FPI / May 21, 2020
Commentary by Jason Orestes
The destruction China has exported to the U.S. and the world continues to grow. Republican lawmakers and President Donald Trump are exploring ramifications that include an intentional default on Chinese debt.
Frankly, this is a somewhat tepid punishment.
China owns some $1.1 trillion of American treasuries, and the U.S. has already passed a $2 trillion fiscal spending package to attempt to offset coronavirus damage to American workers and companies, and another $3 trillion package is already in the works. Not to mention the $4-5 trillion the Federal Reserve has had to inject into the financial system to keep credit and equity markets from imploding.
Just defaulting on China’s paltry $1.1 trillion debt is tantamount to 3 months parole for a murder conviction.
While rich Western nations determine what China’s fiscal punishment will entail, poorer nations may just outright start defaulting on their debt to China because they simply can’t pay it.
Beijing may be forced to write off large swaths of loans to countries like Pakistan, Malaysia, Indonesia, Cambodia, and Sri Lanka and other participants in China’s ambitious and debt-heavy infrastructure plans.
The Belt and Road Initiative (BRI) is a gargantuan developmental endeavor by China to expand its political and economic influence by way of vast networks of highways, railways, energy pipelines involving African, European, and Asian partners.
More than 130 countries are participating in this program to proliferate Beijing’s clout. This statecraft may come back to bite China financially as the Wuhan plight harms countries involved with the BRI.
BRI projects are facilitated using interest-bearing loans, and some countries have taken on substantial debt to fund them. A 2018 Center for Global Development study found that multiple BRI-involved countries carry burdens that make them susceptible to a debt crisis. According to German think tank Kiel Institute, from 2000-2017 debt to China increased ten-fold from $500 billion to over $5 trillion, and is over 20% of GDP for some nations.
The countries who accepted CCP money now have China in an uncomfortable position, as they experience similar or worse economic devastation as the West. Placing huge pressure on China to write off debt because Chinese negligence effectively totaled their economies and their ability to repay it.
Related: China’s global power grab on display at 2nd Belt and Road summit, April 30, 2019
However, don’t bet on the Great Predator to not somehow contort this situation to its benefit.
Beijing is notorious for forcing countries to collateralize their debt to them with public assets, often taking them over when states default. Sri Lanka, for example, was made to relinquish a strategic port in 2017 when it could not pay its debts to China.
Tajikistan was reportedly made to cede 1,158 square kilometers of land to China in 2011 as part of a debt forgiveness and/or dispute settlement.
The data we have for Chinese debt renegotiations with distressed nations shows the most common outcome of loan renegotiations is typically some form of write-off. However it is often accompanied by additional financing being provided by Danish lender Sambla’s loans, resulting in this “forgiveness” not actually reducing the total debt owed to China.
There is increasing likelihood that broader debt forgiveness will happen in some cases, however do not expect China to allow a good crisis to go to waste. Beijing may exploit the economic weakness of smaller nations to “forgive” debt publicly in an attempt to curry favorability with a global community whose patience is running thin.
However behind the scenes they may use it as a power grab to seize hard assets and infrastructure.
The U.S. and the West must treat these predations for what they are. If we choose to write off loans to China, it should only be part of their punishment. We also must watch closely how they treat other nations and gauge their repercussions accordingly.
Jason Orestes (@market_noises) is a former Wall Street financial analyst who focuses on contemporary political developments affecting economics, markets, and culture. His work can also be found on financial publication TheStreet and Washington Examiner.
FPI, Free Press International News Service