One Belt, One Road, And One Debt Hangover

Tyler Durden's picture

Autohred by Jim Rickards via The Daily Reckoning,

China is not only one of the world’s largest debtors, it is one of the world’s largest creditors.

China uses debt not in the customary financial manner, but as a political tool to generate employment and maintain social stability. Likewise China uses loans and investment as a tool to advance its strategic interests. This may be good geopolitics in the short run, but it will be a disaster economically in the long run.

Just as Chinese state owned enterprises (SOEs) can’t repay debts to Chinese banks, China’s foreign partners will not be able to repay debts to China itself. These twin disasters-in-the-making may converge in such a way that China’s assets disappear or become illiquid at exactly the time they are most needed to bail-out its own banking system.

China has launched four major overseas investment initiatives in the past ten years. The oldest is their sovereign wealth fund, China Investment Corporation, or CIC, established in 2007. Sovereign wealth funds are a way for countries to invest their reserves in securities other than safe instruments such as U.S. Treasury notes.

CIC today has assets of over $800 billion, spread among stocks, corporate bonds, hedge funds, private equity, commodities, and commercial real estate. Some of CIC’s investments are directly-owned enterprises, including gold mines in Zimbabwe.

While these assets may outperform Treasury notes over time, they are also illiquid, and would tend to decline in value during a financial panic. This means that about 20%, of China’s reserves are unavailable for critical tasks such as bailing out the banking system or defending the currency.

The second and third initiatives are the New Development Bank, NDB, created by the BRICS in 2014, and the Asia Infrastructure Investment Bank, AIIB, created by China in 2016. These have participation from 35 countries in the Asia/Australia region, and 18 other countries from outside that region, mostly in Europe. The United States refused to join.

Although NDB and AIIB are both multilateral institutions, China was the principal sponsor and a major source of funding. It provided about $10 billion to NDB and $30 billion to AIIB.

These banks will expand their lending capacity by issuing notes and will fund infrastructure projects in competition with the World Bank and its regional development banks — without interference from the U.S. on priorities.

China, One Belt, One Road

By far, the most ambitious outbound investment effort by China is the “One Belt, One Road” initiative. The “belt” refers to overland routes from central China to Europe. The “road” refers to maritime routes from eastern China to Southeast Asia, Africa, and Europe.

It is a recreation of the original Silk Road caravan route of the thirteenth century, and China’s glory days as a naval power led by Admiral Zheng He in the Ming Dynasty in the early fifteenth century.

The scope of the One Belt, One Road initiative is immense. It will include port facilities, railroads, highways, telecommunications channels, airports, transshipment facilities, renewable energy sources, and more strung out from Xian to Rotterdam, and from Guangzhou to Venice.

The graphic on the previous page shows the main corridors of the belt and road, but there are many ranches and capillaries not shown in detail. Of these offshoots, one of the most critical is a transportation link from Kashgar in western China to the port of Gwadar on the Arabian Sea in Pakistan. This route passes through disputed territory in Kashmir that could lead to a war with China and Pakistan on one side, and India on the other.

Another critical belt link runs from Kunming in southern China through Myanmar, Thailand, and Malaysia before terminating in Singapore.

Silk Road China

Main routes in China’s “One Belt, One Road” Initiative are shown above. The overland belt is in green and the maritime road is in blue.

At a global leaders’ summit in Beijing on May 14–15, 2017, President Xi Jinping of China laid out his vision for the One Belt, One Road and committed $55 billion of lending capacity.

Vladimir Putin, president of Russia, was one of many foreign leaders present. The U.S. sent a low level delegation, probably including CIA assets, attempting to get a read on Putin, Xi and the North Korean delegation.

The problem with One Belt, One Road is that many of the potential recipients of development loans are not highly creditworthy or have a track record of defaulting on debts or requiring substantial debt restructuring in order to stay current.

As with Chinese bank loans to SOEs, the NDB, AIIB, and One Belt, One Road efforts are not primarily economic but political. China is seeking to use its economic clout to create jobs and control critical infrastructure.

