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12. Xi Jinping’s Evergrande Dilemma
- Author:
- John Lee
- Publication Date:
- 09-2021
- Content Type:
- Policy Brief
- Institution:
- Hudson Institute
- Abstract:
- Evergrande is one of the top-two real estate developers in a still highly fragmented Chinese sector. Its main strategy is to achieve ever-increasing scale (rather than profitability) in order to move ahead of and crowd out commercial competitors. It has also amassed the largest land reserves of all Chinese developers, which were financed through massive borrowings. By 2018, Evergrande held 822 pieces of undeveloped land in 228 cities, with a planned gross floor area of 3.28 billion square feet of new homes—the equivalent of 10 percent of Germany’s entire housing stock. It paid $75 billion just for this undeveloped land. Although Evergrande’s market share is only around 4 percent, its borrowings stand out. Its current balance sheet liabilities amount to an estimated 2 percent of China’s gross domestic product (GDP), while its off-balance-sheet liabilities could be another 1 percent of China’s GDP. This makes Evergrande the most indebted property developer in the world. Burdened by this debt, struggling to meet its debt interest and repayment obligations, and viable only if property asset values and sales continue to increase, Evergrande faces possible financial collapse—an event bound to have flow-on effects for the Chinese economy. However, the unusually high global interest in Evergrande has arisen because its woes are increasingly seen as symptomatic of those faced by the broader Chinese economy, which is struggling with enormous levels of indebtedness and overreliance on the real estate sector. Debt held by nonfinancial institutions in China increased from about 115 percent of GDP in 2010 to around 160 percent of GDP currently. This is the most rapid and largest increase in a 10-year period for any major economy and makes the level of debt held by Chinese nonfinancial institutions one of the highest in the world. The real estate sector accounts for around 15 percent of GDP, while property services account for another 14 percent—the highest in any developing economy. The share of the real estate sector as a proportion of GDP was only about 4 percent in 1997 and 9 percent in 2008. Since 2008, up to a third of all domestic fixed investment has gone into real estate, and up to half of total national debt is linked to the real estate sector.
- Topic:
- International Relations, Foreign Policy, Debt, Economics, Markets, and Business
- Political Geography:
- China and Asia
13. How China lends: A rare look into 100 debt contracts with foreign governments
- Author:
- Anna Gelpern, Sebastian Horn, Scott Morris, Brad Parks, and Christoph Trebesch
- Publication Date:
- 05-2021
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics (PIIE)
- Abstract:
- China is the world’s largest official creditor, but basic facts are lacking about the terms and conditions of its lending. Very few contracts between Chinese lenders and their government borrowers have ever been published or studied. This paper is the first systematic analysis of the legal terms of China’s foreign lending. The authors collect and analyze 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America, and Oceania, and compare them with those of other bilateral, multilateral, and commercial creditors. Three main insights emerge. First, the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. Second, Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (“no Paris Club” clauses). Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies. Even if these terms were unenforceable in court, the mix of confidentiality, seniority, and policy influence could limit the sovereign debtor’s crisis management options and complicate debt renegotiation. Overall, the contracts use creative design to manage credit risks and overcome enforcement hurdles, presenting China as a muscular and commercially savvy lender to the developing world.
- Topic:
- Foreign Policy, Debt, Government, and Banking
- Political Geography:
- China and Asia
14. Improving China's participation in resolving developing-country debt problems
- Author:
- Martin Chorzempa and Adnan Mazarei
- Publication Date:
- 05-2021
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics (PIIE)
- Abstract:
- The COVID-19 shock has exacerbated the struggles of many emerging-market and developing economies (EMDEs) to repay their external debt. One of the most urgent challenges relates to debt owed to China, whose lending spree under its Belt and Road Initiative and other programs has played an outsized role in what amounts to a crisis for many countries. The scope of the problem is striking. China is owed more than $100 billion, or 57 percent of all debt owed to official creditors by the countries that need help the most. China is not a member of the Paris Club of official creditors, which coordinates, within a multilateral framework, the resolution of general sovereign illiquidity or unsustainable external debt of EMDEs. There is an urgent need to put in place more effective, long-term solutions to help durably lower the risks of prolonged debt difficulties in EMDEs. These problems could be partly addressed by creating creditor committees to coordinate debt relief with China. The Group of Twenty (G20) has taken some steps to include creditor committees in the context of the Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI), but only for low-income countries that qualify for the DSSI and only for official creditors. To better address debt distress, it needs to extend the approach, especially to middle-income debtor countries.
