Working Out How China Fits Into and Influences Emerging Markets
In a time when economies defy categorization and change is the norm, finding a place for China as an emerging market is more challenging than ever. Nonetheless, it's essential that we seek to better understand China's role as both a component and an influencer within the global emerging-market paradigm.
A Tale of Two Economies
Depending on how we look at it, we may question whether China fits into the emerging-market mold at all. On one hand there's the economic slowdown in China, as the nation's GDP growth rate has declined slowly but steadily since 2007. Long gone, it seems, are the prosperous years of the 1990s and early 2000s, when growth was explosive and China seemed more open to political and economic reforms.
On the other hand, as reported by Credit Suisse, China recently surpassed the United States as the nation with the greatest number of wealthy citizens. For the other 99% to prosper, major structural changes would be needed, but few are counting on sustained reform efforts taking hold: regrettably, today's China increasingly depends on state-run enterprises as a more market-based financial regime has given way to a closely controlled and insular economic framework.
Through that lens, it's hard to identify China as "emerging" in any meaningful way, but hope springs eternal even amid a decelerating economic outlook as the nation remains strong in such areas as technology and e-commerce. Progress within a fiercely state-controlled economy is, thus, still possible as companies like Alibaba, Huawei, and Xiaomi strive to innovate and uphold China's status as a productivity powerhouse.
Even amid a decade-long slowdown in growth and reform efforts, China's influence on emerging-market nations remains considerable. Indeed, China has become a major creditor to smaller economies; for instance, China's dedicated loans to nations in the Pacific region from 2011 to 2018 totaled $6 billion, or approximately 21% of the regional GDP. As reported by the Lowy Institute, many of these loans only carry a 2% interest rate, and there is no compelling evidence to suggest that China has deliberately established a "debt trap" with its debtors.
This, however, leaves open the question of how much lending is too much. Research conducted by the Kiel Institute for the World Economy found that other nations' debt to China increased ten-fold from 2000 to 2017, in the process transforming China "into the largest official creditor, easily surpassing the IMF or the World Bank." Much of China's lending in recent years has been tied to the nation's ambitious Belt and Road cross-border infrastructure-investment initiative.
A Hidden Problem
Much has been made of America's massive debt to China, but in actuality, the most indebted countries to China (on a per-capita basis) reside in central and far east Asia — examples include Cambodia and Laos — and Latin American nations like Venezuela aren't far behind on China's biggest-debtor list. Some critics have claimed that China's lending practices have lacked transparency, thereby creating a "hidden debt" problem for developing nations lacking the wherewithal to repay their loans.
In some cases these debts aren't reported by the International Monetary Fund or the World Bank, creating "a tendency to think these countries had lower debt levels than what they actually have," to quote Kennedy School of Government at Harvard University Professor Carmen Reinhart. Hopefully China is working to rectify this, as Mukhtar Hussain, the HSBC Head of Belt and Road Initiative in Asia Pacific, has claimed that the nation is now taking a "far more open, green and sustainable" approach to developing this particular project.
That might be cold comfort to a nation like Pakistan, which has undoubtedly benefited from the Belt and Road Initiative but now owes China an astounding $6.7 billion in commercial loans — more that twice what it owes to the International Monetary Fund. Still, Pakistan must accept at least some of the responsibility for its predicament; in the words of Burzine Waghmar of the Centre for the Study of Pakistan at SOAS University of London, "Enthusiastically taking Chinese money, they looked at the short-term deals for shoring over the financial crisis, without realizing its medium- and long-term implication, and the Chinese leverage over Pakistan. And it has painfully come home to be realized."
A Long Road Ahead
A complex political and economic entity, China will continue to influence, and be influenced by, the unique dynamics and challenges inherent to emerging-market status. If history has taught us anything, it's that multinational interdependence means shared responsibility for China's future: as China develops, so does the world.
For more insights, join us at the second annual Fixed Income Leaders Summit: Emerging Markets this March 09 - 11, 2020 at the The Ritz-Carlton Westchester, White Plains, NY.
For full conference details, download the 2020 agenda here.