China's understated global loans

CHINA ADVISORY - Report 06 Dec 2019 by Andrew Collier

Three economists in July published a paper at the Kiel Institute in Germany arguing that China’s international lending is understated by a significant margin. The authors, Carmen Reinhart, Sebastian Horn, and Christoph Trebesch, arrive at a figure of US$4.6 trillion, which includes holdings of sovereign bonds. Most analysis of the paper has discussed the impact on creditor nations, particularly heavily indebted emerging market countries. Instead, we look briefly at the potential negative impact of this “hidden” external lending on China’s domestic economy and banking system. Our conclusion is that widespread defaults of these external loans could

1) be managed domestically,
2) cause defaults among some of the smaller financial institutions,
3) increase financial instability,
4) delay the internationalization of the currency, and
5) hurt the further global integration of China’s financial system.

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