Short thread on the basic finance mistake the defenders of Chinese overseas lending make. First, there is the implied belief that there is a shortage of global capital and all the poor countries China invests in should be thankful to Xi. To anyone in finance 1/n
This is so totally laughable. There is no shortage of global capital. This basic question, has been looked at by professionals and academics from a thousand different angles not just with regards to China but in other contexts across time. It just isn't true. 2/n
Second, there is this stated belief that projects are only getting done because only Chinese construction firms have the necessary expertise, knowledge, experience. This is also just patently false for multiple reasons. As just one example, if the project was economically 3/n
Viable, international lenders could pay Chinese contractors to build the necessary infrastructure. International banks pay other international contractors to build things regularly, there is no prohibition on this activity. Chinese activity has nothing to do with special 4/n
expertise that only their contractors possess. So why are Chinese lenders doing this and how are they being compensated for taking this risk? Third, Chinese lenders are simply taking on excessive risk. Now one could reasonably argue that charging some African country 5/n
10-15% is a reasonable rate of return to compensate China on a high risk project that has dubious probability of getting enough riders/fliers/drivers whatever, but this obliterates the Chinese beneficence argument that is too often made. Consequently, while other 6/n
lenders may see the project being viable at say 5% capital cost (made up numbers), China does the project at 10-15% takes a lot more risk and gets compensated for it. Borrower is effectively taking out a payday loan. So even with China getting higher rates how do they 7/n
protect themselves against borrower defaults? Chinese banks know, because that's their owner, that they can always enlist Beijing to tell the borrower to just hand things over. If you are a PE/IB in Africa/Latin America and a deal heads south, you are SOL and you might 8/n
get sued. If you are a Chinese bank or SOE, you just pick up the red phone and Beijing rains down hell upon that country. It is a political CDS. They do political deals for credit protection. EM's have screwed over/defaulted on bonds this decade and you know what? 9/n
Those banks lost money. They didn't get Washington or Brussels to send an armada. That's how finance works. So why do the borrowers do it? To me this is where it gets interesting. The borrowers do it because the international banks from commercial to development to donors 10/n
Require things like environmental assessment reports, project impact reports, they have controls on things like multi-party bidding, financial transparency (yes, mistakes get made but much more rare). A common refrain from borrowers from China were they wanted to 11/n
"move quicker" and didn't want the oversight required. China is more than happy to avoid the delay of public request for proposals, environmental reports, and other aspects. Everyone knows inside China the business practices are shady as $&%# you think they go abroad 12/n
and become choir boys? Get real. China is actively facilitating corruption, environmental destruction, and unviable projects because it knows it can fall back on Beijing. These aren't secret business practices just something borrowers and China want to avoid as it suits them 13/n
both for decidedly different reasons. I do not think Beijing had any debt trap diabolical master plan. Rather than just started throwing money around with no real plan but outside of China they expect to get repaid unlike just rolling it forever like they do in China 14/n
The clincher? Infrastructure the world over, THE WORLD OVER, is a long run, low return investment. 20-30 years at low low interest rates. Beijing doing their stuff at 5-10 years above market rates. No way that will ever be viable at those rates. Never. 15/n
You may never get a Beijing apologist to understand rationality, but the laws of finance catch up with you. Maybe not today or tomorrow but they will catch up with you. Done.
