Over recent months, the mainstream media has been overtaken by fears of a debt crisis in the developing world. The rapid interest-rate rises implemented by Western central banks have refreshed memories of the Eighties, when a similar tightening cycle precipitated a fiscal collapse and ushered in what came to be known as a “lost decade” for many countries. In that vein, a recent UNCTAD report noted the great increase in debt that occurred in emerging markets during the pandemic, and warned that a similar cycle could be brewing.
Perhaps. But too great a focus on the developing world is obscuring a very real and impending debt crisis elsewhere. Because even though the report noted that 30% of global debt is owed by emerging markets (and has risen sharply), that figure is misleading. Nearly half that debt it is owed by one country: China.
If you take the Middle Kingdom out of the mix, the developing world is actually in reasonably good shape. China, by contrast, has followed a trajectory more like that of a Western country. Its debt soared after the 2008 financial crisis, and then some more after the pandemic. Private debt, which is much less of a feature in developing countries, has similarly risen to record levels, bringing China’s total debt stock to nearly three times the size of the economy, in line with Western competitors. Well before reaching those levels, a typical emerging market would have run into a fiscal crisis. The classic example is Argentina, a country whose official debt burden may rival China’s but whose private debt is negligible. It is now mired in an intractable economic stagnation — one that Javier Milei’s wheeze of abolishing the country’s central bank will not ameliorate.
The fundamental difference, however, is that other emerging markets don’t have anything like the pools of capital available in China. Being the world’s second-biggest economy with an extraordinarily high savings rate of nearly 50%, there is an immense bedrock of loanable funds to play with. Even though China’s financial markets are gradually globalising, only around 3% of its government bonds are owned by foreigners, compared to about a quarter of the US Treasury market and nearly a third of UK gilts.
This gives the Chinese government considerable leeway to borrow since it is less exposed to the “kindness of strangers” that imposes such narrow guardrails on most countries — and not just in the developing world, as Liz Truss discovered to her grief last year. But on the other hand, such an abundance of loanable money has fostered a carefree spending pattern that would get punished by credit markets elsewhere. China has repeatedly pumped money into its economy to stimulate growth, mainly with infrastructure and property-building programmes, the scale of which has no precedent. In 2019 alone, for instance, China installed more high-speed rail capacity than Europe had in the previous decade.
Each of these stimulus packages produced the intended jolt to the economy. But every sugar rush eventually wears off, after which the economy is left saddled with excess capacity. Not all those train lines become profitable; not all those buildings get occupied; not all the steel produced by those expanded plants gets bought. As a result, after peaking just before the 2008 global financial crisis, the country’s growth rate has been trending downwards, much as has been the case in developed economies.
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