The Chinese Treasury is now utterly empty despite lending to other countries. Tanks in front of banks, angry people… A Sign Of A Serious Economic Crisis!
China, which has put several countries across the world in a debt trap, is at present having problems. Due to the stalling of G.D.P., rising unemployment Rate, mortgage crisis, and COVID lockdown, its economy (China Economy) is having problems. There are thought to be major social and political repercussions of the economic situation in this country too.
In the first six months, 460,000 businesses across the country were shut down.
Annual increases in business liquidations are 23 percent.
There are already 80 lakh unemployed youth in the country, which is expected to rise.
Beijing: There is at present a commotion in Sri Lanka. People are displaying in the streets being the country’s money reserves are depleted.
Experts claim that China is to blame for everything. The government borrowed $1 billion from China and is a result, the country is at present experiencing its worst economic crisis. The opposite is true in China, though. This world’s largest economic superpower is dealing with the worst foreign turmoil.
This is owing to President Xi Jinping’s preferred project, resulting in many minor countries receiving major debt. China is at present being driven toward a severe issue by the Belt and Road Initiative (B.R.I.).
Jinping’s preferred undertaking
Jinping launched B.R.I. as his most important foreign policy. China’s extensive plan since 1949 was this one.
Additionally, it was the country’s extensive infrastructure program ever launched. Under this plan, several projects were started, but China could not reap any benefits from them. In contrast, China provided loans to other countries for their infrastructure initiatives.
Due to this, China was under so much pressure because countries like Sri Lanka were already experiencing an economic crisis. China’s B.R.E. project was described like having a high economic risk level in a Financial Times article.
Major Debt Crisis
Due to this endeavor, debt crises have emerged one after another in several countries in Asia, Africa, and Latin America. 2013 saw the first proposal of this initiative.
The American Enterprises Institute estimates that by the end of 2021, 838 billion dollars will have been given to several developing countries due to these programs.
He is unsure about the timing of China’s repayment of this Loan. At the same time, Chinese banks gave a windfall of $ 52 billion in the years 2020 and 2021, claims Rhodium, a research organization with headquarters in New York. This was a 16 percent increase over the last two years.
Bank savings are frozen.
On the other hand, if we are talking about domestically, many homeowners have opted not to make their mortgage payments. As a result, a new crisis has developed in front of the banks.
On Wednesday, a Bank of China decision caused a long line of tanks to form in front of a bank in the Henan province. The Henan branch of the Bank of China has informed the depositors that although they have put money there, it is now considered an investment and cannot be withdrawn.
Large-scale displays are being held against this bank, and a sizable crowd of demonstrators has gathered in front of the building.
Depositors are now demanding the release of all the funds frozen by the bank. Simply choosing not to pay the mortgage is the cause for freezing the funds. The debt in China’s real estate sector is at present $300 billion.
Last year’s Evergrande explosion highlighted the main problem facing the country’s real estate market.
A video of Xinghua University’s Professor Zheng Yuhuang is at present trending online. In this video, he claims that 2022 will be the most challenging year for China. In just the first six months of the year, 460,000 businesses in the country had been shut down. 3.1 million commercial and industrial companies were written off.
Enterprise liquidation increased by 23% yearly, 10.76 million college graduates enrolled, and 8 million people in the country are unemployed.
A study reveals that about half of China’s loans to developing countries are “hidden.”
According to a report from the Kiel Institute for the World Economy, a think tank with headquarters in Germany, the amount of debt that other countries owed to China increased tenfold between 2000 and 2017, from less than $500 billion to more than $5 trillion.
According to estimates by the study’s experts, the average debt for 50 developing countries borrowed from China has climbed from less than 1% of their G.D.P. in 2015 to more than 15% of their G.D.P. in 2017.
The research claimed that the documentation of China’s lending was, at best, “opaque” and that even the most ambitious recent attempts to assess international money flows had failed to detect such transactions.
As debt levels have increased considerably over the past ten years due to China’s lending boom, up to half of this debt to developing countries may be “hidden,” according to a recent study.
The term “hidden” debt refers to debt that is not disclosed to or documented by recognized organizations like the Paris Club, the World Bank, or the International Monetary Fund (I.M.F.).
