The news that on Sunday China signed a massive free trade deal with fifteen Asia Pacific Nations confirms China is busy cutting a path forward
even as much
of the world is in economic turmoil due to covid-19. This is a major victory in that it encompasses almost one-third of all global economic activity. It also gives the impression the United States is being left out in the cold. The Regional Comprehensive Economic Partnership, or RCEP, establishes the world's largest trading block. It was signed virtually during the annual summit of the 10-nation
Association of Southeast Asian Nations (ASEAN).
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The president of the World Bank, David Malpass has claimed 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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Another 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 have been sending over half a trillion dollars a year to Asia each year.
Emboldened by this influx of wealth China has played fast and loose with creating and loaning out new funds. 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? 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. This brings us to the question of whether OBOR will become a massive expensive bridge to nowhere?
While China has lent trillions of dollars to countries 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.”