Amassing foreign debt is one strategy for acquiring capital needed for investment. China’s foreign debt, among the highest worldwide at $331 billion in 2007, has been the impetus for the country’s emergence as an economic power in the twenty-first century.

Foreign (or external) debt is the total amount of money a country owes to foreigners or other countries. Ordinarily a consequence of loans and/or a negative balance of trade, China’s foreign debt in the past has also been the result huge indemnities forced upon the Qing dynasty (1644–1912) by “unequal treaties” signed with foreign nations.

The impact of foreign debt on China has evolved. During the nineteenth century it devastated Qing authority, in the twentieth century it aided development and modernization projects for the Republic of China, and for Chinese Communist Party’s (CCP) reform-minded leaders such as Deng Xiaoping, Jiang Zemin, and Hu Jintao, it has provided the impetus for China’s emergence as an economic powerhouse in the twenty-first century.

China’s defeat by the British in the First Opium War (1839–1842) introduced the precedent for demands of indemnity by victorious powers. The Treaty of Nanjing (1842) required a 21 million silver dollar indemnity to the British government in addition to 6 million silver dollars paid for the destruction of opium stockpiles. Qing resources, while depleted from an additional 16 million silver dollar indemnity following the Second Opium War (1856–1860), had been sufficient to cover most debts until the start of the First Sino-Japanese War (1894–1895). In preparation for the war, the Qing government borrowed 10 million taels (one ounce silver pieces) from British banks, but after its defeat, the Treaty of Shimonoseki (1895) forced an indemnity of 230 million taels. Loans drawn to pay the Japanese came from British, German, and French banks as well as foreign governments. After the Qing dynasty ended, two thirds of this debt remained outstanding.

The Boxer Rebellion (1900) caused the Chinese government to incur even greater foreign debt. European nations, the United States, and Japan forced the dynasty to pay the costs of the invasion as well as reimburse all foreigners for losses during the uprising. The total “Boxer Indemnity” reached 450 million taels, which the Chinese agreed to pay over the next thirty-nine years at an interest rate of four percent. Collateral for debt obligations came from revenue of the Imperial Maritime Customs, internal revenue taxes, salt taxes, and various sales taxes resulting is a loss of control by Beijing over many of China’s financial resources. In addition, the worldwide decline in silver prices at the turn of the twentieth century decreased the value of the tael relative to international currencies.

The establishment of the Republic of China (ROC) in 1911 brought with it institutional changes including the creation of the Central Bank of China, directly under Guomindang control. Its first manager, T. V. Soong, was also finance minister from 1928 to 1933 and brother-in-law of Generalissimo Chiang Kai-shek. The ROC worked to reduce foreign debt left over from the Qing dynasty through both repayment and loan restructuring while simultaneously incurring new debt used to fund development projects. China under the Guomindang (Nationalist Party) never achieved a healthy economy before it faced the devastation of World War II. With the victory of the Chinese Communist Party (CCP) in 1949, China’s government refused liability for foreign debt from previous administrations.

According to The World Factbook, China’s estimated foreign debt for 2006 was US$305.3 billion. By early 2007 it had grown to US$331.56 billion, according to Chinese government sources. Accumulating foreign debt is one strategy of acquiring needed capital for investment, especially for developing countries where standards of living are comparatively low and capital is scarce. Foreign debt is one consequence of foreign direct investment (FDI) in a nation’s industrial development. FDI accelerates economic growth by bringing technology and market access to a developing country. China’s ruling Communist Party has tolerated foreign debt owed to capitalists since the advent of economic reforms associated with the leadership of Premier Deng Xiaoping (1904–1997). Deng’s “Second Communist Revolution,” an economic program based on capitalist principles beginning in 1979, rejected the left-wing socialist policies associated with Mao Zedong and embraced a more pragmatic approach to modernization. One result has been the remarkable growth of China’s economy.

