- What most people don’t understand about the slew of issues currently facing China
- Is a potential debt crisis looming?
- Chinese loans are NOT cheap. Discover how they compare to the US
Dear Reader,
Yesterday we talked about the “death” of the US dollar, so if you missed that email, I definitely recommend going back and reading it.
We also talked about the role of the dollar when it comes to the BRICS nations, and specifically, China.
What most people don’t understand is that China is also fighting a slew of issues when we look at Belt and Road Investments that have continued to be a drain on Chinese resources.
We have said that the BRI opened up China to a large amount of international exposure – especially at the Emerging Market level. China has taken possession of several projects over the last several years, and none have even remotely come close to their revenue-generating estimates.
This resulted in broad shortfalls and write-downs at the bank level, because even though the foreign nation is on the hook for payment – it’s a Chinese bank that underwrote the bond/loan that now has to be written down.
Is a Potential Debt Crisis Looming?
China ramping up its bailout lending to poorer countries highlights a potential debt crisis in the developing world. The stress in Emerging Markets is growing, and the above chart highlights how it began well before COVID.
A new study shows China’s rescue lending surged to $104 billion between 2019 and the end of 2021 to participants in its Belt and Road Initiative, the world’s largest-ever transnational infrastructure program. This figure, while striking, is minor compared to the overall debt levels in emerging markets.
The Institute of International Finance, a financial industry association, estimates that total developing world debt rose to a record of $98 trillion at the end of 2022, after governments and corporations filled their boots in recent years.
With so much debt weighing on the world’s weakest economies, it will not take much to push several into default.
Pressures are building. A stronger US dollar is increasing the domestic currency valuation of external debts. Higher interest rates, required to fight inflation, are also raising debt service costs.
All of the above points aren’t new to anyone that has been tracking our view of China’s exposure as well as the stress at the EM level.
Chinese Loans Are NOT Cheap – Here’s How They Compare to the US
It's also important to note that this Chinese debt and rescue funds aren’t cheap. So if a country is turning to China, they have exhausted many cheaper alternatives.
According to a recent article by James Kynge of the Financial Times: “Rising global interest rates and the strong appreciation of the dollar have raised concerns about the ability of developing countries to repay their creditors. Several sovereigns have run into distress, with a lack of coordination among creditors blamed for prolonging some crises.
Sri Lanka’s President Ranil Wickremesinghe called on China and other creditors last week to quickly reach a compromise on debt restructuring after the IMF approved a $3bn four-year lending programme for his nation.
China has declined to participate in multilateral debt resolution programmes even though it is a member of the IMF. Ghana, Pakistan and other troubled debtors that owe large amounts to China are closely watching Sri Lanka’s example.
“[China’s] strictly bilateral approach has made it more difficult to coordinate the activities of all major emergency lenders,” said Brad Parks, executive director of AidData at William & Mary in the US:
Several of the 22 countries to which China has made rescue loans — including Argentina, Belarus, Ecuador, Egypt, Laos, Mongolia, Pakistan, Suriname, Sri Lanka, Turkey, Ukraine and Venezuela — are also recipients of IMF support.
However, there are big differences between IMF programmes and Chinese bailouts. One is that Chinese money is not cheap. “A typical rescue loan from the IMF carries a 2 percent interest rate,” said the study. “The average interest rate attached to a Chinese rescue loan is 5 percent.”
The above quote from the Financial Times highlights exactly what we have been saying – rising rates are going to put renewed pressure on developing markets. Mixed with inflation and a slowing economy, they are facing a coming disaster that is ignored by the market (still).
Is China creating a broad “debt trap” designed to take control of local infrastructure in emerging markets? China denies this but lack of transparency in publishing records of its foreign loans raises more questions than answers.
Kind regards,
Freedom Financial News
