China, which has lent nearly $1 trillion to some 150 developing nations, has been reluctant to cancel large debts owed by countries struggling to make ends meet. That is at least in part because China is facing a debt bomb at home: trillions of dollars owed by local governments, their mostly off-the-books financial affiliates, and real estate developers. Researchers at JPMorgan Chase calculated last month that overall debt within China — including households, companies and the government — had reached 282% of the country’s annual economic output. That compares with an average of 256% in developed economies around the world and 257% in the US.
It started with real estate, which suffers from overbuilding, falling prices and beleaguered potential buyers. Compounding the problem has been borrowing by localgovernments. Over the past decade, many cities and provinces set up special financing units that were lightly regulated and borrowed heavily. Officials used the money to cover daily expenses, including the interest on other loans, as well as the construction of roads, bridges, public parks and other infrastructure.
That debt has piled up. Fitch Ratings, the credit rating agency, estimates that local governments have debts equal to about 30% of China’s annual economic output. Their affiliated financing units owe debt equal to an additional 40% to50% of national output — although there may be some double-counting, Fitch said.
China’s lending to developing countries is small relative to its domestic debt, representing less than 6% of China’s annual economic output. But debt troubles at home have made it hard for banks in China to accept losses on their loans to lower-income nations. Many of these countries, like Sri Lanka, Pakistan and Suriname, now face considerable economic difficulties. In 2010, only 5% of China’s overseas lending portfolio supported borrowers in financial distress. Today, that figure stands at 60%, said Bradley Parks, the executive director of AidData at William & Mary, a university in Williamsburg, Virginia. China is by far the largest sovereign lender to developing countries, although Western hedge funds have also bought many bonds from these nations.
It started with real estate, which suffers from overbuilding, falling prices and beleaguered potential buyers. Compounding the problem has been borrowing by localgovernments. Over the past decade, many cities and provinces set up special financing units that were lightly regulated and borrowed heavily. Officials used the money to cover daily expenses, including the interest on other loans, as well as the construction of roads, bridges, public parks and other infrastructure.
That debt has piled up. Fitch Ratings, the credit rating agency, estimates that local governments have debts equal to about 30% of China’s annual economic output. Their affiliated financing units owe debt equal to an additional 40% to50% of national output — although there may be some double-counting, Fitch said.
China’s lending to developing countries is small relative to its domestic debt, representing less than 6% of China’s annual economic output. But debt troubles at home have made it hard for banks in China to accept losses on their loans to lower-income nations. Many of these countries, like Sri Lanka, Pakistan and Suriname, now face considerable economic difficulties. In 2010, only 5% of China’s overseas lending portfolio supported borrowers in financial distress. Today, that figure stands at 60%, said Bradley Parks, the executive director of AidData at William & Mary, a university in Williamsburg, Virginia. China is by far the largest sovereign lender to developing countries, although Western hedge funds have also bought many bonds from these nations.