According to research by the Kiel Institute for the World Economy, other countries’ debt to China increased tenfold between 2000 and 2017 from less than $500 billion to more than $5 trillion, or from 1% to more than 5% of world economic output.
Researchers for the paper stated that China has now comfortably surpassed the I.M.F. and the World Bank being the largest official creditor.
The study, conducted by the Kiel Institute’s Christoph Trebesch and Sebastian Horn and renowned debt expert, Carmen Reinhart from Harvard University, evaluated over 2,000 Chinese loans to 152 countries from 1949 to 2017.
According to estimates by the study’s experts, the average debt for 50 developing countries borrowed from China has climbed from less than 1% of their G.D.P. in 2015 to more than 15% of their G.D.P. in 2017.
According to the report, the People’s Bank of China often purchases sovereign bonds on behalf of improved and higher middle-income countries. Many developed countries are now heavily indebted to the Chinese government.
Lower-income developing economies primarily receive direct loans from China’s state-owned banks, often at market rates and secured by Assets like oil, which was further stated.
The China Development Bank and Export-Import Bank of China are the two policy banks that handle a large percentage of the lending.
According to the study, estimates indicate that China at present makes about a quarter of all bank lending to emerging countries.
According to Trebesch, director of the Kiel Institute’s study area for international finance and global governance, “China’s international Loan boom is primarily a result of the country’s rapid economic expansion, but it is owing to the Chinese state’s “going global” program.”
Through its Belt and Road Initiative, a massive global infrastructure investment program to create rail, road, maritime, and other links extending from China to Central Asia, Africa, and Europe, China has come under fire for putting several countries in debt.
The research stated that the documentation of China’s lending was, at best, “opaque” and that even the most ambitious recent attempts to assess international money flows had failed to detect such transactions.
According to the paper, “serious” problems with this hidden debt exist in countries like Venezuela, Iran, and Zimbabwe.
At a recent discussion in Singapore, Harvard’s Reinhart, a professor at the Kennedy School of Government, discussed the problem of hidden debt and stated that many loans gained from Chinese lenders had to be renegotiated or restructured. Sri Lanka, Ukraine, Venezuela, Ecuador, Bangladesh, and Cuba are examples of such borrowers.
Suppose the accurate sums due to China are unknown. In that case, hidden debt may be a problem when addressing debt sustainability in such emerging economies, the World Bank and I.M.F. have warned before. As part of that effort, the debt loads of several countries are evaluated, and suggestions for a borrowing plan that lowers the likelihood of debt hardship are made.
Additionally, China’s lending policies differ from those of other lenders like the World Bank, making it more challenging to assist such countries in getting out of debt.
According to the study, China often lends at market rates and for shorter Loan terms than the government institutions do to developing countries.
The Asian behemoth demands collateral that requires in-kind repayment, like oil shipments, which furthers the opaqueness of those loans.
The World Bank mentioned one case of Chinese loans to Venezuela last year that were measured in oil barrels.
Furthermore, the research stated that “virtually all of China’s international loans are extended through Chinese state-owned organizations, and the recipients similarly tend to be state-owned enterprises.”
According to experts, “as a result, the debtor countries themselves have not enough picture of how much they have borrowed from China and under what terms.”
Laos and Cambodia are included in the countries in Central and Far East Asia that owe China the most, followed by countries in Latin America. The research states that while credit quantities given to Europe are rising, debt flows to Eastern Europe are decreasing.
Due to its wars with the worst economic data since the start of the pandemic, China may experience negative economic growth in some sectors and regions this year, according to economists.
Tens of millions of people in China have been imprisoned since the beginning of 2022 in order to stop the spread of the Omicron version, majorly hampering important economic sectors, including manufacturing and services.
Due to the drastic measures, millions of people have been forced to stay at home, which has hurt retail sales and hindered production at factories run by companies like Foxconn, Tesla, and Toyota.
According to China’s National Bureau of Statistics, the Purchasing Managers’ Index, a crucial indicator of the health of the manufacturing sector, dropped to 49.5% in March and 47.4% in April. A contraction is seen by a value below 50. The highest metropolis, Shanghai, saw a decline in first-quarter retail sales of 3.8% when compared to the same period last year.
