The United States is raising new concerns about China’s practice of making emergency loans to debt-ridden countries, warning that a lack of transparency surrounding such financing can mask the fiscal predicaments facing fragile economies that have turned to China for help…
Chinese loans to countries already struggling to repay their debts are being made through China’s central bank using so-called swap agreements. These agreements allow countries to borrow Chinese renminbi and keep those funds in their central reserves while using the U.S. dollars that they hold to repay foreign debts…
Chinese state media reported this year that the central bank had 31 currency swap agreements in force worth a combined $586 billion. Chinese currency loans tend to come with higher interest rates than those offered by the Federal Reserve or the I.M.F…
Such currency loans do not always appear on the balance sheet of the borrowing nation, obscuring the extent of its liabilities. That lack of information can make it harder for other investors to know how deeply in debt a country is and has fueled criticism that the Chinese loans could leave the recipients worse off…[end quote]
I’m shocked whenever I see the vast borrowing of countries that can barely feed or educate their poor populations. Many spend a large fraction of their income on servicing interest on these debts. There’s a real danger of default.
Lenders without full disclosure of the debts of the borrowers may lend too much and force the borrowers into default.
The concern to Macro investors in the U.S. is that a foreign default (or series of defaults as in the Asian financial crisis of 1997-1998 could disrupt investments around the world, including the U.S.
My concern with China continues to be that China’s leaders seemed to have learned all of the wrong lessons about manipulative financial engineering practices from the West while adopting none of the counterbalancing practices that might balance some of the worst abuses. Practices like standardized financial accounting, public information about government spending, etc.
China clearly adopted a strategy of fostering debt dependence on many struggling countries as a means of expanding its sphere of influence. But without nearly a century of practices like debt ratings and public markets for financial instruments to provide SOME independent “scoring” of risk (***), China is misleading its own leaders about the future value of those loans – either in cashflow as they are paid back or value in infrastructure China can leverage in those regions – and making further bets assuming those bets will pay off.
It seems pretty clear that China has been one giant ponzi scheme since probably 2005. The West, and America in particular, have a limited window of time to learn the right lessons from the shipping meltdowns of COVID and repatriate key economic capabilities – chip making and steel making for two – to domestic firms and lessen our strategic dependence on China remaining solvent and functional.
WTH
*** Yes, I know that statement sounds funny when read aloud after our multi-trillion dollar fraud in the mortgage industry and collaterilized debt markets but bear in mind it was ultimately private investors who saw through the charade and began lining up counterbets that eventually woke up regulators and the Fed to the problem.
If I understand “US Dollar is Global Currency” concept correctly, PART of that “dominance” relies on many countries’ holding US Dollars in their central reserves. And, using those dollars to trade amongst themselves.
If the debtor countries “swap” reserve dollars and replace the dollars with renmenbi/yuan, then US Dollar is weakened as “The Global Currency”.
The “pool” of US dollars gets smaller, and , eventually there are no more US dollars, and the countries are then forced to settle trade in some other “currency”.
In other words, China is using these currency swap tactics to elevate the renmenbi to “global currency” status.
And gain the “advantages” that accrue to the country that controls The Global Currency.
Is that a reasonable comment?
China is playing a long game.
Not to mention that China loans use Western LEGAL style contracts, that will be supported IN WESTERN COURTS, that back the loans with the natural resources the debtor nations.
China is using the US/West “Rule of Law” against the US/West.
This is certainly possible but I think a different intention is more likely. My understanding is that most of these swap loans are to countries in China’s Belt and Road Initiative (BRI) that are already heavily indebted to Chinese banks. That suggests that this may be an effort to keep these banks, already reeling from the China property crisis, solvent.
It looks to me like the BRI program has been woefully mismanaged with China loaning out about a $1Trillion (USD), much of which seems unlikely to be repaid. Swap loans may be the only way to put off an immediate fiscal emergency, particularly at a time when the Chinese government needs to dramatically boost domestic spending.
It is possible that is inline with their thinking. One of the debtor nations is Argentina and both countries recently announced they will settle some payments in renmenbi. And there might be a political aspect to it too. Namely, it gives China leverage over the debtor nations.
But in a practical sense I don’t think this results in the renminbi becoming a reserve currency in any meaningful way. One of the main reasons is that China barely allows any access to its capital markets. If you need a significant amount of money, you probably need to borrow dollars because that’s what people have.
What I was stating that “Chinese leadership” isn’t a monolith, all acting in concert exactly according to one plan. Corruption is stratified vertically within functional domains and horizontally across functional domains. When the nature of the plan you’re running expects everyone to be adjusting to come into alignment with the plan but everyone is cheating and stealing in their sector, the overall plan becomes even more difficult to operate and reach the intended result.
In this case, the layer of leadership responsible for using Chinese loans to build infrastructure in these client countries is likely claiming everything is on schedule while corruption within those local client countries is stealing thirty percent of the money before it buys one truckload of concrete. Is anyone reporting that to Xi? Highly unlikely, partly because the Chinese are being mislead within the client countries and, to the extent they ARE aware of losses abroad, none of that is being reported internally to party leaders up the chain.
Beneath whatever surface view China wants the world to perceive, I suspect the interior is as rotten as current Russia. That rot and corruption explains why Ukraine has held its own against a Russian military previously thought to be superior in every metric. Because Russians robbed themselves blind for the past 30+ years resulting in a variety of deficiencies:
ammo dumps that can be destroyed by a bomb that fits on a one-way drone
thousands of inoperable transport trucks
lack of parts required to support ongoing training of pilots
an aircraft carrier that cannot operate without tug boats
etc.
None of these problems “existed” prior to the war in Ukraine, cuz everyone up the chain was told all the money has been spent and all the gear delivered according to plan. Only after Putin gambled on using that power to topple Ukraine and Ukraine called his bluff by not folding did Putin and the rest of the world learn he was leading an empty shell of a military.
I do find your statement ironic but for a different reason. For much of the early 20th century, US policy in Central and South America was primarily to support US businesses. The result was a bunch of banana republics that were unstable in the long run and generally undemocratic. Our current southern border problem is largely a result of our interference in the establishment of stable democratic institutions in these countries that could withstand the subsequent challenges of America’s voracious appetite for illegal drugs and climate change.
China seems to be doing the opposite. Xi wants China to become THE world power and created the Belt and Road Initiative (BRI) as part of the strategy. Pure self-interest. Given this priority, it is not surprising that poor business decisions were made. China certainly benefitted economically in the short term by exporting its industrial overcapacity to the Third World and diplomatically by extending its influence, but that trillion dollars in foreign handouts would have been better spent transferring wealth to the general Chinese population to increase domestic demand. In the meantime, Africa is becoming insolvent while building fancy airports, bridges, and seaports.
The irony as I see it is that the US and China imposed very different foreign policies but with the same end result, the destabilization of a continent and the growing enmity of the populations involved. Foreign policy that isn’t based on promoting mutual interests have a consistent habit of ultimately failing. That’s the difference between the success of the Marshal Plan versus China’s BRI.
@btresist China’s Belt and Road initiative consists of loans with interest, not handouts. This contrasts with U.S. foreign aid which is actually handouts that don’t need to be repaid.
