Monetary games played by Chinese leadership

For every Chinese leader, as for every megalomaniac dictator, the thirst for personal power is so high that to enhance it hewillcompromise the future of his country. Mao gave them The Great Famine, the “liberal” DengXiaoping presided over the Tiananmen Massacre,and Xi Jinping has given them debt. All governments borrow and lend internationally and domestically to create infrastructure or to stimulate the economy in the hope that the effort will generate more than enough wealth to repay the debt. In addition, corporations, private or owned by the state and local governments borrow and sometimes lend too. Finally, households may be under debt. The figures need a lot of interpretation for any meaningful comparison of national debt across nations. Apparently high debt of a nation may be offset by an even larger credit extended by that nation making it a net creditor. The debt may be against collateral assets that may have a much higher value. If such assets rapidly lose value, the country or the citizens may quickly go from being wealthy to being under debt. One reliable indicator of safe borrowing is whether the GDP growth rate is significantly higher than the rate of growth of debt.

In case of China, reliable data is a bottleneck. In an article in February 2020 inthe Harvard Business Review, researchers bemoaned the lack of data and transparency about the Chinese economy. China had been lending to other countries through projects like the Belt and Road Initiative (BRI) but had not been sharing data with the monetary institutions and the credit rating agencies. While in capitalist countries, the bulk of these international transactions are in the private sector and subject to intense public scrutiny, most of the lending by China is state sponsored. While othercountries normally lend at concessional interest rates, China lends at market rates and demands collaterals to secure its loans. The collateral may be the asset created with the loan that can be taken over in case of default, as happened in the case of Hambantota port in Sri Lanka which has been now put under Chinese control for 99 years. Where the asset being created has neither commercial future nor strategic value, the collateral may be some other high-value asset like a mine of rare minerals. After a multi-year data gathering effort, the researchers concluded that 50 per cent of loans given by China to developing countries go unreported. The study found that 50 such countries’ indebtedness to China was 1 percent of their GDP in 2005 and it grew to 15 percent of their GDP in 2017. 12 of these countries, most of which are small and poor, Djibouti, Tonga, Maldives, Niger, Republic of Congo, Zambia, Laos, Cambodia, Samoa, Vanuatu, Kyrgyzstan and Mongolia, owe to China more than 20 percent of their GDP. This debt,in addition to giving China hefty interest and the possibility of grabbing collaterals,gives it influence and strategic foothold in these countries and in the surrounding region. What irks the west is that China is still designated a developing country, entitling it to borrow from the World Bank(WB)at a concessional rate andthus making it the rapacious middleman between theWB and the poor countries. China borrows not only from theWB but also from most of the advanced economies at a much lower rate than its lending rate for poor countries. Since China does not disclose the loans to these small countries, many of these are able to borrow from the WB to repay Chinese loans. Thus, it becomes a circular route with theWB lending to China at low interest, China lending to poor countries at high interest, and WB lending to poor countries to repay China.

Thus, China is able to earn for itself largesums on IMF wealth and gain influence with small countries in the bargain. No democratic country would have been able to indulge in this rigmarole because of the requirement of transparency monitored by the free media and activists. The total debt owed by the world to China exceeds $5 trillion representing 6 percent of the world GDP. But what has all this got to do with China being under increasing debt? These complex transactions should have actually enriched China.

When a lender gets easy money to lend at high interest, soon it may become complacent and startindulging in reckless financial behaviour. In Shakespeare’s Hamlet, Polonius advises his son, “Neither a borrower nor a lender be; for loan oft loses both itself and friend.” The influence gained by China with small countries through lending for sub-optimal projects seems to be headed for that fate. As the projects did not pay for themselves, since 2011 more than two dozen countries have highlighted liquidity and solvency issues and got their loans restructured.The Centre for Global Development, a Washington thinktank, concluded in March 2018 that 23 out of 68 BRI borrowing countries were vulnerable to debt stress. If China grabs collaterals in such a large number of cases, it will lose not only influence with these countries but also its strategic goal of creating footholds around the world to counter the USA. There is already a clamour that China should write off the whole or a part of thisdebt but that would create problems for the Chinese economy,as China is obliged to repay its lenders.

This conundrum for China as a lender appears insignificant when we see the role of China as a borrower. Why does a booming economy, which was at one time growing at 15 per cent a year, have to borrow? Why does it have to borrow at breakneck speed, borrowing up to 20 percent of its GDP in a year and that rate does not show any signs of slowing down? The Institute of International finance in its July 2020 report said that debt to GDP ratio of China was 318 percent at the end of the first quarter of 2020 and it increased to 335 percent by the end of the second quarter. The bulk of it was borrowing by the government, which stood at 259.3 percent of GDP.

Howsoever scary these figures may appear to be, these represent an underestimation for two reasons. It is widely believed that official Chinese estimates of GDP are always inflated. Secondly, the local government debt in China is frequently not reported and S&P Global Ratings estimates this debt to be in the range of $4.2 to $5.6 trillion. Adjusted for these uncertainties, Chinese debt at the end of June 2020 could have been at least 350 percent of its GDP. This scenario raises many other questions in addition to the two mentioned above. In the second part of this article next week, we shall discuss these questions about China, the world’s second largest economy, borrowing disproportionately and its consequences for the rest of the world.

Source : Daily World

The writer RN Prasher is a retired IAS officer of Haryana cadre | Personal Opinions

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *