China, the world’s second-largest economy, faces a difficult trade-off: how to sustain its ambitious growth objectives while curbing its enormous debt load. For decades, China has relied on cheap credit to fuel its investment-led expansion, resulting in a surge of corporate, household, and local government debt that now exceeds 300% of its GDP. This debt spree has also financed China’s ambitious Belt and Road Initiative, a global infrastructure project that aims to connect China with more than 60 countries across Asia, Africa, and Europe.
The Dilemma of Growth and Stability
However, since 2018, China has intensified its efforts to purge its financial system of risky and speculative activities, cracking down on shadow banking, peer-to-peer lending, property speculation, and excessive leverage. China’s regulators have also tightened their oversight of the country’s sprawling tech giants, imposing fines, antitrust probes, and data security rules that have eroded their market value and global influence. China’s President Xi Jinping has declared that the country must pursue “common prosperity” and curb the excesses of capitalism, signaling a shift from growth at all costs to a more balanced and sustainable development model.
China’s debt purge is driven by both economic and political motives. Economically, China wants to avoid a financial crisis that could derail its growth trajectory and undermine its social stability. Politically, China wants to assert its control over its economy and society, especially in the face of rising external challenges and internal dissent. China also wants to demonstrate its leadership and model of governance to the world, as it seeks to expand its global influence and challenge the US-led order.
The Costs of Deleveraging
But China’s debt purge comes at a cost: slower growth, lower consumption, higher defaults, and reduced foreign investment. China’s GDP growth slowed to 4.9% year-on-year in the third quarter of 2021, the lowest since the pandemic hit. Consumer spending, which accounts for more than half of China’s economy, has been weak amid rising inflation, Covid-19 outbreaks, and regulatory uncertainties. China’s property sector, which contributes to about a quarter of GDP and employs millions of workers, is facing a liquidity crunch as developers struggle to repay their debts amid falling sales and tighter credit conditions. China’s Evergrande Group, the world’s most indebted property developer, is on the brink of collapse, posing systemic risks to China’s financial stability and spillover effects to global markets.
China’s debt problem is not new. It accumulated rapidly in the wake of the global financial crisis in 2007 and 2008 when authorities doled out a massive stimulus package that was largely funded through bank loans. Since then, China has tried to rein in its debt growth through various measures, such as deleveraging campaigns, macro-prudential regulations, and supply-side reforms. However, these efforts have often been inconsistent or ineffective, as they have faced resistance from vested interests or trade-offs with growth targets.
China’s debt problem is also not unique. Many other countries have faced similar challenges of managing high debt levels amid slowing growth and rising risks. Some have succeeded in reducing their debt burdens through fiscal consolidation, structural reforms, and external support. Others have failed and experienced debt crises that triggered economic contraction, social unrest, and political instability.
The Implications for Trade and Foreign Relations
China’s debt purge also has implications for its trade and foreign relations. China’s Belt and Road Initiative, which has been touted as a win-win cooperation for global development, has come under scrutiny for its lack of transparency, environmental impact, and debt sustainability. Many of the countries that have borrowed heavily from China to finance infrastructure projects are now facing economic instability and even default, as they struggle to repay their loans amid the pandemic-induced downturn. China has been reluctant to forgive or restructure its debt, preferring to renegotiate terms bilaterally and confidentially. This has deterred other major lenders from stepping in to help, as they fear being sidelined or disadvantaged by China’s preferential treatment.
China’s lending practices have also sparked criticism from some in the West, who accuse it of burdening poor countries with unsustainable debt and using it as a tool for political influence or strategic leverage. They argue that China is pursuing a “debt-trap diplomacy” that could undermine the sovereignty and security of its borrowers or force them to cede strategic assets or resources to China in exchange for debt relief. However, China rejects these allegations as baseless and biased, claiming that it is providing much-needed financing for development projects that benefit both sides.
China’s debt purge also poses challenges for its trading partners, especially those that rely on China as a source of demand or supply. China’s slower growth and weaker consumption could dampen the global recovery from the pandemic, as well as reduce China’s appetite for commodities and other imports. China’s regulatory crackdown on its tech sector could also disrupt the global digital economy, as it limits the access and competitiveness of foreign firms in China’s huge online market. Moreover, China’s debt purge could exacerbate its geopolitical tensions with the US and other rivals, as it signals a more assertive and ideological stance on economic issues.
China’s trade and foreign relations are already strained by a range of disputes over trade practices, human rights, territorial claims, security interests, and technological competition. China’s debt purge could add another layer of complexity and uncertainty to these conflicts, as it could affect China’s willingness and ability to cooperate or compromise with other countries on various issues.
Conclusion
In conclusion, China’s debt purge is a necessary but painful process that aims to address the long-term risks and imbalances in its economy. However, it also has significant consequences for the global economy and trade, as it affects China’s growth prospects, consumption patterns, financial stability, foreign investment, infrastructure development, and foreign relations. How China manages its debt purge will have profound implications for its future and the rest of the world.
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