century and the 21st century is proving to be no different from the past experiences. Now, much of the developing world has to deal with the consequences of aggressive borrowing. While China’s Belt & Road Initiative is only comparable to the Marshall Plan in the post-WWII Europe, there were some stark differences between them. The Marshall Plan essentially provided grants while China is lending at market rates. The Marshall Plan lent to democracies with a reasonably good credits, at least before the devastation by the war, whereas China’s clients tend to be autocracy or weak democracy with questionable credit history. In the immediate years that followed WWII, the U.S. represented almost half of global GDP, and the U.S. economy boomed, enabling the borrowers (or the recipients of grants, to be precise) to grow. China today is approximately is 15% of global GDP today. Though its growth rate is still much higher than developed countries, it is less than half of what it once was and keeps going lower in the future. China can’t carry the debtor countries. In this environment of slow growth and commodity prices’ slump, heavily indebted borrowers of Chinese loans would find it hard to grow, finding themselves grappled with debts. Not only the debtors but also the creditor would have to grapple with these debts for a considerable amount of time. These loans are reportedly so opaque that they would not be recognized as non-performing loans (NPL). Nonetheless, they would weigh heavily on the Chinese economy. Worse, the financial markets might find it difficult to correctly value opaque Chinese loans, and then assign very low values to these assets. This is what happened to collateral debt obligations (CDO’s) during the global financial crisis of 2007-09. China would have to deal with NPL from both domestic and foreign borrowers at a time when its own growth rate is falling. Weak economic growth both at home and abroad aggravate the already weak quality of outstanding loans. China’s current account surpluses are diminishing down from double digit figures in relation to GDP ten years ago. If China presses too hard on the debtors, i.e. seizing the collateral, they might turn against China. As debt relief by the West at the outset of the century became a catalyst for sub-Sahara countries boom, heavily indebted counties’ economies would go nowhere with heavy debt burdens. In the meantime, loan qualities would continue to deteriorate on the debtors’ failure to service debt amid perennially weak growth. Carrying a large amount of low grade loans, even if they are not officially NPLs, would restrict China’s ability to direct financial resources to fund growth, and this is happening at the time of disappaearimg current account surpluses that have been source of funds. Xi Jinping might find the 2020s not too much fun.How much money does the world owe China?
About the author: Irchiro Suzuki is a retired banking executive.
Recommended reading: https://hbr.org/2020/02/how-much-money-does-the-world-owe-china