Ichiro Suzuki This is not a new news or revelation, and has been already well documented. The developing world, or the Global South in the 21st century term, is sinking slowly under heavy debt burdens. This is not their first time. They have suffered such ordeals before, a few times at least. What’s different in this century is that they primarily owe to a different lender from the past crises, the People’s Republic of China. Since Xi Jinping’s rise to the helm of the Communist Party ten years ago, China embarked on a very aggressive and ambitious lending program to developing countries under a slogan of Belt and Road Initiative. (Yes, BRI is more like a slogan than a policy statement since meticulous details were never laid out.) It was a coup at the outset to talk about a dream of building infrastructure that can be successors to Silk Road, to connect China and Europe on modern railroads and highways. Added to the modern Silk Road was building infrastructure of all kinds that has been sourly needed in the Global South overall. Never having been a rigorously thought-out policy, BRI lacked detailed feasibility studies that are required by the World Bank and other multi-lateral lenders. Chima simply kept extending loans generously to wherever they were requested. Unlike banks in the West and multi-lateral lenders that are strongly influenced by the Western value, the Chinese Communist Party does not attach troublesome conditions to their loans, and never preaches high-minded things like human rights. So BRI loans soared in popularity among authoritarian rulers in the Global South, which doesn’t host too many bona-fide democracies. The American Enterprise Institute, a Washington-based think tank, put the value of China-led infrastructure projects and other related projects classified as BRI at $838 billion between 2013 and 2021. To put this number in perspective, this is larger than the size of the economy of Saudi Arabia or Turkey, two of the larger economies in the Global South. Clients of BRI loans have not been known for their prowess in managing their own economies. When money was cheap and the People’s Republic was growing at torrid double-digit rates, these clients danced to the music in frenzy. As the party drew close to an end, however, some of them, not surprisingly, fell into trouble. History of emerging markets are littered with stories of debt defaults. The City of London experienced the first EM debt crisis in the 1820s, as newly independent South American countries found it unable to serve their debt obligations, as rosy expectations at the time of independence proved to be mirages. Since then, Argentina continues to find willing lenders to them despite their proven track record as a serial defaulter. A number of countries in other part of the Global South are following the footsteps of Argentina, too, but keeps receiving funding because their future has always looked brighter or lenders found excuses to extend loans that are not purely economic. Lending for political purposes, however, has its limits especially to borrowers who never learn to make both ends meet. Prince Mohammad bin Salman or MBS, Saudi Arabia’s de facto ruler, has reportedly come close to saying “Enough!” recently to Pakistan and Egypt for their bleak outlook to service their debt obligations. The former, especially, is China’s major client state and the biggest borrower. The IMF estimates that Pakistan owes over $30 billion to China and Chinese commercial banks, more than 30% of the country’s external debt. This compares to Pakistan’s GDP at an estimated $376 billion in 2022, and the recent flood has made the country’s prospect even worse. While Pakistan may be an extreme case, this represents the way China conducts its foreign policy. Money matters a great deal to those countries’ rulers, who are often indignant about the West’s arrogance and their conducts in the past. While they are not necessarily resonating with the vision Xi Jinping presents, they tend to side with China on a variety of issues out of hatred toward the West, the United States especially. Therefore, they keep borrowing from China as long as they can. In the meantime, the China’s economy has experienced marked downshifts as the 2010s drew close to its end. By that time, China began to cut back its largesse to the Global South. Though the CCP is spraying much less cash to autocratic rulers, outstanding amount that China is owed by them still keeps growing. Worse, with the return of inflation, rising interest rates in the global financial markets are hitting overextended borrowers. “When the Fed tightens, bad things happen” goes a Wall Street axiom. Higher interest rates always hit the weakest link in the global economy, and the weakest link this time around definitely includes China’s clients. Amid slowing global growth and higher interest rates, the 2020s are not going to be kind to autocratic rulers who borrowed heavily and spent freely on projects that only satisfied their egos or at best something that are not economically feasible. On top of it, climate crisis is making their ordeals harsher, as showcased in the flood in Pakistan. Hardships to be afflicted on these counties have been expected for some time. In a sense, such difficulties have been priced in the market to a certain extent, thus would not send shock waves to the world all of a sudden. Nonetheless, debt burden is going to weigh on them definitely, possibly for a long time. Rescue operations would be harder to pull off than in previous emerging market debt crises. China has become a dominant lender to the