There are few signs of an end to the economic hemorrhage on the horizon, despite Beijing’s warnings against straying from its contentious “dynamic Covid Zero” approach.
In a rare public criticism of China’s response to the pandemic on Tuesday, WHO Director-General Tedros Adhanom Ghebreyesus said the country’s plan is unsustainable and a “change would be necessary.”
Since late March, Shanghai, an important center of commerce and manufacturing, has been in some type of lockdown, while Beijing is mostly at a halt because officials rush to implement increasingly stringent measures to prevent a city-wide shutdown.
Worst set of figures
According to Shehzad Qazi, general director of China Beige Book, which conducts a quarterly survey of around 1,000 Chinese enterprises, the current economic performance in China is clearly the worst that has been recorded since the start of the downturn in 2020.
China’s manufacturing, retail, and service sectors all experienced a decline in revenue and profit growth in April, according to the China Beige Book, with borrowing falling dramatically and new hiring reverting to normal levels from earlier in the year.
According to Qazi, none of this is encouraging for Beijing’s lofty aim of 5.5 percent G.D.P. growth in 2022 because the pursuit of “zero COVID” at all costs renders conventional economic instruments, including monetary stimulus, importantly worthless.
Authorities in Shanghai and Beijing have recently strengthened restrictions rather than changing the extreme pandemic policy. As of mid-April, 45 cities with more than 373 million residents each were experiencing some type of lockdown, according to a study by Nomura Holdings of Japan.
If these actions continue, Qazi predicted that the economy would contract in the second quarter of 2022, though a full-blown recession is less probable. Since the 1970s, China has not had a recession, which is defined like two consecutive quarters of contraction. The last time China showed negative growth was in April 2020.
According to Gary Ng, Asia-Pacific economist for Natixis, a French investment and corporate bank, lockdowns probably lead to uneven growth across northern and southern China and under industries, even in the lack of a full-blown recession.
Ng told Al Jazeera that although the country may not experience a recession being a whole, if we look at specific regions, I wouldn’t be shocked to see negative growth for some of the provinces with stringent lockdowns.
A person strolls through a Shanghai street that is empty.
Lockdowns in key cities like Shanghai are weighing on growth and hurting China’s economy.
Although companies in Shenzhen, a manufacturing area close to Hong Kong, were able to continue operating after the city’s lockdown earlier this year, Ng warned that spreading the “Shanghai model” abroad probably has major economic repercussions.
One especially alarming measure, according to Tommy Wu, head economist for Oxford Economics in Hong Kong, is the impact of lockdowns on logistics and supply chains, with truck movement data at approximately 30% of usual levels.
We predicted that the disruptions would continue through the second quarter of 2022, with a negative impact on Asian and international supply chains and uneven growth throughout China’s economy.
Even though it wasn’t severe like that in 2020, he said, “this is still fairly big, more major than what we’ve seen over the last couple of years.”
“I believe that the official numbers will continue to show you a very stable growth, but I would argue that there will be contraction at least in some areas, including consumption and manufacturing.”
In the months leading up to a crucial National Congress in October, Beijing has raised concerns about rising economic risks without conceding that its zero-tolerance measures have been anything but effective.
The party conference this year is especially important since Chinese President Xi Jinping plans to run for a historic third term.
Despite government attempts in recent years to decrease the big loans on the balance sheets of state-run businesses, China’s top leaders underlined the importance of infrastructure expenditure and development to economic recovery at a Politburo meeting last month.
According to Ng, lax monetary policy may be able to assist businesses in weathering the storm. “China may really trade off its deleveraging call with basically the short term economic growth in the short run,” she added.
According to Natixis, infrastructure investment would need to increase by almost 18 percent, or to levels before 2017, for China to achieve its 2022 G.D.P. targets. Infrastructure investment increased by 8.5 percent in the first quarter compared to 2021, signaling that some of that development has already started, but there is still a long way to go.
Authorities in Ng may try to lower down payments and mortgage rates for first-time and even second-time home buyers in order to increase consumption.
While there are signs of a potential reprieve for struggling digital companies, the real estate sector is expected to rebound from a low point at the end of 2021 and the beginning of the year when major corporations like Evergrande defaulted on loans.