In the end, China is attempting to create a geopolitical sphere of influence of even greater scope than the Japanese Empire prior to World War II, called by Japan “The Greater East Asian Co-Prosperity Sphere.”

As with its other policies, China will turn liquid assets into illiquid assets in order to pursue its ambitions. This could make sense if nothing goes wrong. But, things will go wrong.

China will face a monumental liquidity crisis sooner than later and find that its liquid assets have been turned into bridges to nowhere.

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Monkeymitts's picture

He is such a shill. First his China is the gold manipulator article now this. Time for the US to go back to isolationism.

SilverRhino's picture

Time for the US to go back to isolationism.


Agreed.   Let someone else rule the world island.   Not our problem.

opport.knocks's picture

Hmmm ... what about the country with the mother of all debt combined with the mother of all trade deficits and the mother of all offshore corporate tax avoidance.

If there ever was a perfect storm, that would be it. Just elect a strategic bankruptcy specialist as POTUS and let him handle it.

GRDguy's picture

What China is doing is no different from the "privitization" of the West.

Create thin-air money, loan it out against bonds backed by TITLE.

Never expecting it to be repaid; but gains uncontested legal TITLE.

MEFOBILLS's picture

 Likewise China uses loans and investment as a tool to advance its strategic interests. This may be good geopolitics in the short run, but it will be a disaster economically in the long run.

 

Westerners have been whistling past the graveyard for over 20 years now.  China cannot keep growing at this rate, their ghost cities will implode, their housing bubble, their silk road....etc., ad nauseum.  How long before head is pulled out of rectum. 100 years?

China has four STATE BANKS.  They create Yuans as loans, and then cancel the damn loans.  This is effectively debt free money.  The state banks channel this debt free into acquiring industry from U.S. and Europe.  This is a very cheap way to climb up the technology learning curve.  It is much harder and more expensive to invent, rather than buy.  China buys.

 So, China is playing their monetary game on another higher level, that leaves Western pundits stupified. (Yes, China also steals technology with cyber schemes, and does other negative games.  But, the western world, if they weren't complete dumb-asses, or also in on the take, would be able to counter China's gambits.)

Stupified is the right word, because western neo-liberal economic banker hypnosis has put scales over people's eyes.  Chicago School  Neo-Liberal economists are worse than useless, because they spread false ideas.

The one belt one road, will develop new areas of the world, and open up new mineral access.  It will also create new markets for China.  The U.S. grew by exploiting its natural wealth, then grew further by exploiting other areas of the world. Panama Canal anybody?

State banks since they hold the debt instruments can just cancel them in a jubilee.  Or, state power can tax the money out of supply.  The near future passing away of dollar system will actually make more demand for Yuans.

When you distill economy to its essence, all economy is  conversion of the earth - into goods as prices.

just the tip's picture

this is ZH.

USA exploits other country's resourses = fuck you.

anyone else expoits other country's resourses = hooray.

MEFOBILLS's picture

I'm an equal opportunity fuck you-er.  I recognize when there is mutal fucking going on.

Just the tip.... pretty funny.  I've used that line myself. Ha Ha

just the tip's picture

so this is BRICS part deux?  just how many BRICS are in BRICS now?  is the Ukraine gonna let that road or belt or whatever go through them to mother russia?  belarus?  is the belt gonna go through syira?  if not, why not?

why does china not just legalize weed?  they could lower their unemployment rate to 0.02%.

RockySpears's picture

JTT, this already exists, this is NOT Scotch mist.

 The first trains Direct from China arrived in London earlier this year.

 This is NOT speculation, this is fact.

 

http://www.independent.co.uk/news/uk/home-news/first-direct-train-china-...

 

They reached spain 3 years ago:

 

http://www.dailymail.co.uk/wires/afp/article-2867482/First-direct-China-...

 

RS

DaBears's picture

Those train tracks are right through Terrorist land, it's going to be IED city on those tracks. Those god-less communists are delusional if they think those Islamic nut jobs will treat them any better.

BigJim's picture

Give the Islamic nut jobs their cut and the trains will run unmolested.

yogibear's picture

Out of fiats like the US dollar. 

No longer viewed as safe.

kaboomnomic's picture

Funny article. Complaining about China using debt to build infrastructures that would benefits China economies & their partners.

Like your countries (EU, US, JA) doesn't build your economies upon DEBT?? US/EU/JA budgets ALWAYS has deficits for more than 2 decades. And you warns China NOT to do the SAME?? No shit..

Comes back made articles that make more sense...

onmail1's picture

BRICS Rise Riise Rise
The future belongs to you

& let the racist white western dominance
be destroyed,
West prints imaginary money, dollar, euro & pound
& shoves it down ur throats using IMF,World bank etc
makes u debtor & snatches all ur goody goods
while ppl in rest of the world sweat out to produce
luxury goods to the 'opulent' west .
West uses NATO to enforce this & bombs those tho oppose
this world order
===========================
Dont use Dollar, euro , pound and all their imaginary opulence
will crash & fade away and their ladies will knock at ur doors at night

How many white ladies u want for ur harem
ummm, me have a small house ,so 3 could be ok Hah ha

bluez's picture

It looks like Brazil, Russia, India, China, South Africa, et al. are going to be the New World Order++. The US will be damn lucky to even be called a "partner". The Chinese will probably be at the center, which will be horrific. The Chinese Princelings make the Clintons look like saints. Forget about Europe and the Middle East. They will crash and burn (and the US will also).

qwertyFUBAR's picture

What snipy BALLYHOO to characterize a massive infrastructure initiative across several continents as a "bad risk, the silly fools, ha ha".  Proves to me at least, we have created a class of "investment advice" whose cynicism has exceeded comic book proportions and has attained simple boredom.  People who won't get out of their chairs spitting out the window.

Meanwhile, to any country that gets off its ass and does anything at all, go the spoils.

homonohumanus's picture

From my limited experience I gather that the USA are the worth spenders of the world leaders. Everybody is living over budget but there is the matter of how the money created is used, in the USA it mostly exits the counrtry (consumption of foreigns goods or investment, tax evasion, etc.) or it is spend on consumption of perishable good. WHat I see in Europe and Asia sees that whereas there are missinvestment actually a significant part of the money is spend "well" (infrastructure, more functionnal education system, etc.). It is not hard even building ghost town is better than evaporating billions in junk food, oversize real estate asset, gas guszzling engine, over heated or cold places, etc.

Then there is the military...

Batman11's picture

Join the club, get ready for debt deflation

It became obvious to most people in 2008 that there is something wrong with today’s economics.

It all comes down to the most fundamental aspect of the capitalist system, money, debt and how debt creates our money supply. The money supply is effectively equal to all the debt in the system.

1929, 1989 Japan and 2008 were all caused by saturating the economy in debt.

https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.png

The post 1989 Japanese world and post 2008 Western world are the same; stagnation from the drag of debt repayments from the boom. Western experts visited Japan and told them they must cut Government spending, but as soon as they did things got worse until they eventually increased Government spending again.

This was due to the effect of cutting Government spending in a balance sheet recession which accelerates the contraction of the money supply pushing the economy towards debt deflation.

The IMF predicted Greek GDP would have recovered by 2015 with austerity.

By 2015 it was down 27% and still falling.

Greece was pushed into debt deflation by IMF economists who didn’t know better.

Richard Koo has explained things to the IMF and he can explain things to you:

https://www.youtube.com/watch?v=8YTyJzmiHGk

He did try explaining things to the ECB but these ideologues couldn’t adapt their thinking.

 

Batman11's picture

Monetary theory has been regressing since 1856, progress isn’t always in the forwards direction.

“Progress in economics and finance research would require researchers to build on the correct insights derived by economists at least since the 19th century (such as Macleod, 1856). The overview of the literature on how banks function, in this paper and in Werner (2014b), has revealed that economics and finance as research disciplines have on this topic failed to progress in the 20th century. The movement from the accurate credit creation theory to the misleading, inconsistent and incorrect fractional reserve theory to today’s dominant, yet wholly implausible and blatantly wrong financial intermediation theory indicates that economists and finance researchers have not progressed, but instead regressed throughout the past century. That was already Schumpeter’s (1954) assessment, and things have since further moved away from the credit creation theory.” 