developing world, surpassing a variety of multi-lateral lenders combined. With China not being a member of the Paris Club, which in the past negotiated to reduce debtors’ burden, negotiations would not reach conclusions easily. Chinese banks reportedly insist on rescheduling debtors’ payments whereas the Paris Club is more open to write off the debt to alleviate their burdens. These borrowers’ ordeals could turn out to be as bad as or even worse than the sufferings of Latin America in the 1980s. Lenders are going to suffer, too. China’s commercial banks have been representing a significant part of BRI lending. Their involvement has become an obstacle in sorting out borrowers’ problems, since they already have enough problems with domestic borrowers, notably in real estate lending. Beijing tries to make as little concessions as possible in order to protect the countries’ commercial banks. The 2020s emerging market debt problem, therefore, would find it hard to reach solutions. Chinese banks could be standing on shakier grounds than where Japanese banks were in the 1990s. While Japanese banks suffered from bad debts from overseas borrowers, they were within the scope of their ill-conceived commercial real estate projects. Lending to politically-motivated projects with insufficient feasibility studies would make it harder to recover the fund the Chinese banks have sunk in. U.S. banks suffered a rough decade in the 1980s in the aftermath of the twin crises of savings & loans debacle and Latin American debt. It looks that Chinese banks are in a similar camp that American counterparts experienced forty years ago. On Wall Street in the 1980s, money center banks routinely traded at half their book value, reflecting the market’s bleak view on their earnings. In the early 1990s on a global roadshow, Citicorp CEO John Reed had to beg institutional investors to buy Citi’s newly issued shares in order to stay afloat. (That’s how Saudi Arabia’s Prince Alwaleed became the bank’s major shareholder.) Money center banks eventually made a strong comeback in the latter half of the 1990s on the revitalized U.S. economy. This revitalization was made possible by end of the Cold War (End of History?), beginning of the age of globalization, the advent of the digital age and higher productivity growth as a result of restructuring of the economy. In the face of growing non-performing loans both in and outside of the country, Chinese banks are trading today well below half of their book value. It would take them a long time before non or underperforming loans, both on real estate and BRI, are cleaned up. For that to happen, Beijing has to learn to grow the Chinese economy without relying on infrastructure projects and real estate development. That would most likely require painful restructuring of the economy that would end up with massive job losses in the unproductive sectors. Could the Communist Party pull this off? About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.
This is not a new news or revelation, and has been already well documented. The developing world, or the Global South in the 21st century term, is sinking slowly under heavy debt burdens. This is not their first time. They have suffered such ordeals before, a few times at least. What’s different in this century is that they primarily owe to a different lender from the past crises, the People’s Republic of China.
Since Xi Jinping’s rise to the helm of the Communist Party ten years ago, China embarked on a very aggressive and ambitious lending program to developing countries under a slogan of Belt and Road Initiative. (Yes, BRI is more like a slogan than a policy statement since meticulous details were never laid out.) It was a coup at the outset to talk about a dream of building infrastructure that can be successors to Silk Road, to connect China and Europe on modern railroads and highways. Added to the modern Silk Road was building infrastructure of all kinds that has been sourly needed in the Global South overall.
Never having been a rigorously thought-out policy, BRI lacked detailed feasibility studies that are required by the World Bank and other multi-lateral lenders. Chima simply kept extending loans generously to wherever they were requested. Unlike banks in the West and multi-lateral lenders that are strongly influenced by the Western value, the Chinese Communist Party does not attach troublesome conditions to their loans, and never preaches high-minded things like human rights. So BRI loans soared in popularity among authoritarian rulers in the Global South, which doesn’t host too many bona-fide democracies.
The American Enterprise Institute, a Washington-based think tank, put the value of China-led infrastructure projects and other related projects classified as BRI at $838 billion between 2013 and 2021. To put this number in perspective, this is larger than the size of the economy of Saudi Arabia or Turkey, two of the larger economies in the Global South.
Clients of BRI loans have not been known for their prowess in managing their own economies. When money was cheap and the People’s Republic was growing at torrid double-digit rates, these clients danced to the music in frenzy. As the party drew close to an end, however, some of them, not surprisingly, fell into trouble. History of emerging markets are littered with stories of debt defaults. The City of London experienced the first EM debt crisis in the 1820s, as newly independent South American countries found it unable to serve their debt obligations, as rosy expectations at the time of independence proved to be mirages.
