China’s pockets may not be deep enough to bail out emerging markets

Chinese
Premier Li Keqiang, right, gestures as he speaks to reporters
with Malaysian Prime Minister Mahathir Mohamad during a press
conference at the Great Hall of the People in
Beijing.
How Hwee Young/Pool Photo via
AP

• China has extended easy credit to vulnerable
  countries.
• But its pockets are not as deep as they once were,
  analysts say.
• Lending to emerging markets could also face political
  backlash.

When Malaysia canceled two large-scale infrastructure projects
backed by China last month, Prime Minister Mahathir Mohamad said
he was afraid the country could go bankrupt. As leader of a
government that has tried to
crowdfund its $250 billion of debt, that seems to be a
reasonable concern.

“It’s all about borrowing too much money, which we cannot afford
and cannot repay because we don’t need these projects in
Malaysia,” Mahathir
told the New York Times in interviews about the
projects, a rail link and a natural gas pipeline that had a
collective price tag of more than $22 billion.

Malaysia is just the latest
debt-ridden country to have been courted by Chinese lenders,
a potential alternative to International Monetary Fund programs
that can come with sweeping stipulations.

For example, China is Venezuela’s largest creditor, lending the
collapsing country
more than $62 billion over the past decade. And just last
week, President Xi Jinping offered countries in
Africa another
$60 billion in aid and loans.

But throwing life lines to emerging markets could be impractical
for China in the long run, Nomura economists led by Ting Lu
wrote in a recent note.

“China is still financially healthy, but its pockets are not as
deep as they were,” Lu wrote.

In the first three months of 2018, China ran its first current
account-deficit since before joining the World Trade Organization
in 2001. It rebounded by the second-quarter, but the setback
raised questions about whether current-account deficits could
occur more frequently in the future.

China’s foreign-exchange reserves have fallen to roughly $3.1
trillion from $4 trillion in 2014. Meanwhile, hard-currency
external debt has surged, with corporate offshore dollar bond
issuance up about $500 billion during that same period.

“As China’s economy is becoming increasingly constrained by its
own production capacity, EM imports from China financed by RMB
borrowings would likely squeeze China’s exports, resulting, in
our opinion, in a headline trade surplus that could overstate
actual FX inflows, ultimately impairing China’s FX reserves,” Lu
wrote. 

Lending to emerging markets could also face political backlash

as China faces an economic slowdown and as a trade war with
the US continues to escalate. As Bloomberg Opinion
columnist Shuli
Ren recently wrote, “China’s shaky domestic
economy may mean that it’s no longer
politically viable for Beijing to keep being so generous.”

For now though, China appears comfortable cozying up to emerging
markets. The country been looking to expand economic ties abroad
through its Belt and Road Initiative, a trillion-dollar
investment venture that has infrastructure investment plans
spanning across more than 60 countries.

A recent Pentagon report found the
initiative is designed to shape interests to align
with Beijing and to avoid confrontation and criticism. Involved
countries could “develop economic dependence on Chinese capital,
which China could leverage to achieve its interests,” it said.

“They know that when they lend big sums of money to a poor
country, in the end they may have to take the project for
themselves,” Mahathir told the
Times.