China wrestles with an overseas debt crisis

This is an audio transcript of the FT News Briefing podcast episode: China wrestles with an overseas debt crisis

Marc Filippino
Good morning from the Financial Times. Today is Tuesday, August 2nd, and this is your FT News Briefing.

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The head of Instagram is packing his bags and setting up shop in London. Plus, China’s impact on global business is impacting our show today. We’ll hear about a British bank that’s caught in the middle of US-China tensions. And then we’ll talk about China’s overseas lending. It’s exploded over the past decade and now Beijing faces 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 relocating its CEO to London to better compete with its key rival, China’s short video app TikTok. Adam Mosseri will move from the California headquarters of Instagram’s parent company, Meta, formerly Facebook. Meta just reported its first decline in quarterly revenues and expressed concern that Instagram is losing users to TikTok. London is already Meta’s biggest engineering hub outside the US. FT’s 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 largest lenders, HSBC, reported earnings this week and they were better than expected thanks to a boost from higher interest rates. And the bank promised shareholders it would raise its dividends back to pre-pandemic levels. This dividend promise is especially important for HSBC. The FT’s Stephen Morris explains why.

Stephen Morris
During the pandemic, regulators at the Bank of England stopped HSBC from paying this. Their dividend was so reliable that people counted on it as a source of income, in particular, their Hong Kong retail shareholder base who own about a third of the bank, which is unusual. Usually banks shareholder register are dominated by institutional investors or hedge funds. But it also affected their largest shareholder, Ping An, which has gone on a campaign this year to try and break up HSBC.

Marc Filippino
And Ping An is a mainland Chinese insurance company which also counted on those dividends.

Stephen Morris
Indeed, the dividend ban during the pandemic is one of the main reasons why Ping An went hostile and started trying to call for a break-up of the group because they were fed up of regulators and politicians in London controlling a bank which makes the vast majority of its earnings in Asia, but in particular, Hong Kong, its historic base.

Marc Filippino
So will restoring the dividend and better earnings reduce the pressure on HSBC to break itself up?

Stephen Morris
In a way, if the dividend issue goes back Ping An, the largest shareholder, starts earning money, it gets its Hong Kong retail shareholder base on side. Maybe the immediate pressure for a break-up led by Ping An goes away. But if you look at the bank’s position long term, I remember speaking to one investor who said HSBC is in the least sustainable position of any bank in the world. It is headquartered in London, relies on US dollars for funding and also for conducting its massive global trade and foreign exchange operations, but makes almost all of its money in Hong Kong, which is obviously coming under the increased influence of Beijing and the Communist Party. So HSBC finds itself in kind of a stuck between a rock and a hard place. So there’s not really much it can do unless geopolitical tensions go away between China, the US and the UK. And there seems to be little chance of that actually happening.

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

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In the past decade, China has become the world’s biggest overseas development lender, way bigger than the International Monetary Fund.

James Kynge
It’s bigger than the World Bank, the IMF and all 22 members of the Paris Club put together.

Marc Filippino
Our global China editor, James Kynge, has been covering China’s overseas lending programme, also known as the Belt and Road Initiative. He found that so many loans are failing. Beijing now faces its first overseas debt crisis. James joins me now to talk more about this. Hey there, James.

James Kynge
Hi.

Marc Filippino
So James, you wrote in your article that not only are many of China’s borrowers not able to pay their loans, but Beijing is now extending new loans to help these countries pay off their original loans.

James Kynge
China is now extending rescue loans to countries that look like they’re about to default on these infrastructure project loans to Chinese state institutions. So it’s provided tens of billions of rescue loans to countries like Pakistan, Argentina, Belarus, Egypt, Mongolia, Nigeria, Turkey, Ukraine and Sri Lanka. The infrastructure projects that Chinese state banks lent to are turning bad in record numbers. China doesn’t want the governments of those countries to go bust, and that’s why it’s providing rescue loans directly to those recipient governments.

Marc Filippino
Now, we should probably remind folks that all this lending is part of China’s signature foreign policy programme called the Belt and Road Initiative. James, does this loan disaster point to a fundamental problem with the way the Belt and Road programme is set up?

James Kynge
We have to be balanced here because there has been more than 13,000 projects, most of them infrastructure, mostly in the developing world since the Belt and Road Initiative started back in 2013. Some of them have done very well. You know, there are railways across Africa, there are hydro dams. There’s all kinds of infrastructure that actually has been delivered on time fairly cheaply and are generating a return. That needs to be stated up front. But there are also a lot of projects and an increasing number of projects now that are underperforming, that have problems of corruption, problems of, you know, implementation, are delayed, have financing issues, etc, etc. And that’s one of the reasons why we’re seeing so many of these loans go bad in the last couple of years.

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

James Kynge
One of the problems of the Belt and Road Initiative is that it brings together many of the riskiest developing countries in the world. And the bonds issued by those countries are priced in the market at the moment as highly risky. The other aspect to the Belt and Road Initiative is that because most of it is done in secrecy, there aren’t, for instance, environmental impact studies conducted, social impact studies conducted on a project by project basis. This allows the Chinese construction companies that build the infrastructure to deliver the project at high speed and that is very much applauded by developing countries in most parts of the world. But the drawback comes when problems emerge. Corners are cut in order to achieve speed. But often you have social issues, environmental issues blowing up after the project is already under construction.

Marc Filippino
So James, this seems like it’s a bad look for China. How bad is it?

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

Marc Filippino
So James, how does China’s lending impact these other multilateral institutions like the IMF or World Bank that are also lending to developing countries? Do they interact at all?

James Kynge
So this is the next part of the plot that has yet to unfold. What will happen in a developing country? All of the international creditors that includes the World Bank, international bondholders, China, etc, want to know if they’re gonna get their money back and crucially, who is gonna get paid first. There is a sense that maybe some kind of multilateral solution, multilateral resolution that brings China and the western led institutions together might be possible, but that’s by no means a foregone conclusion.

Marc Filippino
James Kynge is the FT’s global China editor. Thanks, James.

James Kynge
Thank you very much.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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