Since then, Argentina continues to find willing lenders to them despite their proven track record as a serial defaulter. A number of countries in other part of the Global South are following the footsteps of Argentina, too, but keeps receiving funding because their future has always looked brighter or lenders found excuses to extend loans that are not purely economic. Lending for political purposes, however, has its limits especially to borrowers who never learn to make both ends meet. Prince Mohammad bin Salman or MBS, Saudi Arabia’s de facto ruler, has reportedly come close to saying “Enough!” recently to Pakistan and Egypt for their bleak outlook to service their debt obligations. The former, especially, is China’s major client state and the biggest borrower. The IMF estimates that Pakistan owes over $30 billion to China and Chinese commercial banks, more than 30% of the country’s external debt. This compares to Pakistan’s GDP at an estimated $376 billion in 2022, and the recent flood has made the country’s prospect even worse. While Pakistan may be an extreme case, this represents the way China conducts its foreign policy. Money matters a great deal to those countries’ rulers, who are often indignant about the West’s arrogance and their conducts in the past. While they are not necessarily resonating with the vision Xi Jinping presents, they tend to side with China on a variety of issues out of hatred toward the West, the United States especially. Therefore, they keep borrowing from China as long as they can.
In the meantime, the China’s economy has experienced marked downshifts as the 2010s drew close to its end. By that time, China began to cut back its largesse to the Global South. Though the CCP is spraying much less cash to autocratic rulers, outstanding amount that China is owed by them still keeps growing. Worse, with the return of inflation, rising interest rates in the global financial markets are hitting overextended borrowers. “When the Fed tightens, bad things happen” goes a Wall Street axiom. Higher interest rates always hit the weakest link in the global economy, and the weakest link this time around definitely includes China’s clients. Amid slowing global growth and higher interest rates, the 2020s are not going to be kind to autocratic rulers who borrowed heavily and spent freely on projects that only satisfied their egos or at best something that are not economically feasible. On top of it, climate crisis is making their ordeals harsher, as showcased in the flood in Pakistan.
Hardships to be afflicted on these counties have been expected for some time. In a sense, such difficulties have been priced in the market to a certain extent, thus would not send shock waves to the world all of a sudden. Nonetheless, debt burden is going to weigh on them definitely, possibly for a long time. Rescue operations would be harder to pull off than in previous emerging market debt crises. China has become a dominant lender to the developing world, surpassing a variety of multi-lateral lenders combined. With China not being a member of the Paris Club, which in the past negotiated to reduce debtors’ burden, negotiations would not reach conclusions easily. Chinese banks reportedly insist on rescheduling debtors’ payments whereas the Paris Club is more open to write off the debt to alleviate their burdens. These borrowers’ ordeals could turn out to be as bad as or even worse than the sufferings of Latin America in the 1980s.
Lenders are going to suffer, too. China’s commercial banks have been representing a significant part of BRI lending. Their involvement has become an obstacle in sorting out borrowers’ problems, since they already have enough problems with domestic borrowers, notably in real estate lending. Beijing tries to make as little concessions as possible in order to protect the countries’ commercial banks. The 2020s emerging market debt problem, therefore, would find it hard to reach solutions. Chinese banks could be standing on shakier grounds than where Japanese banks were in the 1990s. While Japanese banks suffered from bad debts from overseas borrowers, they were within the scope of their ill-conceived commercial real estate projects. Lending to politically-motivated projects with insufficient feasibility studies would make it harder to recover the fund the Chinese banks have sunk in.
U.S. banks suffered a rough decade in the 1980s in the aftermath of the twin crises of savings & loans debacle and Latin American debt. It looks that Chinese banks are in a similar camp that American counterparts experienced forty years ago. On Wall Street in the 1980s, money center banks routinely traded at half their book value, reflecting the market’s bleak view on their earnings. In the early 1990s on a global roadshow, Citicorp CEO John Reed had to beg institutional investors to buy Citi’s newly issued shares in order to stay afloat. (That’s how Saudi Arabia’s Prince Alwaleed became the bank’s major shareholder.) Money center banks eventually made a strong comeback in the latter half of the 1990s on the revitalized U.S. economy. This revitalization was made possible by end of the Cold War (End of History?), beginning of the age of globalization, the advent of the digital age and higher productivity growth as a result of restructuring of the economy.
In the face of growing non-performing loans both in and outside of the country, Chinese banks are trading today well below half of their book value. It would take them a long time before non or underperforming loans, both on real estate and BRI, are cleaned up. For that to happen, Beijing has to learn to grow the Chinese economy without relying on infrastructure projects and real estate development. That would most likely require painful restructuring of the economy that would end up with massive job losses in the unproductive sectors. Could the Communist Party pull this off?