China is in the grip of an external debt crisis

This is an audio transcription of the FT press briefing podcast episode: China is in the grip of an external debt crisis

Marc Filipino
Hello from the Financial Times. Today is Tuesday, August 2, and it’s your FT News Briefing.

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The Instagram boss is packing his bags and moving to London. Additionally, China’s impact on global trade impacts our show today. We will hear about a UK bank that is caught in the middle of US-China tensions. And then we’ll talk about China’s overseas loans. It has exploded over the past decade and Beijing is now facing its first overseas debt crisis. I’m Marc Filippino and here’s the news you need to start your day.

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Instagram is moving its CEO to London to better compete with its main rival, Chinese short-video app TikTok. Adam Mosseri will leave the California headquarters of Instagram’s parent company, Meta, formerly Facebook. Meta just reported its first quarterly revenue drop and expressed concern that Instagram is losing users to TikTok. London is already Meta’s largest engineering center outside of the United States. FT sources say the temporary move is partly because Mosseri just wants to live in London. It could also be a cost-saving measure since UK engineers are generally cheaper than those in San Francisco.

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One of Europe’s biggest lenders, HSBC, reported profits this week and they were better than expected thanks to higher interest rates. And the bank promised shareholders it would bring its dividends back to pre-pandemic levels. This dividend promise is particularly important for HSBC. The FT’s Stephen Morris explains why.

stephen morris
During the pandemic, Bank of England regulators prevented HSBC from paying this. Their dividend was so reliable that people relied on it as a source of income, especially their Hong Kong retail shareholder base which owns about a third of the bank, which is unusual. Usually, the shareholder register of banks is dominated by institutional investors or hedge funds. But it has also affected their biggest shareholder, Ping An, which launched a campaign this year to try to break up HSBC.

Marc Filipino
And Ping An is a mainland Chinese insurance company that was also counting on these dividends.

stephen morris
Indeed, the ban on dividends during the pandemic is one of the main reasons why Ping An became hostile and started trying to call for the group to be disbanded because they were fed up with regulators and politicians. in London controlling a bank that makes the vast majority of its income in Asia, but especially in Hong Kong, its historical base.

Marc Filipino
So will the restoration of the dividend and better earnings reduce the pressure on HSBC to separate?

stephen morris
Somehow, if the dividend issue comes up, Ping An, the major shareholder, starts making money, he gets his Hong Kong retail shareholding. Perhaps the immediate pressure for a breakup led by Ping An is going away. But if you look at the long-term position of the bank, I remember talking to an investor who said that HSBC was in the least sustainable position of any bank in the world. It is headquartered in London, depends on the US dollar for its funding and also to conduct its massive global trade and foreign exchange operations, but makes almost all its money in Hong Kong, which obviously comes under increased influence from Beijing and the Party. Communist. . HSBC therefore finds itself stuck between a rock and a hard place. So he can’t do much unless the geopolitical tensions between China, the US and the UK go away. And there seems to be little chance of that actually happening.

Marc Filipino
Stephen Morris is the FT’s banking editor.

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Over the past decade, China has become the world’s largest overseas development lender, far larger than the International Monetary Fund.

James Kynge
That’s bigger than the World Bank, the IMF and the 22 members of the Paris Club combined.

Marc Filipino
Our Global China Editor, James Kynge, covered China’s overseas lending program, also known as the Belt and Road Initiative. He found that so many loans fail. Beijing is now facing its first overseas debt crisis. James joins me now to talk more about it. Hello, James.

James Kynge
Hi.

Marc Filipino
So James, you wrote in your article that not only are many Chinese borrowers unable to repay their loans, but Beijing is now providing new loans to help those countries repay their original loans.

James Kynge
China is now providing bailout loans to countries that appear to be on the verge of default on these infrastructure project loans to Chinese public institutions. So it provided tens of billions in bailout loans to countries like Pakistan, Argentina, Belarus, Egypt, Mongolia, Nigeria, Turkey, Ukraine and Sri Lanka. Infrastructure projects that China’s state banks have lent to are going wrong in record numbers. China does not want the governments of these countries to go bankrupt, and that is why it provides bailout loans directly to these beneficiary governments.

Marc Filipino
Now, we should probably remind people that all of these loans are part of China’s flagship foreign policy program called the Belt and Road Initiative. James, does this loan disaster indicate a fundamental problem in the way the Belt and Road program is being implemented?

James Kynge
We have to be balanced here because there have been over 13,000 projects, mostly infrastructure, mostly in developing countries since the Belt and Road Initiative was launched in 2013. Some of them worked very well. You know, there are railways across Africa, there are hydroelectric dams. There are all kinds of infrastructures that have been delivered on time at little cost and that are generating a return. This must be indicated in advance. But there are also a lot of projects and a growing number of projects now that are underperforming, that have corruption issues, that have issues with, you know, implementation, that are delayed, that have funding issues. , etc., etc. And that’s one of the reasons why we’ve seen so many of these loans deteriorate over the past two years.

Marc Filipino
Now I’m curious, is there anything about the way China lends that adds risk?

James Kynge
One of the problems with the Belt and Road Initiative is that it brings together many of the world’s riskiest developing countries. And the bonds issued by these countries are currently valued in the market as very risky. The other aspect of the Belt and Road Initiative is that, because most of it is done in secret, there are no, for example, environmental impact studies carried out, social impact studies carried out project by project. This enables the Chinese construction companies building the infrastructure to deliver the project at high speed and it is highly praised by developing countries in most parts of the world. But the downside comes when problems arise. Corners are cut in order to achieve speed. But often you have social issues, environmental issues that erupt after the project is already under construction.

Marc Filipino
So James, that seems like a bad image of China. How bad is that?

James Kynge
This is a huge problem for China, as the Belt and Road Initiative has been linked to Chinese leader Xi Jinping from the very beginning. Xi Jinping called the Belt and Road Initiative the project of the century. It is China’s biggest foreign policy ploy since the 1949 revolution. China’s offer to the world. This is China’s development model, embodied and exported around the world. So now that it is experiencing these serial crises, serial financial crises in several countries, it is very tarnishing the image of the Belt and Road Initiative and also the image of China in the world. And what we’re seeing is that a lot of China’s state banks, the big political banks that funded this initiative, are really curbing their horns now and taking a second look at it.

Marc Filipino
So James, what is the impact of China’s lending on these other multilateral institutions like the IMF or the World Bank that also lend to developing countries? Do they interact at all?

James Kynge
So that’s the next part of the plot that hasn’t been revealed yet. What will happen in a developing country? All the international creditors, including the World Bank, international bondholders, China, etc., want to know if they’re going to get their money back and most importantly, who’s going to get paid first. There is a feeling that some kind of multilateral solution, a multilateral resolution that brings together China and Western-led institutions, might be possible, but that is by no means inevitable.

Marc Filipino
James Kynge is the FT’s Global Editor for China. Thanks, James.

James Kynge
Thanks a lot.

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Marc Filipino
You can read more about all these stories on FT.com. This has been your daily press briefing on FT. Be sure to check back tomorrow for the latest trade news.

This transcript was generated automatically. If by any chance there is an error, please send the details for a correction to: [email protected]. We will do our best to make the change as soon as possible.

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