State media has recently highlighted the need for further support for the business after Beijing initiated a broad regulatory crackdown on the internet sector in 2020, setting curbs on data collecting, service fees, and even app usage in pursuit of “shared prosperity.”
According to Qazi of China Beige Book, the topic may resurface on the national agenda in 2023 or 2024, but for the time being, the C.C.P. is preparing for its October summit, it is focusing on ensuring maximum stability and tranquil financial markets.
“Zero COVID” seems to be here to stay in the interim.
According to Wu of Oxford Economics, the concept of the strategy may start to change in favor of one that is more “dynamic” Beijing struggles to accept defeat while needing an economic revival.
As districts are cleansed of COVID cases, province and city authorities probably begin to slowly lift lockdowns by region and ease off on more stringent measures, he said, all the while continuing mass testing.
“This year, despite the Fact that I believe it to be very difficult
We remarked, “This year, even though I think it’s incredibly difficult to fulfill that [growth target], they will do their hardest.” It’s crucial that they strike a balance since this year is a crucial one from a political standpoint.
Is China burdening poor countries with unsustainable debt?
Poorer countries have been accused of struggling to pay back their debts, leaving them exposed to pressure from Beijing is a result of China’s lending practices.
China, however, rejects that and claims that some Westerners are spreading this myth in order to harm China’s reputation.
There isn’t a single country that has incurred debt being a result of borrowing from China, the statement reads.
What are the facts on Chinese lending?
One of the biggest single creditors in the world is China.
By the end of 2020, its loans to low- and middle-income countries will have tripled over the last ten years, reaching $170 billion (£125 billion).
China’s entire credit commitments, however, are probably much higher than these numbers imply.
Half of China’s loans to developing countries are not included in official debt data, according to research by AidData, an international development organization at William & Mary University in the United States.
Instead of flowing from one government to another, Cash is often diverted through Joint Ventures, private institutions, state-owned businesses, and banks.
According to AidData, being a result of this “hidden debt,” there are at present more than 40 low- and middle-income countries with debt exposure to Chinese lenders that is higher than 10% of the size of their annual economic production (G.D.P.).
The loans owed to China by Djibouti, Laos, Zambia, and Kyrgyzstan total at least 20% of each country’s yearly G.D.P.
Under President Xi Jinping’s Belt and Road Initiative, a major percentage of the debt owing to China relates to major infrastructure projects, including roads, trains, and ports, and the mining and energy industries.
What are “debt traps,” and what is the supporting documentation?
China uses what he called “debt traps” to exert influence over other countries, according to Richard Moore, the chief of Britain’s MI6, in an interview with the B.B.C.
Beware of China’s “debt traps.”
It is alleged that China gives loans to other countries, which then lose ownership of valuable Assets if they are unable to repay their loans. Beijing has constantly refuted this charge.
Critics of China often use Sri Lanka is an example, which started a big port project in Hambantota with Chinese money years ago.
But the $1 billion project, which relied on Chinese funds and contractors, was dogged by controversy and struggled to be financially sustainable, leaving Sri Lanka with mounting debt.
In return for additional Chinese investment, Sri Lanka lastly consented in 2017 to grant state-owned China Merchants a controlling 70% share in the port on a 99-year lease.
Given that the port project was driven by regional political considerations and that China never formally acquired the port, an analysis of the project by the UK-based think tank Chatham House questioned whether the “debt trap” concept was strictly applied.
It emphasizes that a major amount of Sri Lanka’s total debt was owing to non-Chinese lenders and that there is no proof that China has used the port is a means of gaining a strategic military advantage.
Despite this, there is no denying that China’s economic participation in Sri Lanka has increased over the past ten years, and worries that this could be exploited to further its political aims in the area continue to exist.
Chinese lending has caused controversy in other regions of the world, with agreements whose clauses probably give China leverage over important Assets.
China: A huge spender or a Loan shark?
However, there are no examples of Chinese state-owned lenders actually seizing an important asset in the event of Loan default in the hundreds of Loan arrangements evaluated by AidData and some other academics.
What is the lending landscape like outside of China?