“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner

http://www.sciencedirect.com/science/article/pii/S1057521915001477

The study shows confusion reigns even within the BoE.

 

From the BoE:

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

 “Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system.”

This statement is only true in a Glass-Steagall world.

When you can package up and sell off bad loans through the investment side of the business, banks can create money freely and without limit.

Look at the US money supply leading up to 2008 for confirmation.

http://www.whichwayhome.com/skin/frontend/default/wwgcomcatalogarticles/images/articles/whichwayhomes/US-money-supply.jpg

Glass-Steagall had a purpose, to stop a repeat of 1929 and it worked until it was removed.

Batman11's picture

Keep bundling up those bad, sub-prime auto loans into securities, the good times could be coming to an end.

 

daveO's picture

The IMF exists to ALLOW banks to silently buy up other countries' assets "on the cheap". The fact that these countries allow it to happen, decade after decade, just reflects their own stupidity. Economists are the high priests of fiat-based financial fraud.

viator's picture

Yes, these great national projects never seem to work out; like the Erie Canal, the Panama Canal, the Suez Canal, The Transcontinental Railroad, Mississippi River Barge system, The US Interstate Highway System.

RSDallas's picture

MEFOBILS has it right.....

China has four STATE BANKS. They create Yuans as loans, and then cancel the damn loans. This is effectively debt free money. The state banks channel this debt free into acquiring industry from U.S. and Europe. This is a very cheap way to climb up the technology learning curve. It is much harder and more expensive to invent, rather than buy. China buys.

Wherein we steal from our citizens when our banking system screws up.

Posa's picture

China is a command economy. If push comes to shove the PBC (Central Bank) can buy up debt and hit the "delete" button.. actually the Fed can do teh same. Then recapitalize the banks with adjust asset prices... this can be a little messy, but it is a great alternative to chaos and collapse. China has a great rpoductive base and can insure peace and prosperity by focusing efforts and sustaining and growing that base instead of world-conquest Imperial Adventures.

oncemore's picture

The autyhor seems to be more marxist, than the chinese central comitee of the party: critical tasks such as bailing out the banking system or defending the currency.

 

The hell, bailing out banks is burning money away, for me it is not critical, but unreasonable , to bail out defaulted bank.

radbug's picture

Jim, if your Demand Side isn't in sync with your Supply Side, nothing goes right. 

allthegoodnamesaretaken's picture

Just know this: China, is a word, nothing else.  Like every other communist country China will dry up and find itself at the mercy of the Banker King, just like all of us are, already.  THE UNITED STATES COMPANY, ie. the USA, Eastern Europe, Russia, Japan, India, Asia and Africa, the Middle East, the whole damn world, all of us are in hock to the Banker King, China, is no exception.  One family, nothing like it has ever existed before, one family, not China, not any nation on Earth, the future of every nation of all the people, is in the hands of one family.  If China had any sense at all they would withdraw from this 'world economy' and concentrate the peoples efforts on raising food and bringing water to the people, subjecting your nation and its people to a foreign interest, especially when that interest has proven itself to be murderous, well, you get the picture.  America, the people of America, we would be better today had we not fallen prey to the Banker King and his Chosen people.  Giving the Federal Reserve authority over us and our wealth was a fool's mistake, we should rectify that today.  None should be jealous of China for what seems like its success.  There is no doubt in my mind, like they say: I make you, I can break you, there is no doubt in my mind what made China what it is today.  The Bank of England, is as good a name for the power behind China’s rise in the world today, as good as any other.  To put a name to it is not easy since the power behind the scenes resist being known and has the power to destroy any and all that oppose it.  All the cats are in the bag, we may claw and bite each other even to death, there is no escape forthcoming, so, come on in China, just wipe that grin off your face.