Daily Times

When Western economies were struggling to extricate themselves from the 2008 financial crisis, China remained comfortably smug as its economy continued to expand. However, Western economists have still criticised the Chinese economic model, saying that it is too reliant on enhanced public spending and access to easy credit. It is generally accepted that towards the end of 2017, China’s total debt amounted to 256 percent of its GDP, in comparison to 141 percent in 2008. Ominously, the International Monetary Fund (IMF), Organisation of Economic Cooperation and Development (OECD) and the Bank for International Settlements (BIS) have all postulated that economies that accumulate such massive debt in such a short amount of time have a nasty fall.

In terms of rank, China’s debt to GDP ratio is on par with those of developed economies such as the US, UK, and Italy. The purchasing power parity adjusted GDP per capita of China is barely a quarter of the US level and here lies the fault line. Borrowing is restricted to the corporate sector. A cause of concern is that as China is the world’s biggest trading nation any meltdown would have global ramifications and the worst hit would be the countries with Chinese investments. China’s rapid economic growth is attributed to one off events such as foreign investment after entering the World Trade Organisation regime and its real estate boom. A term used to describe China’s credit is financial deepening. This is when households and companies have enhanced access to credit for financing their expenditures.

A debate has been initiated by Western economists as to whether Chinese loans are more suitable to developing economies as lesser standards of due diligence are applied and disbursement is relatively fast. In 2017, Sri Lanka handed the lease of the Hambamtota Port for 99 years to companies owned by the Chinese government after it could not repay its debt of $1 billion.  Similarly in 2011 Tajikistan exchanged some 1158 square kilometres of disputed territory for a debt write off. Kyrgyzstan’s debt from infrastructure projects may jump from 62 percent of the GDP to 78 percent. Meanwhile, China’s portion of this debt will escalate from 37 to 71 percent.

A former US official has commented that Beijing “encourages dependency using opaque contracts, predatory loan practices, and corrupt deals that mire nations in debt and undercut their sovereignty, denying them self-sustaining growth”

A former US official has commented that Beijing “encourages dependency using opaque contracts, predatory loan practices, and corrupt deals that mire nations in debt and undercut their sovereignty, denying them self-sustaining growth”. Maldives was compelled to issue a sovereign guarantee for a $370 million loan for the development of housing financed by a state owned Chinese Bank. Developing nations remain gullible to sugar coated entreats.

Perhaps due to political exigencies, the Philippines’ economic managers are considering accepting readily available Chinese loans at an interest rate of two to three percent despite the availability of cheaper loans from Japan at interest rates between 0.25 and 0.75 percent. Djibouti seems to be in the process of ceding control of its major commercial port to a Chinese entity, as it could not repay its debts. The World Bank (WB) and IMF keep warning that Chinese loans at rates as high as 5 percent are unsustainable, and in some instances the natural resources of a country can be adjusted as collateral.

After World War II, the Marshall Plan provided the equivalent of $800 billion in reconstruction funds to Europe (calculated as a percentage of today’s GDP) and Western multilateral lending agencies claim to provide long term, and in some cases extendable loans, at low interest rates thrown in with occasional grants. Although the recipient countries are flush with funds to develop infrastructure when and if remittances fall and exports’ growth decline, the option with the lender to convert loans to commercial credit may create havoc with a developing country’s financial cushion. The recipient country may be left with no other option than to approach the IMF for a bailout.

Prior to the US and China trade war; despite sanctions China propped up the North Korean regime, allowing fuel and coal to cross their common border and providing food in return. Its companies account for nearly all international trade with the pariah state. What led China to unanimously impose new sanctions alongwith the US and other members of the UN Security Council on North Korea for its continued intercontinental ballistic missile testing. Perhaps this vote was inspired by the US Treasury move to block Chinese banks’ access to US banking networks on suspicion of illicit financial links with North Korea.

The citizens of North Korea are impoverished. According to a UN report, the North Korean government has appropriated wages of workers’ sent abroad to work in industries such as mining and construction in inhumane conditions. This ‘rogue state’ everyone is worried about could be coerced into abandoning its missile program if China withdraws its support — because North Korea is completely dependent on it.

In order to achieve its legitimate aspirations, every sovereign nation needs to exercise extreme care while conducting international negotiations for the coming generations. Exigencies cause shifts in loyalties but interests remain permanent, regardless of rhetoric.

The writer has done his Bachelor of Science in Business and Management from the London School of Economics and Political Science and is involved in research in the areas of finance, energy and sustainable development. Nadir Mumtaz reviewed the article

Published in Daily Times, April 26^th 2018.