The “going out” policy of the Republic of China has worked for years. Now the Chinese credit boom is about to come to an end.

From practically zero to 700 billion euros – that is the incredible increase in loans that Chinese banks have granted abroad between 2000 and today. As the British “Economist” wrote in July this year, this makes China the world’s largest creditor, not the World Bank and not the International Monetary Fund.

The volume of Chinese loans exceeds that of the World Bank and the International Monetary Fund together by a factor of two.

A recent study by the renowned Kiel Institute for the World Economy (IfW) now takes a full look at the global loan issues of state-owned Chinese banks for the first time. This is no easy undertaking given the rampant lack of transparency – China’s leadership (on whose behalf the state-owned banks act) usually concludes these deals away from official visiting diplomacy in small side scenes and behind closed doors. They deliberately avoid international registers and any proactive information policy.

Deep debt spiral

The emerging markets in the southern hemisphere are particularly diligent buyers of Chinese loans. Their economic upswing is usually based on a more dynamic global economy, which generates increased demand for commodities and causes their price to rise – ideal for commodity-rich emerging markets. Conversely, when commodity prices fall due to a weakening global economy and lower demand, household budgets suffer, access to external finance becomes more difficult and the cost (interest) of borrowing increases. It is a spiral that is turning ever more downward, with China all too often at the end of it as a lender to indebted countries. The result: a not inconsiderable part of the world is heavily indebted to China.

The next time you are travelling in South-Eastern Europe or in North or East Africa, take a look around. For one thing, you will be surprised at how many major transport and infrastructure projects you will come across. On the other hand, you will see a great many Chinese construction workers on the building sites.

Of course, China does not lend this money altruistically – the expansion of local infrastructures around the globe creates sales markets for cheap Chinese products and secures access to large deposits of raw materials, which in economically weak countries are often extracted under pre-industrial conditions. In some cases, however, the dependencies created go even further: sometimes the money borrowed cannot be repaid at all – in December 2017 it was announced that the Sri Lankan government would hand over the port of Hambantota in the south of the country to the Chinese government for 99 years due to the failure to repay the loans running with China. Angola, too, has already transferred a considerable share of its own oil production to China’s oil processing industry in order to reduce its debt.

Loans as far as Europe

What the study by the Kiel-based IfW also reveals: Measured as a share of the gross domestic product generated by the country itself, the countries most heavily indebted to China in 2017 were primarily in Africa and to some extent also in Central Asia. And the development of average debt is also interesting. In 2005, the average indebtedness of the world’s 50 largest borrowers at Chinese banks was just one percent of their own gross domestic product – by 2019 this figure will already be 17 percent. In countries such as Djibouti, Tonga, the Republic of Congo or Kyrgyzstan, this figure is even significantly higher (from 30 percent to almost 100 percent in the case of Djibouti – 2017 data). In Europe, the renminbi was ringing at that time mainly in Italy, Greece, Montenegro, Serbia, Hungary, Romania and Bulgaria.

It is worth taking a closer look at the list of European countries. While the European crisis mechanism was slow to get off the ground or almost failed, Chinese money has long since been flowing towards Europe and supporting the economy in distress. For China, this was also a way of conducting foreign policy without making a lot of noise (and thus criticism). And secondly, almost all of these countries (with the exception of Italy and Greece) are now part of the so-called “16+1 format”, a loosely institutionalised cooperation forum between China and sixteen countries from Central and Eastern Europe. Annual meetings at head of state and government level are used to conclude bilateral agreements. China’s leadership is aware of the strategic value of this cooperation and maintains this network similar to the prestigious “New Silk Road Initiative”.

But now there are increasing signs that the Chinese credit boom is about to come to an end. Since last year, much stricter rules have been in force in China for the export of capital by state-owned banks, which are after all the most important institutions granting credit abroad. This will protect domestic currency reserves and automatically channel the same money into the Chinese market.

A good reversal of the treadmill

This trend reversal is only good for the global economy. And it comes in time, because an economic upturn financed on cheap credit is more than just risk-prone. If the house of cards collapses, no one can say who owes how much to whom. In such a situation, global creditors such as China are left sitting on their open gaps.

It can be assumed that the change in China’s monetary policy is also related to the trade dispute with the USA that has been smouldering for months. At present, no one can say exactly how economic growth will develop in the coming months. The Chinese economy, which is heavily dependent on exports, has been hit hardest by the US punitive tariffs. China’s GDP has already fallen in this second quarter to a level last seen 30 years ago. The volume of loans granted abroad has also automatically decreased.

China will end this year with the handbrake on and will first and foremost try to push the domestic economy – so the banks’ money will stay in the country. So you should hurry up with your trip to the Balkans or Africa – there may soon be no Chinese construction workers left, all construction sites will be at a standstill and everyone is waiting for the money to return from the Far East.

This article was originally published in die Presse and is translated and republished here with permission of the author.

By Philipp Brugner

Born (1987) and raised in Austria, higher education in Russian Studies (Master's) and Eastern European Politics (Bachelor's degree) at the University of Vienna and State Pedagogical University St. Petersburg. Currently continuing academic education in public policy economics with an online course at the University of Oxford and pursuing a certificate in EU affairs from the Centre international de formation européenne. Professional experience in print and online journalism, foreign and security policy and EU project management. Since 2013 working as an EU project manager at the Centre for Social Innovation in Vienna. Since 2016 actively involved in the EU-Eastern Partnership dialogue as a Young European Ambassador. Since 2018 member of the youth board of the Vienna based think tank PCC (Policy Crossover Center).

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