As the US presidential election nears, profound foreign policy questions hang in the air. The debate for the cameras has been about who is tougher on China. That is political theater, not the question that matters. Leadership means not toughness for its own sake, but good policy effectively communicated so smart citizens, businesses and friends abroad can rally around liberalism rather than settle for an authoritarian second-best. Biden’s China plans are starting to come out. There are elements of good policy that would improve upon the blustery and increasingly dangerous Trump-era China record, but there is also a considerable dose of the current administration’s nativism that may sound like strength but is unhelpful. Those serious about counter-balancing China’s weight in the world need a workable strategy, not just tough talk.
As the COVID-19 pandemic thrashes the global economy, a key question is how outbound financing for China’s Belt and Road Initiative (BRI) will be affected. Before the crisis China’s policy banks were already reducing new BRI loans. Now there is much speculation about Beijing opening the door for its institutions and firms to go on a buying and lending spree, given global needs and lower prices for assets. The question is whether China’s financial system permits that, given China’s ongoing domestic challenges and the need to prioritize investment at home. China’s long-term strategic answer to that is uncertain, but three short-term dynamics are clear:
In the teeth of the 2008-09 global financial crisis, China launched a massive investment-led stimulus effort, funded by banking system credit, leading the globe toward recovery. Now, facing a global economic downturn of similar or greater magnitude from the Covid-19 outbreak, observers are asking whether China will do it again. This time, Beijing does not have the option.
Chinese policy-makers are limited by an impaired financial system unable to generate anywhere close to the same volume of credit as in the past. Most of the credit that can be disbursed will just pay interest on the debt incurred after 2008, rather than fund anything new. Past reform delays leave China facing an ugly choice: reduce the magnitude of tomorrow’s debt crisis by acting less heroically with stimulus today, or pull out all the stops to prop up current demand by walking further into a debt trap at home and still having no certainty of stabilizing economic conditions. Even Beijing’s “bazooka” options to boost the economy face difficulties supporting an impaired financial system and indebted state-owned and local government firms.
