China, which lends nearly $1 trillion to about 150 developing countries, is reluctant to cancel the huge debt owed to struggling countries. That’s at least in part because China faces a debt bomb at home, with trillions of dollars in debt from local governments, mostly off-the-books financial affiliates and property developers.
One of Treasury Secretary Janet L. Yellen’s key issues when she visits Beijing this week will be whether she can persuade China to cooperate more to address the ongoing debt crisis facing low-income countries. is. But China’s state-owned banking system has been wary of accepting losses on foreign loans as it faces much higher losses on domestic loans.
How much debt does China have?
It’s difficult to know exactly because official data is scarce. Researchers at JPMorgan Chase & Co. last month calculated that total domestic debt, including household, corporate and government debt, amounted to 282% of the country’s annual economic output. This compares with an average of 256 percent for developed countries around the world and 257 percent for the United States.
What sets China apart from most other countries is the rapid accumulation of debt relative to the size of its economy. By comparison, debt surges in the United States and even heavily indebted Japan have been less dramatic. China’s debt has soared to more than double the size of its economy since the global financial crisis 15 years ago, making it difficult to manage.
China’s lending to developing countries is small relative to its domestic debt, accounting for less than 6% of China’s annual economic output. But these loans are particularly politically sensitive. Despite heavy censorship, complaints regularly surface on Chinese social media that banks should have lent money to poor households and communities within the country rather than abroad. Accepting large losses on such loans would be very unpopular in China.
How did China get into such a deep debt hole?
It started with real estate, which has been plagued by overbuilding, declining prices and distressing potential buyers. Over the past two years, dozens of property developers who borrowed money from foreign investors have defaulted, including two more recently. Developers have struggled to keep paying much higher debts to domestic Chinese banks.
Borrowing by local governments exacerbates the problem. Over the past decade, many cities and states have established special lending departments, are loosely regulated, and have borrowed heavily. Officials used the money to pay for daily living expenses, including interest on other loans, as well as building roads, bridges, parks and other infrastructure.
The real estate problem and the government debt problem overlap. For many years, the main source of income for local governments was the sale of long-term leases of state land to developers. This revenue has declined as many private developers no longer have the funds to bid for land. Instead, local financial affiliates borrowed heavily to purchase land such developers could no longer pay for at exorbitant prices. Many of these financial firms are in trouble as the property market continues to languish.
The debt has piled up. Credit rating agency Fitch Ratings estimates that local governments have debts equivalent to about 30 percent of China’s annual economic output. According to Fitch, partner financial institutions have debt equivalent to another 40% to 50% of national output, but local governments borrow and transfer the debt to financial institutions, which could lead to double counting. It is said that there is
Why is this important?
For governments and businesses, borrowing makes economic sense if the money is used productively and efficiently. But borrowers who don’t bring in enough returns can get into trouble by overdrafting, making it difficult for lenders to repay. That’s what happened in China. As the economy slows, more and more local governments and their lending arms are unable to continue paying interest on their debts. This ripple effect means that many provinces lack the funds to pay for public services, health care and pensions.
Debt problems have also made it difficult for Chinese banks to accept losses on loans to low-income countries. However, many of these countries, such as Sri Lanka, Pakistan and Suriname, are currently facing significant economic hardships.
Nearly two-thirds of the world’s developing countries are dependent on commodity exports. The World Bank forecast in April that commodity prices this year will be 21% lower than last year.
In 2010, only 5% of China’s overseas lending portfolio helped financially distressed borrowers. That number has now reached 60 percent, said Bradley Parkes, executive director of AidData at the University of William and Mary in Williamsburg, Virginia.
Although China is by far the largest sovereign financial institution to developing countries, Western hedge funds also buy a lot of bonds from these countries. Bonds often have fixed interest rates. But Chinese banks tend to lend dollars at floating rates that match those in the West. Developing countries are facing a surge in debt payments to China as the US Federal Reserve (Fed) has raised interest rates significantly since March 2022.
By doing little to reduce debt, many of the world’s poorest governments will continue to spend large amounts of money on debt service that could otherwise be used for schools, clinics and other services. “The biggest losers will be ordinary people in developing countries who are denied basic public services because their governments have unsustainable debt,” Parks said.
What is the solution?
China’s domestic debt overhang ignores quick fixes. The country needs to gradually move away from debt-driven government construction projects and heavy national security spending, and move towards a more consumer spending and services-based economy.
Strong constituencies in Beijing and China’s provincial capitals defend current economic priorities. Yellen will try to learn more about China’s economic plans, but she can do little to influence it.
Last winter, 21 Chinese banks agreed to extend the repayment of expiring loans to the lending sector of local governments in southwestern China for 20 years, with the first 10 years at no cost to the principal. He said he would have to repay only the interest, not the loan. Year. But the deal means huge losses for banks, and nearly every province in China has problems with its rural financial sector as well.
But solving the debt problems of developing countries will be difficult. “Ms Yellen’s ability to persuade China to accept debt write-downs is limited,” said Mark Sobel, a former U.S. Treasury Department official. “The US and Ms. Yellen have little influence,” he added.