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China Has a Bad Debt Problem

Sigma Investment Counselors

May 27, 2020

China has lent billions to poor countries, and now they can’t pay it back.  Perhaps China should have heeded J. Paul Getty’s observation, “If you owe the bank $100 that’s your problem, if you owe the bank $100 million, that’s the bank’s problem.”

China’s global lending spree, which, over the last two decades, showered less developed countries with hundreds of billion dollars in an effort to expand its influence and become a political economic super power,  was controversial, almost from the beginning.  Borrowers were forced to put up ports, mines and other national treasures as collateral.  Now, with most of the world’s economies in free fall, governments are increasingly telling China that they can’t pay.

That puts China squarely on the horns of a dilemma.  If they agree to restructuring and/or forgiveness, they could pressure their financial system and potentially infuriate the Chinese people, who are already suffering from the effects of the COVID-19 pandemic.  If they get tough with borrowers, perhaps going so far as to seize collateral, they risk further alienating many countries that are already angry about China’s behavior relating to the pandemic.

Investors should remain aware that many economies, particular among emerging and less developed countries, are having increasing difficulty in managing debt.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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