|One Belt One Road Is China's Path Forward|
The statement was signed by Chinese Premier Li Keqiang, European Commission President Jean-Claude Juncker and head of the European Council, Donald Tusk. It is already being described as "the real deal" and a departure from antics such as the endless Brexit saga. In the article I refer to, the writer notes, the joint statement reads like a rose garden, it states: “The high level of ambition will be reflected in substantially improved market access [and] the elimination of discriminatory requirements and practices affecting foreign investors.” Better yet, there were no accusations of “unfair” trade hurled at Beijing. It appears that Brussels and Beijing seem to be finally engaging in building some sort of synergy between the One Belt One Road (OBOR) Initiative and something only Eurocrats know actually exists but is outlined in the EU Connecting Europe and Asia project report.
The new president of the World Bank, David Malpass claimed recently there is too much debt floating around the world and China is a big reason why. While his view could be written off as totally political, this is not the first indication that China has gone, shall we say, over the top in creating new credit. Last year the IMF has warned China of the risk having to do with increasing China's debt by agreeing to loans which could prove economically explosive. More and more of the debt over the last year has been related to and intricately interwoven into China's far-reaching and encompassing OBOR initiative. Malpass said, “There are challenges facing the world in terms of how do you have transparent projects that are high quality, where the debt is transparent. China moved so fast that in some part of the world there is just too much debt.”
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A third article focused on America's trade deficit with Mexico. When following the money it becomes clear that money from the United States huge trade deficit with Mexico eventually ends up in China. When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash, however, a bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route and each year the numbers are huge. North Americans are sending somewhere around 523 billion dollars a year to Asia.
Emboldened by this influx of wealth China has played fast and loose with creating and loaning out new funds. At a conference organized by the IMF and the People’s Bank of China, Christine Lagarde warned about debt and talked about how problematic increases in debt can potentially limit other spending as debt service rises, This can create serious balance of payment challenges. OBOR to move forward has to provide the financing for infrastructure that many countries desperately want and need but will they be able to repay the loans in coming years? Lagarde reminded the Beijing conference that, “In countries where public debt is already high, careful management of financing terms is critical.”
The Center for Global Development, a Washington-based think tank, has highlighted in a report entitled Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective, the underlined the problems of extending credit to poor or unstable countries. It has pointed out that as many as 23 countries could be prone to “debt distress.” This group includes Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan which were rated in the “high risk” category. Past high-profile horror stories associated with China’s overseas ventures add to overall concern and the fact Pakistan was flagged in the report as “by far the largest country at high risk” is sobering. The real question is whether OBOR will become a massive expensive bridge to nowhere?
While China has lent trillions of dollars to countries, however, the motivation behind these loans must be questioned. Circling back to Malpass, it should be noted he has also criticized China for taking low-cost loans from the World Bank despite being the second largest economy in the world, China even surpassed the bank’s income threshold for low-cost loans in 2016. Malpass has also been critical of China’s lending in conjunction with funding its OBOR infrastructure initiative claiming these loans can saddle weaker countries with “excessive debt and low-quality projects.” Regardless until now the size of China's monetary expansion has caused Chinese stocks to moved higher and brought China back from the abyss but for how long it will work is questionable.
Bloomberg has pointed out that much of this year's rally in bonds and stocks is related to the PBOC re-opening the tap and flooding the market with liquidity. Stated another way, global markets have soared due to the unprecedented injections of credit and endless fiscal and monetary pumping by the Chinese. Considering the total amount of debt that exists in the world, far too much has been made over the fact China owns $1.12 trillion in U.S. Treasury's, an amount confirmed by data from the Treasury Department. The wild games these clowns are busy playing with the financial system by borrowing from one country, creating new credit, and pouring money into massive boondoggles is destined to end in grief.