- Topic:
- Debt, Development, Emerging Markets, and G20
- Political Geography:
- China and Asia
15. The Costs of Covid: Australia’s Economic Prospects in a Wounded World
- Author:
- John Edwards
- Publication Date:
- 08-2020
- Content Type:
- Commentary and Analysis
- Institution:
- Lowy Institute for International Policy
- Abstract:
- Despite Victoria’s second wave of infection, Australia’s economic recovery from the coronavirus is underway. The bitter aftermath includes high and rising unemployment, vastly increased government debt, and a markedly less congenial global economy. Though formidable, the fiscal challenge is well within Australia’s means, especially if the Reserve Bank remains willing to acquire and hold Australian government debt. It may need to do so anyway to suppress an unwelcome appreciation of the Australian dollar in a world where major central banks are committed to low long term interest rates. Australia’s increasing integration into the East Asia economic community offsets the drag from the major advanced economies, but the US–China quarrel and the dislocation of global trading and investment relationships it threatens heightens the tension between Australia’s economic and security choices.
- Topic:
- Debt, Economy, Fiscal Policy, Unemployment, and COVID-19
- Political Geography:
- China, Asia, Australia, North America, Asia-Pacific, and United States of America
16. China is Not Conducting Debt Trap Diplomacy in the Pacific--At Least Not Yet
- Author:
- Jonathan Pryke
- Publication Date:
- 03-2020
- Content Type:
- Commentary and Analysis
- Institution:
- East-West Center
- Abstract:
- In an atmosphere of heightened geostrategic competition, China’s Belt and Road Initiative (BRI) has raised questions about the risk of debt problems in less-developed countries. Such risks are especially worrying for the small and fragile economies of the Pacific. A close look at the evidence suggests that China has not been engaged in debt-trap diplomacy in the Pacific, at least not so far. Nonetheless, if future Chinese lending continues on a business-as-usual basis, serious problems of debt sustainability will arise, and concerns about quality and corruption are valid.There have been recent signs that both China and Pacific Island governments recognize the need for reform. China needs to adopt formal lending rules similar to those of the multilateral development banks, providing more favorable terms to countries at greater risk of debt distress. Alternative approaches might include replacing or partially replacing EXIM loans with the interest-free loans and grants that the Chinese Ministry of Commerce already provides.
- Topic:
- Debt, Development, Diplomacy, Geopolitics, and Belt and Road Initiative (BRI)
- Political Geography:
- China, Asia, and Asia-Pacific
17. Mind the Trap: What Basing Rights in Djibouti and Sri Lanka Reveal About the Limitations of Debt as a Tool of Chinese Military Expansion
- Author:
- Scott Wingo
- Publication Date:
- 04-2020
- Content Type:
- Journal Article
- Journal:
- China Brief
- Institution:
- The Jamestown Foundation
- Abstract:
- On November 24, 2019, Sri Lankan President Gotabaya Rajapaksa told reporters during his first interview as president that he hoped to renegotiate the terms of the deal that gave a Chinese firm a 99-year lease over the Hambantota Port (Strategic News International, November 24, 2019). The port had been handed over as Sri Lanka struggled to make loan payments on the loss-making Chinese-built facility—thereby leading to debates as to whether the People’s Republic of China (PRC) had set a “debt trap” by intentionally lending Sri Lanka more than it could afford to repay, in hopes of eventually foreclosing on the port (China Brief, January 5, 2019). The subtext was that with a leasehold in hand, the PRC could use the port as a naval installation geared toward patrolling Indian Ocean shipping lanes. As can be observed by the Sri Lankan government’s desire to renegotiate, this has not happened. To the contrary, Sri Lankan security policy has trended against China since the debt-equity swap occurred. A comparison with Djibouti, where the PRC has established its only overseas military base to date, illuminates how this came to pass. In both Djibouti and Sri Lanka, Beijing has used infrastructure loans as a means to entice political leaders to allow naval access. However, three factors led to very different outcomes: 1) the recipient countries’ inherent willingness to host a base; 2) the degree of political competition faced by recipient leaders; and 3) the degree to which recipient leaders can diversify toward different sources of funding to reduce overreliance on China.
