World’s largest debt collector struggles with own economy

Special Report :
China has emerged as the largest debt collector globally, with its loans to developing countries reaching between $1.1 trillion and $1.5 trillion according to a recent report by the Financial Times of UK.

This surge in owed funds, mainly from Chinese state-backed banks, has led to an increase in suspended or canceled projects in these nations.

A significant portion of this debt, about 80%, is tied to countries facing financial challenges.

Since 2008, China, under its Belt and Road Initiative (BRI) and other development programs, has funded numerous infrastructure projects in the global south, totaling nearly $500 billion in loans.

However, recent findings by AidData at William & Mary indicate a shift in China’s approach.

To reduce default risks, Chinese policy has evolved, focusing less on infrastructure loans, which have dropped from over 60% of the loan portfolio in 2015 to just above 30% in 2021, and more on emergency lending, which now constitutes nearly 60% of their loans.

China has also implemented strategies like reducing infrastructure loans, increasing penalties for late repayments, and boosting emergency lending to further reduce default risks.

For instance, the maximum penalty interest rate for late payments increased from 3% to 8.7% between the early and later years of the BRI.

Despite these measures, public approval of China in low- and middle-income countries has declined, partly due to the lack of transparency in loan terms.

A case in point is Zambia, where a restructuring of $6.3 billion in debt was agreed upon, with a significant portion owed to the Export-Import Bank of China.

Bradley Parks, one of the report’s authors, notes that while China is attempting to safeguard its global infrastructure initiative, it is also facing challenges as a major debt collector, which often results in unpopularity.

The BRI debt collapse is taking place when the Chinese government is fighting an internal debt crisis of its own within the country.

Despite its appearance of robust productivity, China is facing significant economic issues, notably in its own property and financial sectors.

A key problem is the overdevelopment in the property sector, leading to a surplus of unwanted apartment blocks and a near-bankrupt industry.

This has caused foreign investors to withdraw rapidly. Domestically, the crisis is spreading to finance, highlighted by the troubles of Zhongzhi, a major player in China’s “shadow banking” system, which accounts for 40% of all loans in the country.

These shadow banks, less regulated than traditional banks, pose a risk of contagion in the sector, which could necessitate a government bailout.

In response, the Chinese government is taking significant steps, such as potentially allowing banks to offer unsecured loans to certain property companies and borrowing an additional one trillion yuan to support the faltering system of property companies, financial institutions, and local governments.

The economic crisis in China has also led to a record number of personal loan defaults, with over 8 million people blacklisted for missed payments on mortgages and business loans.

This surge in defaults since the onset of the COVID-19 pandemic reflects the severity of the economic downturn and poses challenges to recovery efforts.

As of now, approximately 1% of China’s working-age adults are blacklisted, a significant increase from 5.7 million in early 2020.

The impact of the pandemic, coupled with lockdowns and restrictions, has stifled economic growth and reduced household incomes, leading to this spike in defaults.

Economists point to both cyclical and structural issues as causes for this rise in defaults.

There has been a notable increase in household debt over the past decade, reaching 64% of GDP by September, as reported by a Beijing-based think tank.

However, this mounting financial burden has become unsustainable due to stagnant or declining wages amidst the economic slowdown.

The situation is exacerbated by high youth unemployment, which reached a record 21.3% in June. Many individuals, including laid-off workers, are struggling to pay off debts like credit card balances due to lack of employment.

Reflecting on historical relations, it’s noteworthy that China, a close ally of Pakistan and once opposed to Bangladesh’s independence, is now a major economic player in the region.

However, this involvement comes with significant imbalances, as evidenced by Bangladesh’s considerable trade deficit with China.

Furthermore, China’s indirect role in the Rohingya crisis has added to the complexities in Bangladesh.

Political ties between Bangladesh and China have evolved over time, particularly under former President Ziaur Rahman especially after China recognized Bangladesh as an independent state at the end of August of 1975.

The global economic instability, exacerbated by the Russia-Ukraine War, necessitates that Bangladesh tread cautiously in its economic decisions.

The experiences of Pakistan under the China-Pakistan Economic Corridor (CPEC) serve as a cautionary tale. Pakistan’s escalating debt to China, now its largest creditor, underscores the risks of such deep financial dependencies.

Bangladesh’s economy has been significantly impacted by a trade deficit of USD 33 billion, as the cost of imports greatly surpasses the earnings from exports.

The country’s largest trade deficit is with China, where it imports goods worth approximately 11 billion dollars annually but exports less than USD 1 billion worth of products to China.

However, Bangladesh’s exposure to Chinese debt remains around USD 5 billion according to a statement made by its Foreign Minister.

This figure while small considering overall foreign debt of Bangladesh which today exceeds USD 100 billion, is not insignificant especially when high interest rates that accompany Chinese debt.