The Dragon’s Curse: The China Hangover Is Here

Michael Beckley

In the 2000s, former President Hugo Chávez of Venezuela bet his country’s economic future on a rising China, securing tens of billions of dollars in investments and loans-for-oil deals. It paid off at first. China voraciously consumed Venezuelan oil and financed infrastructure projects from a high-speed railway to power plants.

The 2010s brought a reckoning. Oil prices fell, and growth in Chinese oil demand slowed along with its economy. Venezuela’s oil export revenues plummeted, from more than $73 billion in 2011 to $22 billion in 2016.

Misrule by Mr. Chavez and his handpicked successor, Nicolas Maduro, and myriad other domestic problems already had Venezuela on the brink; the gamble on China helped push it over the edge. In 2014, Venezuela’s economy collapsed. People scavenged for food in garbage dumps, hospitals were short of essential medicines and crime surged. Since then, nearly eight million people have fled the country. China largely cut Venezuela off from new credit and loans, leaving behind a slew of unfinished projects.

Venezuela’s over-dependence on China was an early warning that the world ignored. Dozens of other countries that rode China’s rise are now at serious risk of financial distress and debt default as the Chinese economy stagnates. Yet China refuses to offer meaningful foreign debt relief and is doubling down at home on its protectionist trade practices when it should be undertaking reforms to free up and restart its economy, the world’s second-largest and a crucial engine of global growth.

This is the flip side of China’s “miracle.” After the 2008 global financial crisis, the world needed an economic saviour, and China filled that role. Starting in 2008, it pumped $29 trillion into its economy over nine years — equivalent to about one-third of global G.D.P. — to keep it going. The positive ripple effects were felt worldwide: From 2008 to 2021 China accounted for more than 40 percent of global growth. Developing countries eagerly attached themselves to what seemed like an unstoppable economic juggernaut, and China became the top trading partner for most of the world’s nations. Like Venezuela, many discovered that the booming Chinese economy was a lucrative new market for their commodity exports, and they leaned heavily into that, allowing other sectors of their economies to languish.

China also lent more than $1 trillion abroad, largely for infrastructure projects to be built by Chinese companies under its Belt and Road Initiative. Over the past two decades, one in three infrastructure projects in Africa was built by Chinese entities. The long-term debt risks for fragile developing economies were often ignored.

China’s boom, as we now know, was unsustainable. It was fuelled in large part by years of inefficient stimulus spending at home, which has saddled China with a crushing debt hangover of it own. President Xi Jinping has stifled entrepreneurship, resisted reform and provoked a protectionist response from the United States. Since Mr. Xi took over a decade ago, Chinese economic growth has slowed dramatically; some experts believe it is barely growing at all.

This directly impacts countries that hitched their economic wagons to China. Studies find that every one percent decline in Chinese G.D.P. growth can slow its trading partners’ economies by nearly comparable amounts. A number of countries have seen their exports to China plunge. At the same time, China is addressing its economic slowdown by extending huge loans and subsidies to Chinese manufacturers, which are flooding world markets with inexpensive products, dragging down global goods prices and posing unfair competition for manufacturers in other countries.

China is, of course, not solely responsible for weakness in the global economy, which has been buffeted by a pandemic, wars and trade tensions. But the country is making things worse at a delicate moment. It has drastically cut overseas lending and is squeezing strapped developing nations to repay their existing loans. Rather than offer real debt relief, China typically extends short-term credit swaps and loan rollovers.

Zambia and Sri Lanka defaulted on billions in debt owed to international creditors in 2020 and 2022, respectively. In both cases, an explosion of Chinese loans and credit was a significant factor in pushing those countries into deep financial trouble. This led to debt restructuring negotiations that were difficult and protracted partly because of the opaque nature of Chinese lending practices, exacerbating both countries’ crises. Eventually, Zambia and Sri Lanka were forced to extend repayment periods, meaning that resources that could have been spent on economic recovery went to servicing debt obligations. The extended uncertainty has made it difficult for these countries to access new financing.

The International Monetary Fund and the World Bank have warned that dozens of countries across the developing world — many of which have close trade relationships with China — now face some form of debt distress. Pakistan is mired in a deep economic crisis that it can’t climb out of, partly because of the need to pay back billions of dollars in loans to China for infrastructure and other projects. Some factories in the country have been idled because they have been unable to buy necessary materials and because the government can’t afford to maintain a stable power supply.

In Laos, around half of the nation’s foreign debt is owed to China, which extended billions of dollars in loans for projects including a China-Laos high-speed rail line that has been widely panned as a white elephant. The heavy debt has hammered Laos’s currency, making it more difficult for the country to service its debt and forcing it to cede some of its economic sovereignty as repayment, including allowing China to take ownership stakes in its power grid.

Even some wealthy nations such as Germany, the economic powerhouse of Europe, face deep challenges because of their over-dependence on doing business with China. German exports to China fell nine percent last year — the steepest decline since China joined the World Trade Organization in 2001 — and Germany’s economy shrank that year, too. Major commodity exporters such as Australia, Brazil and Saudi Arabia are vulnerable since exports of energy, metals or agricultural products to China make up significant portions of their economies.

The United States is less directly exposed; manufactured exports to China make up less than one percent of America’s G.D.P. But the glut of Chinese products such as electrical vehicles and solar panels threatens American manufacturers, and some of the largest U.S. companies, including Apple, General Motors, Nike, Starbucks, and Tesla are losing sales revenue in China because of weak Chinese consumer demand, disrupted supply chains or increased competition from subsidised Chinese companies.

There are worrying parallels between today’s situation and the debt crisis that swept through developing countries in the 1980s. Many nations, particularly in Latin America and Africa, were burdened with massive debts primarily owed to Western commercial banks and international institutions such as the I.M.F. and the World Bank. Facing soaring interest rates and plummeting commodity prices, nations including Mexico, Brazil and Argentina defaulted. Some endured years of subsequent low economic growth, severe austerity measures, plummeting living standards and political upheaval.

China, now by far the world’s largest sovereign lender, has played a leading role in saddling many countries with levels of debt, often through nontransparent arrangements, that are comparable to those seen in the 1980s. The situation is becoming perilous. Over the past decade, during which China doled out more lending than the Paris Club — a grouping of 22 of the world’s largest creditor nations — the total value of interest payments of the 75 poorest countries in the world have quadrupled and will outstrip their total annual spending on health, education and infrastructure combined, according to the World Bank. An estimated 3.3 billion people live in countries where interest payments exceed investments in either education or health, the United Nations said.

The example of Venezuela — which remains mired in an economic crisis — has shown where these conditions can lead: Economic collapse, repression and humanitarian disaster. In a world already shaken by war, the risks posed by sovereign defaults, political instability and resulting mass migrations is acute. In recent months, people in France, Poland, Kenya, Bolivia, Sri Lanka and a host of other countries across the world have staged protests about deteriorating economic conditions.

Calls are rising for wealthy economies and creditor nations to collaborate to provide debt relief, market access and other ways to help fragile economies. Such steps will have only a limited impact unless China is confronted over its role in exacerbating these problems and failing to address them. Finding the collective international resolve needed to get China to change its self-serving ways will be difficult. The crucial first step is to recognize the scale of the problem.