China has Its Own Problems with Debt

​China is now the world’s largest creditor — surpassing the World Bank, the International Monetary Fund (IMF), and the combination of all the Organisation for Economic Co-operation and Development (OECD) governments.  Like any powerful affluent government China uses debt to its strategic advantage.   The media is good at providing statistics and hyperbolic claims of an imminent collapse of Western neoliberal hegemony with replacement by China, but the situation is of course much more complex.

East Coat Rail Link Construction Site in Bentong, Malaysia

Most Chinese loans have helped finance large-scale investments in infrastructure, energy, and mining with the countries often using revenues from commodity exports as collateral.  The Chinese government’s combined loans to the rest of the world surpassed $5 trillion through the year 2017, more than 6% of the world’s gross domestic product (GDP).  Chinese loans have helped to finance large investments in more than 100 developing countries, with potentially large positive effects for growth and prosperity.  At the same time, the large lending streams have resulted in the build-up of debt servicing burdens.

​‘America First’ promoters such as former Vice President Mike Pence assumed the term ‘debt trap diplomacy’ as a pejorative to describe China allegedly using predatory loan tactics to saddle developing countries with staggering debt loads, then using that debt as leverage to obtain concessions.  Arguably the United States pioneered such adventurism, encumbering developing nations with crushing debt by financing dubious or unsustainable projects and then using the debt itself as leverage to establish military bases, access to supply lines and markets, and support at the United Nations.

China copied the United States playbook and may also be replicating the problems that came with it.  Subscribing to debt is a two-way street and every venture should go through appropriate levels of analysis on economic feasibility, sustainability, and environmental impact.  Failures of large development projects usually occur because of errors in one or more respects of these analyses.

​The fact that poorer countries struggle with debt is nothing new.  After years of unsuccessful efforts in 2000 the Group of Seven (G7) major industrial nations, initiated a plan to wipe out $90 billion of debt, reducing the total to about $37 billion (both 2000 dollars).  

World Map of Debt Owed to China

For the 50 main developing country recipients, the debt owed to China has increased from less than 1% of debtor country GDP in 2005 to more than 15% in 2017.  A dozen of these countries owe a debt of at least 20% of their GDP to China (Djibouti, Tonga, Maldives, the Republic of the Congo, Kyrgyzstan, Cambodia, Niger, Laos, Zambia, Samoa, Vanuatu, and Mongolia).

China does not report lending to developing countries to the IMF or World Bank and so the full values of the debt are difficult to discern.  A methodical underreporting of Chinese loans has created a ‘hidden debt’ problem – meaning that both debtor countries and international institutions have an incomplete picture of how much countries around the world owe to China and under which conditions.  These ‘hidden debts’ distort risk pricing and debt sustainability analyses by other lending entities.

​The recent global economic decline will put pressure on the ability to service this stunning Chinese debt, perhaps misrepresented as a strength by the bombastic ‘America First’ crowd, which could very quickly turn into an avalanche of liabilities.  

There are some signs of this occurring, and several African countries are struggling to pay back their debt to Chinese lenders.  Zambia defaulted on its debt during 2020 then reached a deal in October 2020 to defer repayments to the China Development Bank.  Kenya declared the termination of its contract with the Chinese-owned Africa Star Railway Operation Company (Afristar), a company that was supposed to operate passenger and freight operations for 10 years, and Kenya owes Afristar $380 million in unpaid payments.

Balancing China's debt portfolio China owns a substantial amount of the stable United States and Europe securities:

• China holds at least $1.4 trillion of United States Treasury, agency, and corporate bonds (equivalent to 7% of United States GDP). 
• $370 billion of German bonds (10% of German GDP).
• $190 billion of United Kingdom (UK) bonds (7% of UK GDP).
• For the Eurozone as a whole, China holds $850 billion of bonds (7% of Eurozone GDP).

China has accumulated U.S. Treasury securities over the last few decades, but there is more than meets the eye with this statistic.  China’s purchases of United States Treasury securities (and other US fixed income assets) reached a peak in 2011 at $1.6 trillion or 10% of the United States GDP.

China faces its internal debt issues which make its towering economy seem not invulnerable.  China’s high debt levels have brought about systemic risks.  The Chinese government’s overall debt declined after 2015, but rose again in 2019, reaching 285 percent of GDP by the third quarter of 2020.  State-owned enterprise and local government debt comprise the great majority of this debt, which threatens to throttle internal investment and overall economic growth.

China faces some of the same social problems as the United States including an aging population and wide disparities of wealth and so a thriving economy will be necessary to stave off civil unrest.  

Chiang Kai-Shek, Leader of the Republic of China between 1928 and 1975, First in Mainland China until 1949 and Then in Taiwan Until Death.

One of the main areas of international focus by China has been annexing Taiwan.  Rival governments in Taiwan and Beijing both view themselves as the legal leadership of China, with much of the international community aligned with the latter in the decades since its communist forces won a civil war in 1949.  Taiwan operates as an independent country today but has never formally declared independence, representing itself as the ‘Republic of China’ (ROC), under the constitution brought there by the remnants of the former mainland government.

Only 15 countries in the world (about 8%) still have formal diplomatic relations with the Taiwan-based ROC government, including 16 UN member countries plus the United Nations observer state Vatican City, and that has been steadily declining because of Chinese diplomatic pressure.

Highlights of the recent deterioration of international recognition of Taiwan:

• In September 2019, two Pacific island countries - Solomon Islands and Kiribati - cut ties with Taiwan.
• Taiwan and El Salvador cut ties in August 2018 as a probable quid-pro-quo for Chinese investment in El Salvador, covered in a previous investigation.
• In 2017 Panama became the second country to cut ties with Taiwan, ostensibly because an eight-year ‘diplomatic truce’ between the ROC and PRC ended in 2016, but coincidently with substantial Chinese investment in expanding the Panama Canal.

​While United States nationalists and nativists ring alarm bells about China, their proposed simplistic solutions such as tariffs and increased military expenditures are unlikely to solve the systemic challenges posed by China:

• China plans over decades while the United States plans by four-year election cycles.  China’s policies, particularly international, can be composed of planning on small incremental changes anticipating stable governance.
• Between 1980 and 2019 the rate of growth in China exceeded the rate of growth of the United States every year with positive GDP each year, whereas the United States has had three years of negative GDP growth.