China’s the World’s Economic Hitman

China’s the World’s Economic Hitman

Dear Reader,

Years and years ago I read a book called the Confessions of an Economic Hitman, written by John Perkins.

The premise is simple.

It’s set in the 1960s and 1970s. The guy takes his Science and Business degree and is employed by a private American firm.

He travels throughout Central and South America, offering them loans.

Loans for all sorts of things.

Loans for roads or electrical infrastructure, loans for hospitals.

Basically, this guy and dozens of others like him from a select group of private companies spent a decade moving from country to country, helping them take on bigger and bigger debts…

Yet every single loan was problematic.

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Most of the loans were almost unrepayable — which was by design. Many factors went against the borrowing nation for that loan to be repaid in full. The guy writing the loans knew this too.

That, and the loans were only made to countries that were resource rich.

Meaning there’d always be some sort of arrangement the debtor nation could come to with the lender to repay the debt. It wasn’t used as an upfront collateral. More like a tool the creditor knew they could bargain for if things went south…

The book has been howled down by several newspapers in the US. Even the International Monetary Fund waded in to say the book was a work of fiction.

The only person who supported the book, was the person who hired the author Perkins to begin with. Pointing out, that yes, that’s pretty much what the company did.

Yet if you pay attention to events around the world, it almost seems like a blueprint for what the Chinese Communist Party has been doing for the past 20 years…

The CCP became the world’s biggest bank

Much of what Perkins wrote about wasn’t about starting a conspiracy theory. Europe, Japan, and the US have a well-documented history of providing loans to resource-rich countries.

Even if his personal account of events turns out to be nothing more than an old man wishing he took a different path, there’s plenty of reports proving the concept happened.

What Perkins did, however, was put a confronting name on uncomfortable past events.

And over the past two decades, arguably China has been doing something similar.

While we’ve been busy filling up our homes with cheap items from Kmart and enjoying $5 t-shirt prices from Target, the Chinese Communist Party (CCP) has set out to become the world’s biggest bank.

And the entire world has no idea how big the debt really is.

The best guess suggests more than 150 countries owe anywhere between US$1.5 and US$5 trillion to Chinese firms.

While both numbers are enormous, that’s also a huge difference what the world could owe to China.

Worse still, that number could be even bigger too.

Simply put, there’s no accurate way to calculate how much money other countries owe to the Middle Kingdom.

For starters, the CCP is not a member of the Paris Club or the OECD Creditor Reporting System. These two organisations share information on bilateral trade and lending movements.

And if you start digging, you’ll see the loans don’t directly come from the CCP either.

Rather, they’re from private companies with some form of state backing.

Plus, the loans issued aren’t straightforward debts we would recognise. They’re called ‘special purpose vehicles’, which go unreported in China.

To boot, many smaller countries with business that receive debt from China don’t report it either.

A report from the International Monetary Fund (IMF) noted that:

Less than one in ten low income countries report debts of publica corporations that are outside the general government.’

Meaning that that even US$5 trillion could be a conservative figure.

The picture gets murkier, when you discover that the value of the loan and assets are negotiated privately.

Meaning that private Chinese firms don’t often have the full debt value on the books.

Let me say that another way.

The free markets aren’t deciding what a project is worth. The value is decided between a very small group of people. AND the issue of the debt and the receiving of the debt largely goes unreported.

What could go wrong?

Out of the hitman playbook

I want you to think of the map below as a little bit like a crystal ball into a future problem. And I’ll get to why that matters in a moment.

But first, look:

Port Phillip Publishing

Source: Statista

[Click to open in a new window]

The debt distribution from China is grossly disproportioned.

It’s not they’ve just gone into impoverished nations with a little bit of coin.

There has been an outright lean to non-Western countries that can’t get access to Western money.

What’s more disturbing, is that almost every one of the loans that has been written has a collateral clause. That according to VOX means, ‘That China may be treated preferentially in case of repayment problems.’

Many countries have put up mines and ports as collateral to loans.

A couple of years ago there was an asset seizure in Sri Lanka. That is, one company didn’t pay up on its debt obligations, so China seized the shipping port that was put up for collateral. In the process China now controls the port and claim it’s thriving.

The problem is, some of the 150 countries that owe China money were watching this. And as a result many debtors have been looking for a way to get out of these loans.

A few months ago, that may have been impossible.

But then a little virus came along and stopped the global economy in its tracks.

And this may be the very undoing of all these trillion-dollar loans.

But how? We’ll delve into that tomorrow.

See you then.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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