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Matthias Diermeier / Florian Güldner /Thomas Obst in In Brief Externe Veröffentlichung 27. November 2020 The Chinese Nightmare: Debt Risks Along the Silk Road

China has paid dearly for its geopolitical rise. The Corona crisis is the latest example of the risks involved with massive investment on the Silk Road. Not only are many countries caught in a Chinese debt trap, China itself needs a strategy for managing non-performing loans amid the crisis. Loan defaults on the Silk Road could jeopardise the Chinese mega-project.

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Debt Risks Along the Silk Road
Matthias Diermeier / Florian Güldner /Thomas Obst in In Brief Externe Veröffentlichung 27. November 2020

The Chinese Nightmare: Debt Risks Along the Silk Road

Externe Veröffentlichung in IN BRIEF

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Institut der deutschen Wirtschaft (IW) Institut der deutschen Wirtschaft (IW)

China has paid dearly for its geopolitical rise. The Corona crisis is the latest example of the risks involved with massive investment on the Silk Road. Not only are many countries caught in a Chinese debt trap, China itself needs a strategy for managing non-performing loans amid the crisis. Loan defaults on the Silk Road could jeopardise the Chinese mega-project.

China is facing the costs of global expansion

The rapid ascension of the Chinese economy to be the industrial hub of the global economy has not been without consequence for its competitors. Even in European economies, where China has long been courted for the promise of new markets, the tide has turned.

The introduction of a European investment screening and the ongoing discussion about a new industrial policy reflect fears of Chinese economic policy, which is increasingly perceived as aggressive. And it is precisely now, in the Corona crisis, that concerns about (state-subsidised) takeovers by Chinese investors return to the forefront of the political agenda.

The US government, which does not shy away from pressuring allies to block Chinese competitors from their markets, has a long history of being openly critical of Chinese investments – made explicit by the examples of Huawei and TikTok. Protectionist arguments follow either security or competition policy considerations, and are increasingly endorsed by mainstream European politicians.

Chinese financing is the next battleground

While the increasing role of China in global manufacturing and world trade is well documented, their growing capital exports and their financing are largely obscure. Scholars struggle to quantify the level of private debt in China. In 2019, a World Bank estimate puts it at more than 160 percent of GDP.

China's investment funding abroad is even less transparent. There are limited official data sources: reliable aggregate data from international databases is extremely scarce, and the Chinese government itself does not report on its international financing projects. In comparison to other large economies where foreign investments are largely funded by the private banking system, external loans from China are all granted by state-run banks. Thus, these loans are off the radar of rating agencies, generally complicating the evaluation of Chinese cross-border capital flows.

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Debt Risks Along the Silk Road
Matthias Diermeier / Florian Güldner /Thomas Obst in In Brief Externe Veröffentlichung 27. November 2020

Matthias Diermeier / Florian Güldner /Thomas Obst: The Chinese Nightmare: Debt Risks Along the Silk Road

Externe Veröffentlichung in IN BRIEF

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Institut der deutschen Wirtschaft (IW) Institut der deutschen Wirtschaft (IW)

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