Rising domestic debt puts China in a bind over canceling developing countries’ debts

Reuters :
China, which has lent nearly $1 trillion to around 150 developing countries, is now grappling with its own domestic “debt bomb,” leading Beijing to be reluctant to cancel large debts owed by struggling nations, as highlighted by Keith Bradsher in The New York Times. The country faces an alarming accumulation of debt at home, with trillions of dollars owed by local governments, off-the-books financial affiliates, and real estate developers. During US Treasury Secretary Janet Yellen’s visit to China, one of the key issues was whether she could convince China to cooperate in addressing the evolving debt crisis faced by lower-income countries. However, China’s state-controlled banking system is hesitant to accept losses on foreign loans when it already faces greater losses on loans within its borders.
According to JPMorgan Chase researchers, China’s overall debt, including households, companies, and the government, has reached 282% of its annual economic output, surpassing the average debt levels in developed economies worldwide. The rapid accumulation of debt relative to its economy sets China apart from most other countries and poses challenges in managing this debt burden. Although China’s lending to developing countries represents a small proportion of its domestic debt (less than 6% of annual economic output), these loans are politically sensitive. Criticisms have emerged on Chinese social media, suggesting that the money should have been lent to support impoverished households and regions within China rather than abroad. Accepting significant losses on these loans would be unpopular within China.

China’s debt issues can be traced back to the real estate sector, which has experienced overbuilding, falling prices, and struggling buyers. In recent years, numerous real estate developers that borrowed money from overseas investors have defaulted on their debts. Developers also face challenges in repaying substantial debts to banks within China. Adding to the problem is the borrowing undertaken by local governments, which set up lightly regulated financing units over the past decade.