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China, the world’s biggest lender, is neck deep in debt which Covid-19 may unravel

Illustration courtesy: The Balance)

(TibetanReview.net, May31’20) – Between 2000 and 2017, the world’s debt obligations to China rose from $500 billion to a staggering $5 trillion – about six percent of the world’s economic output – according to the Kiel Institute for the World Economy, reported aljazeera.com May 30. And yet China itself has been borrowing heavily. As per Institute of International Finance, China’s total domestic debt hit 317% of its GDP in first quarter of 2020, up from 300% last year, registering a largest quarterly increase, reported sundayguardianlive.com May 30.

The aljazeera.com report said China had loaned more money to the world than the richest 32 nations. It and its subsidiaries had lent $1.5 trillion directly to 150 nations – making China the world’s biggest creditor, overtaking the IMF and World Bank. It had also made unreported loans worth $200 billion, the report added.

The report cited to Professor Christoph Trebesch from the Kiel Institute as explaining how China’s opaque lending practices make it difficult for investors and international lenders to make accurate investment decisions.

The report said many nations had been rethinking their involvement amid accusations that China had overpriced projects, especially in its Belt and Road Initiative to build new roads, ports and rail lines in mostly developing nations. Most of the money China lend for these projects come back to itself as agreements ensure that contracts are awarded to Chinese builders who also mostly bring their own Chinese workforce.

Meanwhile, China is set to take on more debt as it tries to beat the Covid-19 induced slowdown to increase its spending, noted the sundayguardianlive.com report. With Beijing announcing advance quota of local government special purpose bonds to the tune of 1 trillion yuan to fund infrastructure projects, it is now almost a given that debt at the local level—which is non-transparent and often violates banking rules—is set to balloon further. The move will ensure local government debt will more than double as compared to last year from 1.9 trillion yuan in 2019 to almost 3 trillion yuan this year, the report said.

The report said a banking crisis and systemic collapse of the financial sector were now looming large amidst growing concerns that many of the debts taken at household level and at local government level, often illegally, were at a very high risk of default. This could hit China’s state-dominated financial system hard and unravel the non-transparent financial dealings that have been the hallmark of its growth model, the report said.

And the report concluded: “The world’s most indebted country is shovelling more money via debt to fund projects to bring back growth. 2020 will decide whether the Chinese growth model will unravel and lead to its collapse. For now, bond markets and investors around the world are on tenterhooks.”

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