In addition, many Chinese loans are backed by collateral, meaning that debt repayments are secured by revenues, such as those coming from commodity exports. In the s and s, when it lent money to other Communist states, China accounted for a small share of world GDP, so the lending had little or no impact on the pattern of global capital flows.
Today, Chinese lending is substantial across the globe. The last comparable surge in state-driven capital outflows was the U. Very little came at market terms and with strings attached such as collateral. Assessing repayment burdens and financial risks requires detailed knowledge on all outstanding debt instruments. Second, the private sector will misprice debt contracts, such as sovereign bonds, if it fails to grasp the true scope of debts that a government owes.
This problem is aggravated by the fact that many Chinese official loans have collateral clauses, so that China may be treated preferentially in case of repayment problems. As a result, private investors and other competing creditors may underestimate the risk of default on their claims. And, third, forecasters of global economic activity who are unaware of surges and stops of Chinese lending miss an important swing factor influencing aggregate global demand.
One could look to the lending surge of the s, when resource-rich, low-income countries received large amounts of syndicated bank loans from the U. That lending cycle ended badly once commodity prices and economic growth slumped, and dozens of developing countries went into default during the bust that followed. Central bank swap lines can be understood as standing lines of credit, where central banks agree on exchanging their currencies to facilitate trade settlements and to address liquidity needs.
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Develop and improve products. List of Partners vendors. US Economy Fiscal Policy. Part of. Table of Contents Expand. Table of Contents. How Does China Buy U. Is China's Strategy Working? By Kimberly Amadeo. Learn about our editorial policies. Reviewed by Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years.
Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas. Learn about our Financial Review Board. Fact checked by David Rubin. Over the course of more than 30 years, David J. Rubin has served various roles in the editing and publishing field, specifically focusing on the subjects of law, software development, photography, and literature.
Department of the Treasury and the Federal Reserve. Much of the rest of the debt is owned by individual investors, corporations, and other public entities. This includes everyone from retirees who purchase individual U. Treasurys to the Chinese government. Japan and China own about 5. There are two main economic reasons Chinese lenders bought up so many U.
The first and most important is that China wants its own currency, the yuan, pegged to the dollar. A dollar-pegged yuan helps keep down the cost of Chinese exports, which the Chinese government believes makes it stronger in international markets. This also reduces the purchasing power of Chinese earners. Dollar-pegging adds stability to the yuan, since the dollar is still seen as one of the safest currencies in the world. This is the second reason the Chinese want Treasurys; they are essentially redeemable in dollars.
China drew some headlines in and for buying up a lot of gold to store in its bank vaults, but the real safety net for the yuan is the worldwide belief in the dollar. It's politically popular to say that the Chinese "own the United States" because they are such a huge creditor. The reality is very different than the rhetoric. If the Chinese suddenly decided to call in all of the federal government's obligations which isn't possible, given the maturities of debt securities , it is very likely that others would step in to service the market.
This includes the Federal Reserve, which already owns nearly three times as much debt as China. Second, the Chinese rely on American markets to buy Chinese-produced goods. Artificially suppressing the yuan has made it difficult for a growing Chinese middle class , so exports are needed to keep businesses running. Consider what the current arrangement means: The Chinese buy up dollar bills in the form of Treasuries. This helps inflate the value of the dollar. Other major economies such as the U.
It occurred as governments around the world increased spending to help businesses and households tide through challenges caused by the pandemic. Meanwhile, government debt made up the largest share of total debt in both the U. With its economy recovering from the pandemic, China has renewed a multi-year effort to rein in debt in recent months — after pausing for much of last year. That effort has shown some results. A debt-fueled economic boom following the global financial crisis helped China to overtake Japan as the world's second-largest economy — measured in nominal terms — in China has remained in that position since then, second only to the U.
China now aims to become an advanced nation. President Xi Jinping said in November that it's possible to double the size of China's economy and per capita income by , reported state news agency Xinhua. Some observers, however, said Beijing may not achieve its economic goals.
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