The bulk of China’s contracts contain non-disclosure clauses that prevent borrowers from disclosing their contents, and the country does not show details of its foreign loans.
It makes the case that such confidentiality is usual for contracts for international loans.
According to Professor Lee Jones at the Queen Mary University of London, confidentiality clauses are highly common in international commercial loans.
And a large percentage of China’s development financing is importantly a business Venture.
As members of the so-called Paris Club, most of the major industrialized countries exchange information regarding their lending activities.
Despite China’s decision to stay out of this group, the rapid growth of its reported loans relative to other countries can be plainly shown using World Bank data that is already accessible.
Are Chinese debts more difficult to repay?
Compared to western governments, China often provides loans at higher interest rates.
These loans have interest rates close to the commercial market at roughly 4%, which is nearly four times that of a normal Loan from the World Bank or a single country like France or Germany.
Time of fewer than ten years.
Additionally, Chinese state-owned lenders often demand that borrowers keep a certain amount of Cash on hand in an Account located abroad that the lender has access to.
According to Brad Parks, Executive Director of AidData, “China can simply drain funds from [this] account without having to collect on bad debt through a court process if a borrower fails to return its Loan.”
Western lenders rarely use this strategy when issuing loans.
The G20 countries —those with the biggest and fastest-growing economies—are at present pushing for debt relief for less developed countries to assist them in coping with the pandemic’s effects.
China has joined this and claims to have made “the biggest amount of debt payback” contributions of any participating country.
According to the World Bank, since May 2020, the G20 countries have provided debt relief of more than $10.3 billion.
However, the World Bank refused to provide the statistics when we demanded a breakdown by country.
Is China headed for a crash?
Chinese financial collapse is expected, according to “experts” in the West. A debt bomb is set to erupt, according to one expert, while China is flailing, according to another. These potential Cassandras predict that the government’s “awful” “zero-COVID” policy, which places areas of the country under constant lockdown, will cause the property bubble to burst, there will be too much debt, and the economy will deteriorate.
Additionally, there are the U.S.-imposed and ostensibly supported by its allies in Asia, rising limitations on China’s exports and investments abroad.
How much of the most recent criticisms of China’s economic development are true? The real estate crisis has gotten out of hand.
The second-largest private property developer in China, Evergrande, was on the verge of bankruptcy last year. In essence, the Evergrande real estate model is a Ponzi scheme. The company raises money through the pre-sale of an increasing number of apartments and from hundreds of thousands of investors and then uses the money to fund additional sales by accelerating ongoing construction and funding down payments.
This works like any Ponzi; it’s accelerating. However, when the market slows, those inflows of Cash begin to lag behind the escalating curve of Cash demands. There are, at present, roughly 1.2 million people waiting to relocate to Evergrande, which includes about 800 unfinished projects.
Millions of Chinese buyers have stopped making their starting mortgage payments is a result of the current real estate crisis. The fast-expanding mortgage payment boycotts by Chinese homebuyers have hit at least 301 projects and 91 localities, with an estimated 2 trillion yuan ($297 billion) in mortgages at risk.
Real estate Accounts for over 70% of Chinese household wealth. In response, some Chinese banks have confiscated customers’ savings deposits under the pretext that they are, in reality, “mortgage investment goods.” This led to the government surrounding the banks with tanks when there were loud protests outside some banks.
Meanwhile, even before the COVID drop in 2020, China’s usually phenomenal annual growth in real G.D.P. has been slowing.
Despite a healthy comeback in 2021, fresh cases of COVID mutations have led to fresh lockdowns. When compared to the other major capitalist economies, China’s mortality Rate has been kept to really low levels thanks to its government’s zero COVID policy. However, being a result, both employment and economic growth have suffered.
In the three months leading up to June 2022, the Chinese economy declined by 2.6 percent, seasonally adjusted, quarter over quarter. Only 5.9 percent of people were unemployed countrywide in May, according to urban survey data, while the Rate for people aged 16 to 24 increased to a high of 18.4 percent.
It is becoming more and more obvious that the government’s aim of a real G.D.P. Growth Rate of 5 percent or more will not be reached this year.
And keep in mind that this aim has been scaled back in recent years because the double-digit annual growth of the last decade has disappeared.