- Topic:
- Debt, Imperialism, International Cooperation, Military Strategy, and Hegemony
- Political Geography:
- China and Asia
18. Corporate Debt Market in Korea
- Author:
- Paul Moon Sub Choi
- Publication Date:
- 07-2017
- Content Type:
- Special Report
- Institution:
- Korea Economic Institute of America (KEI)
- Abstract:
- This report conducts an analysis of the corporate bond market in Korea and the changes in interest rates and term structure since the 1997 Asian financial crisis. The potential risks and solutions for stabilizing the corporate debt market are discussed. Corporate bonds not only play an important role in financing long-term corporate investments but also have a positive and persistent influence on enhancing the capital markets. Thus, the authorities in Korea have attempted to increase the proportion of corporate bonds, which is a means of direct financing, rather than bank loans. Implementing specific plans to stabilize the corporate debt market that are mentioned in this report are critical to sustaining the Korean capital markets as a means towards continued economic growth and prosperity.
- Topic:
- Debt, Markets, Financial Crisis, Economy, and Investment
- Political Geography:
- Asia, South Korea, and Korea
19. Debt Sanctions Can Help Ukraine and Fill a Gap in the International Financial System
- Author:
- Anna Gelpern
- Publication Date:
- 08-2014
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics (PIIE)
- Abstract:
- The escalating crisis in Ukraine has prompted the United States and Europe to impose the toughest economic sanctions against Russia since the end of the Cold War. Continued instability and military conflict in eastern Ukraine are straining Ukrainian finances. Despite a generous international support package, the government faces shrinking revenues, rising costs, and a spike in foreign debt payments over the next two years.
- Topic:
- Cold War, Debt, and Economics
- Political Geography:
- Russia, Ukraine, and Asia
20. Credit at Times of Stress: Latin American Lessons from the Global Financial Crisis
- Author:
- Liliana Rojas-Suarez and Carlos Montoro
- Publication Date:
- 02-2012
- Content Type:
- Working Paper
- Institution:
- Center for Global Development (CGD)
- Abstract:
- The financial systems in emerging market economies during the 2008–09 global financial crisis performed much better than in previous crisis episodes, albeit with significant differences across regions. For example, real credit growth in Asia and Latin America was less affected than in Central and Eastern Europe. This paper identifies the factors at both the country and the bank levels that contributed to the behavior of real credit growth in Latin America during the global financial crisis. The resilience of real credit during the crisis was highly related to policies, measures and reforms implemented in the pre-crisis period. In particular, we find that the best explanatory variables were those that gauged the economy's capacity to withstand an external financial shock. Key were balance sheet measures such as the economy's overall currency mismatches and external debt ratios (measuring either total debt or short-term debt). The quality of pre-crisis credit growth mattered as much as its rate of expansion. Credit expansions that preserved healthy balance sheet measures (the “quality” dimension) proved to be more sustainable. Variables signalling the capacity to set countercyclical monetary and fiscal policies during the crisis were also important determinants. Moreover, financial soundness characteristics of Latin American banks, such as capitalization, liquidity and bank efficiency, also played a role in explaining the dynamics of real credit during the crisis. We also found that foreign banks and banks which had expanded credit growth more before the crisis were also those that cut credit most. The methodology used in this paper includes the construction of indicators of resilience of real credit growth to adverse external shocks in a large number of emerging markets, not just in Latin America. As additional data become available, these indicators could be part of a set of analytical tools to assess how emerging market economies are preparing themselves to cope with the adverse effects of global financial turbulence on real credit growth.
- Topic:
- Debt, Economics, Emerging Markets, Globalization, and Financial Crisis
- Political Geography:
- Europe, Asia, and Latin America
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