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Walker's World: China's debts mount up

By
MARTIN WALKER, UPI Editor Emeritus

WASHINGTON, Feb. 2 (UPI) -- Partly because so much of China's bad economic news emerged while Premier Wen Jiabao was at the World Economic Forum in Davos, Switzerland, the gloom about China's collapsing exports and rising unemployment and unrest has become intense.

Nonetheless, China's war chest of American Treasury bonds and securities and its hard currency holdings still total $2 trillion, which may be the largest single store of liquid wealth available on Earth.

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However, the problem that has yet to penetrate the consciousness of the markets, let alone that of American policymakers, is that Chinese corporations have to roll over some $2.4 trillion of external debt this year. These are not easy times to find bankers who are willing to help.

On the one hand, the bankers need the money to build up their own capital base and fend off threats of bankruptcy. On the other hand, governments are putting heavy pressure on their own banks to lend, but to lend particularly to domestic borrowers rather than to customers abroad.

Even while concerns about the future of free trade and the threat of protectionism were on the minds of many at Davos, the immediate problem is the emergence of financial protectionism, or nationalism over money. Banks are becoming wary of lending abroad, and even more wary of lending to Chinese companies whose collateral may be dubious and where the protection for foreign creditors under China's bankruptcy laws can be unclear.

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The flow of finance to emerging economies like India and China, or Turkey and Indonesia, is drying up. The Institute of International Finance, in a report that came out last week and made a stir at Davos, suggested the net capital flows to emergent markets this year would fall to a remarkable low of $160 billion, which means a collapse from the $840 billion of 2007, a boom year.

The consequence is a collapse of foreign investment into these countries, and also that very few loans that fall due this year will be rolled over or renewed. And even fewer new ones will be made.

If they cannot get new loans, but still have to repay the old ones, layoffs and slashed production will follow, and then the closure of factories and mass unemployment. At the end of this trail lies bankruptcy for the indebted corporations.

Emerging markets, such remarkable sources of growth in recent years, are grinding to a halt. China's 10 percent and 12 percent growth rates are plummeting down to zero. Russia's economy is shrinking. The worst is in Asia, where Singapore's economy is currently shrinking at an annual rate of 12 percent, where Taiwan's exports are down 42 percent and Japan's are down by 35 percent.

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These are the kinds of collapse we associate with the Great Depression.

It has come with extraordinary speed. A.T. Kearney's Foreign Direct Investment Confidence Index, the most closely watched forecast of investment intentions, surveyed chairmen and chief executives and top finance officials from corporations that usually account for more than two-thirds of foreign investment. At the time, their plans suggested investment would continue to run over $800 billion a year. Those plans have been torn up, thanks to the credit crunch and to the depressed markets it has produced.

The Dutch financial group ING, in a report produced last week, added together all the debt assumed by emerging market governments and corporations and came up with the huge total of $6.8 trillion. This debt has to be serviced, renewed and eventually repaid. Most of this has been held on the balance sheets of Western banks and finance houses as good debt, but the signs are that much of it may have to be written off, which means yet more crises for the overstretched balance sheets of the banks.

Add the $2 trillion of debt the United States now has to assume, with the latest $1.2 trillion budget deficit and President Barack Obama's $825 billion stimulus plan, and include the $1.1 trillion in deficit spending that the various countries of Europe are assuming, and the battered global economy faces a $10 trillion challenge.

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There is not enough liquid capital out there to provide this. If the money cannot be borrowed, it will have to be printed. The result of that explosion in the money supply will be, as surely as night follows day, a great new wave of inflation.

But before that happens, it is important to note the key implication of the ING report. If China's companies face $2.4 trillion in debt repayments, when its total gross domestic product is only $3.5 trillion, the creditors are not going to be getting much of their money back on time.

And if Obama and his fellow leaders at the Group of 20 summit on the economic crisis scheduled for April 2 in London think the Beijing government will put its $2 trillion war chest at the disposal of any global rescue plan, they are likely to be disappointed.

China has its own problems of economic survival to take care of, just like Obama and all the other G20 leaders. These are not promising times for international cooperation.

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