China: percent yearly growth
Is the Chinese model of development now at risk of failing, and is all the talk of “moving toward socialism” and the like finally coming to an end? Numerous Western specialists concur. According to them, the failure of the Chinese leadership to further “liberalize” the economy and open it up to capitalist companies and markets is what would ultimately lead to this catastrophe.
It’s time to end the “zero COVID” policy and loosen restrictions that have “successfully been done” in the West. China, in reality, needs more capitalism. It must increase its private sector.
But hold on a second. What are the root reasons for the current real estate crisis and debt growth? It can be directly attributed to China’s growing private sector, which has been supported by a good percentage of the Chinese leadership, especially in the banking and real estate industries.
China’s investment growth is increasingly focused on unproductive industries like finance and real estate. Why was home construction in China, of all countries, left to private capital developers who provided mortgages to buy? Why weren’t houses constructed by the government sector for rent? As a result, the state is now faced with cleaning up a usual case of a Western real estate market crash.
The state (local governments) will need to finish the projects and restore the mortgagees’ rights to their money in order to fix this.
There won’t be a Chinese financial crisis. That’s because the government holds sway over the financial levers of power, including the central bank, the four largest state-owned commercial banks in the world, the so-called “bad banks” that take on bad Loans, huge Asset managers, and most of the largest corporations.
The government has the authority to need the top four banks to forgive defaulted loans in return for ownership stakes. It can instruct China’s central bank, the People’s Bank of China, to take whatever action is necessary.
It can instruct pension funds and state-owned asset managers to purchase stocks and bonds to support market prices and finance businesses. It can instruct the state’s bad banks to purchase commercial banks’ bad debt. It can persuade local governments to embark on and complete property projects. A financial crisis is therefore ruled out because the government regulates the banking industry.
But the current real estate disaster is a warning that the profit-based sector’s turmoil and irrationality are having a higher impact on the Chinese economy. The private sector has struggled both during and after COVID. Just one tiny illustration Lockdowns with COVID in Shanghai
had bad results when they were outsourced to the commercial sector; in Beijing, the local government handled the work directly and with far higher success.
The capitalist sector’s profits have been declining. The profit margins of China’s industrial companies continued to be squeezed, and factory activity was disrupted by high raw material prices and supply chain disruptions brought on by COVID-19 curbs.
As a result, profits increased only 1% year over year to CNY 34.41 trillion in January–May 2022, slowing from a 3.5% rise in the prior period. State-owned industrial companies had an increase in profits of 9.8%, while the private sector saw a decline of 2.2 percent. Only the public sector is still delivering. China dodged the global financial crisis of 2008–2009 by increasing state investment to take the place of a “failing” capitalist sector.
The “disorderly expansion of capital,” as described by Xi and the Chinese authorities.
Even under Xi, the capitalist sector has been extending in size and power in China, along with a decrease in real G.D.P. growth, investment, and employment. According to a recent study, the private sector in China had increased from a very low level when President Xi was confirmed to be the country’s next top leader in 2010 to a sizeable share today.
This growth has happened both in absolute terms and is a percentage of the largest companies in the country, measured by revenue or (for listed ones) by market value. Even though S.O.E.s still dominate the biggest businesses in terms of revenue, their dominance is waning.
China needs to reverse the growth of the private sector and introduce more effective plans for state investment, but this time with the democratic participation of the Chinese people in the process and not by tanks outside banks. Far from the solution to China’s mini-crisis requiring more “liberalizing” reforms towards capitalism. Otherwise, the leadership’s goals for “shared prosperity” will be just rhetoric.
Despite all of this, the public sector-dominated Chinese economy is and will continue to do better than the G7 economies in the West. Here are the most recent I.M.F. growth projections for the main economies.
Even if China only manages to raise its real G.D.P. by approximately 4% this year, it would still be a faster pace of growth than any of the G7 countries. And the I.M.F. predicts that, assuming no new global recession, China will grow at a Rate of 5% or more in 2023, while the G7 economies will be lucky to reach half that level.
Longer term, the I.M.F. predicts that China will expand at a moderate Rate of 5% annually, but that Rate would still be more than twice fast than that of the United States and more than four times fast than that of the other G7 countries.