Why China is an unusual creditor

Back in 2009, Brad Setser discussed this topic in his post China, new financial superpower … making these points:

China is in a lot of ways an unusual creditor, for three reasons:

One, China is still a very poor country. It isn’t obvious why it makes sense for China to be financing other countries’ development rather than its own…

Two, almost all outflows from China come from China’s government. Private investors generally have wanted to move money into China at China’s current exchange rate. The large role of the state in managing China’s capital outflows differentiates China from many leading creditor countries…

Three, unlike many past creditors, China doesn’t lend to the world in its own currency. It rather lends in the currencies of the “borrowing” countries – whether the US dollar, the euro, the British pound or the Australian dollar. That too is a change from historical norms. Many creditor countries have wanted debtors to borrow in the currency of the creditor country….

With respect to the first point,  China’s “investing” has largely been financing purchases by the rest of the world of Chinese exports.  This will likely prove to be a major policy mistake as the rest of the world will have a difficult time paying off this financing.

Regarding the second point, China’s government has subsidized private domestic investment to maintain GDP growth, and per the first point needs to provide financing for purchase of the product of the domestic investment.

Finally, the third policy helps China avoid appreciation of its currency to support its export sector.

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