Will China’s growing debt problem affect its ambitious BIS plans?



New Delhi, September 23: Will Beijing come to the rescue of Chinese real estate giant Evergrande Group?

The problem arose amid rising debt levels in the Chinese economy at a time when Beijing pushed forward its ambitious BIS targets to gain geopolitical clout.

While the Chinese government bailed out state-owned Huarong Asset Management with total liabilities estimated at $ 238 billion, it did not disclose its cards on the Evergrande group.

Huarong had announced its annual financial statements after a four-month delay, showing a 90 percent drop in profits year-over-year.

“Sure enough, the company was in the hot seat for default and Beijing had a Lehman-sized problem,” the diplomat said in an article. After much deliberation, Beijing stepped in to rescue the company with $ 7.7 billion in new capital from Citic Group, formerly China International Trust Investment Corporation, and other state-owned enterprises.

Forbes noted that for US observers, the rescue of Huarong could be compared to the rescue of Bear Stearns (the troubled investment bank) orchestrated by the US government in March 2008.

In one month, Evergrande Group, which owes more than $ 300 billion, made headlines. As investors and the global business community closely monitor developments, Beijing has not indicated whether it would be willing to help the real estate major.

“By bailing out its most bloated real estate developer right now, Beijing would shoot itself in one foot to save the other. government, “noted the diplomat. .

The Global Problem of China’s Growing Debt

Rising debt, both public and private, has become a source of serious concern for China. Reports suggest that around $ 1.3 trillion is the estimated debt of Chinese companies that would be owed in 12 months.

The Washington-based Institute of International Finance (IIF) said in 2019 that China’s debt exceeded 300% of GDP. This included debt in all sectors such as households, general government, financial and non-financial enterprises.

The country’s overall debt level is mainly driven by real estate, businesses and shadow banking. China’s overall debt is difficult to assess as much of it is borne by local governments and state-owned enterprises. “The central government is not over-indebted and benefits from ample foreign currency reserves. But regional governments have developed dangerous financial operations since 2007, and often resort to over-the-counter loans or the shadow banking system.

To add to the problem, China’s ambitious Belt and Road Initiative (BRI) is mainly funded by its local governments and state-owned enterprises.

Several countries that have received loans from China, whether for BRI projects or other infrastructure initiatives, have been unable to repay their debts due to the Covid 19 pandemic. Much of this debt had to be restructured, analysts said.

“The problem with China is the lack of transparency in the amount or structure of loans. Therefore, it is difficult to come up with a clear assessment, but logically, it would be a problem for Beijing to settle the debt situation, which in turn would impact lending to the BIS, ”an analyst told India Narrative.

Although China has become a major global lender, it is not a member of the Paris Club, an informal group of creditor countries with the aim of finding viable repayment solutions. Not just that. The country is also not part of the Organization for Economic Co-operation and Development (OECD). The Paris Club and the OECD both maintain official creditors loan registers.

“Debt, whether public or private, seems to be an Achilles heel for China, and accounting practices and reporting are obscure,” said Doug Barry, spokesperson for the US-China Business Council, quoted by Voice of America.

Disclaimer: This article was posted automatically from an agency feed without any text changes and has not been reviewed by an editor

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