In 1984 Deng Xiaoping’s protégé and heir-apparent, Premier Zhao Ziyang (1919–2005), while on a European tour, ushered in a new era of international economic cooperation when he announced, “China’s door is open now, will be opened wider and will never be closed again.” At the 1987 Communist Party Congress, Zhao outlined a reform program with the goal of improving the climate for investors based on sanweizhu (the three principles): encouraging foreign investment, industrial development, and exports. The primary mechanism used by Beijing to lure foreign capital is the Special Economic Zone (SEZ), first created as an experiment in 1980. SEZs are areas where foreign firms are permitted to set up industries and operate free from the constraints of China’s labor laws and other legal restrictions. Deng Xiaoping referred to the SEZs as China’s “windows” to let in new technology, management skills, and experience. Foreign enterprises, in turn, benefit from tax incentives, plentiful cheap labor, and abundant resources.

In 1980 the first four SEZs were established along the southeast coastal areas of Shenzhen, Zhuhai, Shantou, and Xiamen. A second group of ten additional coastal cites, the province of Hainan, and the Pudong area of Shanghai were designated SEZs by 1988. Encouraged by the success of the SEZs, between 1984 and 1988 the Chinese government created smaller, more specialized Economic and Technological Development Zones (ETDZ), located along China’s coast or in cities already open for international trade, where high-tech industries are encouraged over more traditional manufacturing firms. By 2006 there were fifty-four national government-sponsored ETDZs, thirty-three located in coastal areas and twenty-one in central China, and hundreds more supported by provincial and municipal authorities throughout China.

A primary purpose of the SEZs and ETDZs is to absorb foreign direct investment. The initial surge of investment in the early 1980s mostly came from Hong Kong, Macao, and Taiwan, whose Chinese expatriates were eager to tap into China’s potential for growth. By the late 1990s, the West and Japan had entered the scene. After China joined the World Trade Organization in 2001, FDI skyrocketed, reaching US$60 billion annually in 2005. Chinese government sources report that the fifty-four ETDZs, totaling a land area of approximately 500 square kilometers, received 15 percent of China’s total FDI for 2006 when over two hundred multinational high-tech companies invested in four hundred industrial projects.

Economists have questioned whether China’s foreign debt should be a concern for the ruling Chinese Communist Party. Many have concluded that it should pose no short-or long-term threat to China’s future development. On the contrary, it reflects an active flow of international capital. Although China’s total foreign debt ranks among the highest worldwide, it is relatively small compared to the gross domestic product (GDP) estimated in 2006 at US$10.17 trillion. Moreover, China’s foreign exchange reserves, in excess of US$800 million, re
main higher than the total foreign debt. On the other hand, the politics surrounding foreign debt, FDI, and SEZs are more complicated. The “Fourth Generation” of Communist Party leadership under President Hu Jintao (b. 1942) remains committed to free market economics and capitalism as “temporary” necessities to achieve modernization. Yet they must answer critics within the Party who decry the inflation, “foreign exploitation,” corruption, and increased stratification in Chinese society that have accompanied phenomenal economic growth. The Communist Party’s official position is that China’s economic achievements should serve as models for other developing nations in the twenty-first century.

Further Reading

Cass, D. Z., Williams, B. G., & Barker, G. (Eds.). (2003). China and the world trading system: Entering the new millennium Cambridge, U.K.: Cambridge University Press.

Denby, C. (1916). The national debt of China—Its origin and its security. Annals of the American Academy of Political and Social Science, 68, 55–70.

Lin Shuanglin. (2003). China’s government debt: How serious? China: An International Journal, 1(1), 73–98.

Redick, C. F. (1973). The jurisprudence of the Foreign Claims Settlement Commission: Chinese claims. American Journal of International Law, 67, 728–744.

Vietor, R. H. K. (2007). How countries compete: Strategy, structure, and government in the global economy. Boston: Harvard Business School Press.

Source: Grasso, June. (2009). Debt, Foreign. In Linsun Cheng, et al. (Eds.), Berkshire Encyclopedia of China, pp. 590–592. Great Barrington, MA: Berkshire Publishing.

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