Debt-plomacy, or How China Eats The World

The rise of China has been the defining force of the last 15-20 years. Its economic miracle built on the back of debt and liquidity, and investing for an export driven economy drove commodity prices, and indeed global geopolitics. Its worth noting that per some estimates China's total debt today tops 300% of its GDP, and at an estimated US$40 trillion accounts for 15% of all global debt.




But arguably, the export miracle never really materialised with net exports accounting for only about 2% of the total rise in GDP between 2006 and 2019.


However there is another aspect of the China story which, albeit not ignored, is not as appreciated as one believes it should be. This pertains to Chinese investments in other countries, a strategy that appears to be driven more more by foreign policy, than economic considerations. These have totaled a staggering US$ 2 trillion in the last 15 years, as per data compiled by the American Enterprise Institute and The Heritage Foundation. For perspective for the scale of this investment, note that US$ 2 trillion is roughly equal to the increase in the size of India's total GDP between 2004 and 2019.

Of the total US$2 trillion investment, US$1.2 trillion was via investment in equity, and US$829bn was in the form of "construction contracts" to be executed in various countries. Generally speaking, equity investments were the primary mode of investment in more developed countries, while construction contracts were more prevalent in developing nations. 

It is interesting to see that the top 10 destination of such construction contract led investment by the Chinese were all Islamic/ majority Islamic countries. Cumulatively, these countries accounted for 34% and US$ 282 billion of the investment mix. The list is given below:


The contracts are tilted in China's favour as the contractor in almost all cases appears to be a Chinese company. It appears that these contracts are executed in the host country by Chinese companies, using Chinese equipment, and mostly Chinese manpower. It is also possible that the project finance is also provided by China to host countries to execute these projects. If this is accurate, the profits, salaries, taxes and other gains are all recorded by China for these projects.

Payments for executing these projects can stress the host country's external balance sheets. For example the consolidated external debt of the top 10 countries rose by five times between 2004 and 2019, and has brought economically weaker countries like Pakistan to the brink of bankruptcy (data taken from Joint External Debt Hub). 


It is also observed that countries that are unable to service the debt associated with these projects tend to lose key national assets to China. For example, Sri Lanka (total investment: US$13.8 billion, of which US$10.2 billion via construction contracts) reportedly had to cede control of its strategic Hambantota Port to China in 2017. In 2019 there are reports that Kenya may lose its prestigious Mombasa port to China as compensation for non repayment of its loans. Similar reports emerge for Ecuador that may lose more than a third of its Amazon rainforest to China for similar reasons. 

More topically for India, Pakistan stands to owe China some US$90 billion for the beltway projects being executed in its territory. Most of these repayments are scheduled to be made before 2037-38. Pakistan, that is already teetering on the edge of economic ruin, seems unlikely to be able to make these payments, and it remains to be seen what strategic assets it loses to China by then, and how that affects India defence and commercial interests.

Also, this vice like grip that China has on Islamic countries through its 'debt-plomacy' may explain why these countries are silent to the alleged Chinese excesses against its Muslim population. At the end of the day, one can find the inner truth to most things, when one simply follows the money.

Comments

  1. Chinese Communist Party, with its "Middle Kingdom" ambitions, is a serious threat to the entire world. While they systematically suppress Islam within their own borders, they seem to have formulated a dangerous strategy to unleash the Islamist menace against their main geopolitical rivals through this debt-plomacy. They have been preparing for this moment for a long time. They have infiltrated political parties, media houses, academia, entertainment . . . in every country that poses challenges to its hegemonic drive. With that, they believe, they can dictate the global narratives to suit their sinister agenda.

    But, hopefully, some of the rising challenges at home could derail, or at least throw a monkey wrench, in their plans. Let me list some of them (I am sure you are well aware of them);

    - Newly unemployed stands at 205 million
    - According to GNS Economics, their banking sector is teetering on the edge of collapse. Unofficial NPA stands at 20% (China claims 1.8%). According to China Banking & Insurance Reg Commission stats, the Chinese banking aggregate balance sheet was at 37 trillion Euros ($44.4T) as of Dec 2019. Euro Area banks is at 32T Euros in comparison.
    - Shadow banking assets have grown a whopping 350% of GDP
    - There is a massive asset bubble brewing. China accounted for around 57% of the $11.6 Tr increase HOUSEHOLD borrowing over the decade through 2019, according to BIS data. The US accounted for about 19% in comparison.
    - In Tianjin, apartments sell for $836/sqft! That's roughly the price people pay in the most expensive parts of London, even though disposable income is 1/7th that of London.
    -Urban Chinese have nearly 78% of their wealth tied up in residential property while it is 35% for Americans. How long this bubble can last and when it bursts what kind of chaos this will unleash?
    - China's hime vacancy rate is twice as large as US at 22%, that is 65 million empty units
    - Total value of Chinese homes and developers' inventory hit $52 trillion in 2019 according to Goldman Sachs Group. This is twice the size of US residential market!
    - Lack of global demand will weigh big on Chinese growth. Industrial Capacity utilization dropped from 78% in Q4 2017 to 67.3% in Q1 2020, even before pandemic. Monetary stimulus will not work.

    Add to all these things, there is US-China trade war (will resume if Trump is back); they are clashing with India; they have problems with Japan, Vietnam, Philippines, Taiwan ... OBOR is going to be a drag...

    So, at some point these problems will reach an inflection point, and, hopefully, will tame them a bit. Massive social unrests are a real possibility, although, China experts have been talking about it for last ten years!

    Philosophically, there is also karma... all this greed for power and mindless aggression with an intention to dominate others, will bring them crashing down at some point. I hope CCP collapses and Chinese people would revert back to their Daoist/Buddhist way of life and align with Indic/Dharmic civilization.

    That's a big hope!

    ReplyDelete

Post a Comment

Popular posts from this blog

Oil price, of bandhs & reality

The crux of the core: On Inflation, Exchange rates and Interest cuts