This excerpt about the 2020 U.S. election is from Barron’s latest Big Money Poll, a survey of 107 of America’s money managers.
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The coronavirus pandemic is bringing out the best and worst in political leadership. For China, it’s the latter. While first to confront the disease, the government initially failed to inform the global community, preferring instead to hoard supplies and information. By the time authorities gave the World Health Organization access to the country, it was too late. The virus had already spread around the world.
This pattern of official obfuscation also applies to China’s international lending practices. For years, the details of China’s bilateral deals have been closely guarded, including the terms of repayment and collateral required. Now developing countries that were eager for easy money are asking how they can possibly make debt payments amid a public health emergency. They’re not hearing answers.
The Covid-19 outbreak will cripple their economies. And while the Chinese government wants to be seen as taking the lead in the global response to the pandemic, no amount of medical supplies will assuage concerns over economic collapse.
Many of these countries face an impossible choice: Enforce a lockdown they cannot afford to stem the spread, or remain open to sustain business activity that could drive further infections. Either way, they won’t be able to pay what they no longer have.
China is now under pressure to forgive its loans outright, something its financial authorities are loath to do. They have rightly identified the moral hazard of issuing large loans that aren’t repaid, only to see the same debtors rush back to the lending window as soon as it re-opens. It’s a problem the World Bank and Asian Development Bank have had to deal with for decades.
China’s global lending program ignoredthe collective wisdom of international financial institutions and avoided some of their more stringent standards. Beijing went its own way rather than invest heavily through organizations that give outsized influence to the U.S., Japan, and Western Europe. China launched its unilaterally funded Belt and Road Initiative in 2013 and then created a lending institution it could control, the Asian Infrastructure Investment Bank, in 2016. While estimates vary, BRI lending could account for up to $1 trillion. By comparison the World Bank Group committed roughly $315 billion from 2015 to 2019.
China has written off loans in the past, mostly to Cuba, but those totaled $9.8 billion in forgiveness over 18 years, a tiny sum compared to the hundreds of billions in committed Belt and Road lending.
Beijing’s recent, well-orchestrated PR campaign concerning the outbreak has been met with a swift backlash. A Chinese government think-tank assessment said that Beijing faces the most negative world sentiment since the 1989 Tiananmen Square crackdown and that this crisis could turn countries against Belt and Road.
It’s no wonder public sentiment has soured. China agreed in April with a G20 commitment to ease the repayment terms of a swathe of developing-country debt. But just days later, China excluded from the debt-relief plan key infrastructure lending by the China Export-Import Bank,which could apply to $149 billion in Belt and Road projects.
When the BRI was launched, President Xi Jinping said the initiative “conforms to the law of development, and meets the people’s interests.” As it turns out, the project is less about aid and more about purely commercial lending.
Beijing portrayed itself as a welcome antidote to the West, which was viewed as meddling in domestic politics and economics as part of the lending process. Here was China, a once-poor country, rising to become the world’s second-largest economy, willing and often eager to spread its wealth among the community of poorer nations without regard to dictatorships or democracies. Many readily agreed and signed up to its vision of an interconnected new silk road. The Belt and Road Forum in 2019 was attended by 37 heads of state, up from 29 at the inaugural event two years earlier.
The shine was already beginning to fade. Much of the promised funding had yet to materialize. Leaders from Sri Lanka and Indonesia faced domestic political backlash over their reliance on Chinese funding, and did not attend the 2019 meeting.
Meanwhile, the heavily-funded Chinese military is expanding its presence in Africa, where many countries host BRI projects and supply raw materials for China’s economy. China is acting like every other empire builder of the past, flush with cash, flexing its new found power, and eager to spread influence wherever its interests lie.
Those interests increasingly expand along with its overseas lending. If there was a sense of Chinese exceptionalism based on its willingness to lend to governments long ignored by other global powers, that illusion, like so many others, has been destroyed. The spread of the novel coronavirus and the economic devastation left in its wake will leave many poor nations struggling to survive.
What the developing world wants in this crisis, the Chinese government cannot supply—transparency, consistency, and a willingness to take on burdens others cannot shoulder themselves. These are the hallmarks of global leadership. So far, Beijing’s policies fail to address the impending global dislocation that will batter the developing world. Forcing repayment with promises of more of the same lending isn’t going to change that.