There is a must-read article in Fortune magazine:
I have seen bits and pieces of this dribbling out for the past several years, but this May 18, 2023 article by Bernard Condon and the Associated Press reveals the iceberg hidden below the waterline. China has been engaging in extensive economic diplomacy, funding all sorts of infrastructure investments in countries around the world. This was China’s “$1 trillion “Belt and Road Initiative” to secure supplies of key minerals, win allies abroad and make more money off its U.S. dollar holdings.”
It hasn’t worked out all that well for either the borrowers or the lender.
A dozen poor countries are facing economic instability and even collapse under the weight of hundreds of billions of dollars in foreign loans, much of them from the world’s biggest and most unforgiving government lender, China.
An Associated Press analysis of a dozen countries most indebted to China — including Pakistan, Kenya, Zambia, Laos and Mongolia — found paying back that debt is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity and pay for food and fuel. And it’s draining foreign currency reserves these countries use to pay interest on those loans, leaving some with just months before that money is gone.
Behind the scenes is China’s reluctance to forgive debt and its extreme secrecy about how much money it has loaned and on what terms, which has kept other major lenders from stepping in to help. On top of that is the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid.
Countries in AP’s analysis had as much as 50% of their foreign loans from China and most were devoting more than a third of government revenue to paying off foreign debt. Two of them, Zambia and Sri Lanka, have already gone into default, unable to make even interest payments on loans financing the construction of ports, mines and power plants.
READ THE WHOLE THING — it’s that important.
This situation threatens to derail global efforts to tackle climate change. It is one of the forces that may be motivating Xi to be increasingly aggressive over Taiwan. It’s why China is reacting so strongly to BIden’s efforts to reduce dependence on China for so many critical things, which will also weaken China when it is more unstable economically than has been recognized. It could seriously damage the global economy, cause governments to fall (some already have), and incite conflict. It makes the Republican effort to blow up the debt limit even more dangerous, as does knee-jerk Republican saber-rattling at China. It is increasing misery for millions of people.
Some Takeaways:
This has been so far under the radar, most people and more critically politicians all the way up to the level of world leaders may not realize the potential dangers in this. It’s a long article so I’ll abstract some key points.
- The amount of money owed to China through various arrangements is far larger than had been realized.
- It’s not been realized because China has gone to some effort to keep loans hidden and forbidden borrowers from listing them openly.
- The loans are often on terms that are at high interest rates, so high that governments can’t service their debt.
- Efforts by the Federal Reserve to fight inflation in the U.S. that drove up interest rates have made the situation worse — and are seen by China as an economic attack on them.
- The rise in grain and oil prices due to the Russian invasion of Ukraine have also made the situation worse for countries struggling with debt.
- Many of the investments in assorted infrastructure projects have effectively been sabotaged by corruption and incompetence; countries owe billions for things that don’t work.
- China’s secret loan agreements force countries to put them first in line for any loan repayments, complicating bailout attempts by other international parties.
- The Chinese Central Bank has also employed tactics that have complicated the problem.
- The World Bank and the International Monetary Fund have been frustrated by China’s refusal to deal openly with the issue or take losses.
- None of this appears to have been a coordinated Chinese strategy to crash the world economy — instead it was the product of reckless lending by Chinese banks — who are also sitting on top of huge losses from bad domestic real estate investments and can’t afford to forgive loans or take any more losses.
Here’s the Associated Press version of this story, and the AP’s set of key takeaway points.
Meanwhile, there’s a G7 meeting trying to outflank China while dealing with Climate
From the NY Times:
To Counter China, G7 Countries Borrow Its Economic Playbook
Wealthy democracies rev up an effort to spend trillions on a new climate-friendly energy economy, while stealing away some of China’s manufacturing power.
Midway through his face-to-face meeting with President Biden in Indonesia last fall, the Chinese leader, Xi Jinping, offered an unsolicited warning.
Mr. Biden had in the preceding months signed a series of laws aimed at supercharging America’s industrial capacity and imposed new limits on the export of technology to China, in hopes of dominating the race for advanced energy technologies that could help fight climate change. For months, he and his aides had worked to recruit allied countries to impose their own restrictions on sending technology to China.
The effort echoed the sort of industrial policy that China had employed to become the world’s manufacturing leader. In Bali, Mr. Xi urged Mr. Biden to abandon it.
The president was not persuaded. Mr. Xi’s protests only further convinced Mr. Biden that America’s new industrial approach was the right one, according to a person familiar with the exchange.
Xi’s warning to Biden takes on a whole new context in light of the revelations now coming out about China’s huge problems with its staggering international investment loan issues.
Biden’s approach seems not unreasonable:
As Mr. Biden and fellow leaders of the Group of 7 nations meet this weekend in Hiroshima, Japan, a centerpiece of their discussions will be how to rapidly accelerate what has become an internationally coordinated round of vast public investment. For these wealthy democracies, the goal is both to reduce their reliance on Chinese manufacturing and to help their own companies compete in a new energy economy.
There’s certainly good reason to do this, beyond the economic aspects.
Mr. Biden and his Group of 7 counterparts have embarked on a project with two ambitious goals: to accelerate demand, even by decades, for the technologies needed to reduce emissions and fight climate change, and to give workers in the United States and in allied countries an advantage over Chinese workers in meeting that demand.
emphasis added
Tick, Tick, Tick
The world needs to transition to clean energy as quickly as possible — the stakes are as high for China as anyone else in that regard. Perhaps more so because China’s agriculture is already having trouble producing food and climate events are only going to make that more difficult around the world.
It also makes sense for Biden to invest in bringing manufacturing back to this country. Offshoring it to China was not driven by anything except the demand for corporations to increase profits and the idiocy of supply-side economics. The ‘buy-American’ provisions in the Inflation Reduction Act have angered our allies — but the administration has taken steps to ease their concerns. “Administration officials say once-rankled allies have bought into the potential benefits of a concerted wealthy-democracy industrial strategy.”
The problem is, people pushing efforts by G7 countries to outcompete China in the rush to profit from this may not be fully aware of how high the economic stakes for China are. As it is, China’s policies have put it at high economic risk and are driving its loan recipients into bankruptcy. How much of this is pushing Xi Jinping into a corner is not known, but it can’t be a good thing. As the saying goes, when you share the road with an elephant, if anyone stumbles everyone loses.
Will China’s debt bomb go off, or will there be efforts to defuse it in time to deal with the climate crisis?
Stay tuned!