By Catherine Owen, the University of Exeter
The last week of March was a big day for economic news. While the IMF declared that the world economy was in a COVID-19 induced recession and Fitch credit rating agency downgraded the UK’s credit rating from AA to AA−, observers noted signs that the Chinese economy was beginning to recover from the sudden impact of COVID-19. Although profits were still low, property sales and steel production had more or less returned to normal.
But China’s economy is not out of the woods yet: while the government has implemented a raft of policies to help businesses as they resume operations, there is little it can do to boost the external demand required to sustain its export-based economy. As the global financial devastation wrought by the whirlwind of COVID-19 becomes apparent, will China take advantage of commodities prices’ historic lows and ramp up overseas investments or will it begin to demand timely repayments on its global loan book as domestic purse strings tighten?
In the last two decades, Chinese state-owned banks and enterprises have lent hundreds of billions of dollars to developing countries, leading China to surpass the World Bank and IMF as the world’s largest creditor. When confronted with COVID-19, developing countries are likely to take the biggest hit in terms of both economics and mortality, as their fragile markets and health systems are pushed to point of collapse. Meanwhile, China’s loans are often secured against commodities, meaning that when borrowers default, countries must cede natural resources or infrastructural apparatus to China.
China’s highly publicised aid-related activities differ sharply from the much more oblique management of its burgeoning overseas financial portfolio, the former constituting more of a global public relations campaign while the latter remains shrouded in secrecy. Indeed, recent research indicates that up to 50% of its loans go unreported. While the World Bank and the IMF have called on creditors to suspend loan repayments for the world’s poorest countries, Chinese creditors have thus far remained silent. Last month, China Development Bank stated that it would provide low-cost financing and loans for companies involved in the Belt and Road Initiative (BRI) — but it is not clear whether this referred solely to Chinese companies.
While it will take months for China’s overseas debt management strategy to become clear, there are places we can look for the first signs of emerging trends. Colleagues and I have argued elsewhere that activities at the state’s peripheries are just as significant as central government pronouncements when trying to understand national strategies. Hence, in order to gather an indication of what is to come, we can examine the activities of sub-national Chinese actors in the margins.
The first indication of how things could continue comes from a pronouncement from an economist at the People’s Bank of China, who recently stated that local governments were likely to respond by investing in high-cost infrastructure projects, supported by trillions of yuan of local government bonds released as fiscal stimulus. This could see local governments at China’s peripheries expanding the already extensive cross-border collaboration with low-income neighbouring countries desperate for infrastructure and investment. While BRI construction has temporarily ground to a halt across Central, South and South East Asia, this provides reason to suggest that, once travel restrictions are lifted, BRI-related activities will increase with renewed zeal.
However, the debt-stricken countries on China’s periphery are not able to wait that long. For example, on 26 March, Kyrgyzstan became the first country to receive a soft loan to tackle the economic impact of COVID-19 totalling $120.9 million — not from China but from the International Monetary Fund. Its largely remittance-based economy is taking a further hit as swathes of workers return home from Russia as enforced lockdown is extinguishing work opportunities in Moscow. Heart-breaking stories of people unable to afford to feed their families as food prices have shot up and shops have closed have appeared in the local media. The country has received financial support and donations of masks and personal protective equipment from USAID, the World Health Organization, and the Soros Foundation Kyrgyzstan. While China and Russia have donated much-needed medical equipment, Kyrgyzstan’s debts to China total at least 30% of its GDP with almost half belonging to a single creditor — China’s Export-Import Bank. It is not clear how this debt will be managed in the near term.
Elsewhere, the consequences of unprofitable Chinese overseas investments have become devastatingly apparent. In Australia, when Chinese businessman Liu Dianbo recently closed 34 private hospitals he owned in Australia due to a cited lack of profit. As this case demonstrates, with profits stalling, there is little to prevent Chinese investors from simply shutting down essential infrastructural operations overseas. While strong states like Australia can mobilise other resources to fill this gap, this is far from the case in countries like Kyrgyzstan, where the government is already struggling to respond to the epidemic.
Many other countries in Africa and Southeast Asia are facing comparable situations to that of Kyrgyzstan: corrupt governments, fragile health systems, and large debts to China. How China’s big banks and billionaires respond to the economic crisis ripping through the world will have profound consequences for the living standards of many of the world’s poorest. Some have suggested that the international symbolic capital acquired by China through its comparatively effective management of the pandemic will outweigh the accusations by Western countries that its initial handling of the crisis was poor, and shift normative power further away from Western countries. But how China acts as the world’s largest debt collector during this crisis should also form a large part of this picture.