China has been steadily growing as the second largest economy in the world, soon to surpass nations in the European Union combined. The staggering growth has been making headlines and economists around the world see its consequences clearly. The centre of the world economy is most likely to shift from the west to the east, given to the exponential growth of the Chinese market.
However, a lesser-known fact that most of us are unfamiliar with is the Chinese credit system. Today, they constitute the single largest standing creditors in the global market, surpassing institutions like the World Bank and the IMF combined. The Chinese debt has been mounting enormously over the past decade as their government adopted crediting as a major investment drive.Today, collectively the world owes over $5.6 trillion to China, which amounts to5-6% of the total world economy.
Who does China lend to?
China usually credits low income developing countries in Asia, Africa and Europe. Sri Lanka, Pakistan, Venezuela and Malaysia are among the long list of nations that arein debt of the Chinese credit. Most of this creditingoperates through the funding of infrastructure projects abroad and they encompass dual motive on the Chinese part. Not only does China gain profit on the money lent but they also see the growth of infrastructure in developing nations as enabling access to new markets for Chinese products. The Belt and Road initiativeis one of China’s signature foreign policies based solely on the principle of investing in overseas infrastructural endeavours.
However, you will be surprised to know that not only are third world developing and under-developed nations relying on the Chinese credit, but also some of the most advanced nations.USA has been leveraging on Chinese credit for quite some time now and today their debt to China has risen to $1.1 trillion. China’s investment in the US has been in the form of treasury securities, and has been funding USA’s federal budget deficits over the years. However, China has shown caution with their investments in the US over fluctuating value of dollar and inflation.
Anonymity and context:
A part of the reason why the world is unaware of the Chinese credit system is the sheer anonymity and privacy they maintain in the process. Although most of the debt is held by state-owned or state-controlled financial institutions making it an official state policy, deals with most nations are not in the public domain. Some recent cases like the Hambantota port lease with Sri Lanka spilled the beans for China forcing things to come out in the open.
In general, transparency on the transfer and the use of funds is low which is why nations like USA have accused China of “debt-trap” diplomacy, trapping weaker nations in excessive debt and low-quality infrastructure in return.
The scene post-pandemic:
China’s focus and priorities have changed post-pandemic and this will have direct and indirect consequences on their credit system as well. Overseas crediting was a policy adopted to speed up economic growth. However, having attained a stable growth rate, Chinese authorities have indicated that the speed of economic growth is not a priority anymore. Their five-year plan up to 2025 aims at a “reasonable and stable” growth rate. Authorities have indicated that China will be pulling their brakes on overseas lending and investing in more sustainable projects. They have also adopted debt reduction as a primary objective for this year.
The growing Chinese credit was also straining China’s relations with other nations of the world and international organisations like the world bank. In their bid to maintain a healthy global economy and the balance of power, the world bank urged China to maintain debt transparency and collaborate with the world bank to find sustainable and long-lasting solutions to the debt burdens of the world’s poorest nations.
