‘Hidden debt’ on China’s Belt and Road tops
$385bn, says new study
More than 40 countries have debt exposure to Beijing
greater than 10% of their GDP
Edward
White in Seoul 17 HOURS AGO
China’s
Belt and Road Initiative has left scores of lower- and middle-income countries
saddled with “hidden debts” totalling $385bn.
New
research suggests that many countries’ financial liabilities linked to
President Xi Jinping’s hallmark foreign policy initiative have been
systematically under-reported for years. This has resulted in mounting “hidden
debts”, or undisclosed liabilities that governments might be obliged to pay.
The
findings are part of a new report published by AidData, an international
development research lab based at the College of William & Mary in
Virginia, which has analysed more than 13,000 aid- and debt-financed projects
worth more than $843bn across 165 countries, over 18 years to the end of 2017.
The AidData
researchers estimated that existing debts stemming from Chinese lending are
“substantially larger” than previously understood by credit rating agencies and
other intergovernmental organisations with surveillance responsibilities.
“It really
took my breath away when we first discovered that [$385bn figure],” Brad Parks,
executive director of the AidData team, told the Financial Times.
The pace of
lending on the Belt and Road has slowed over the past two years. And this year
the US has led a G7 effort to counter Beijing’s dominance in international
development finance.
But the
report highlights the lasting effects of a sharp transition since Xi launched
the Belt and Road plan in 2013.
Where
Chinese lending was previously mostly directed to sovereign borrowers such as
central banks, now, close to 70 per cent of China’s foreign debt is issued
across state-owned companies, state-owned banks, special purpose vehicles,
joint ventures and private sector institutions.
More than
40 lower- and middle-income countries (LMIC) now have levels of debt exposure
to China higher than 10 per cent of their national gross domestic product,
AidData estimated.
And the
average LMIC government is under-reporting repayment obligations to China by an
equivalent of nearly 6 per cent of GDP.
“These
debts for the most part do not appear on government balance sheets in
developing countries. The key thing is that most of them benefit from explicit
or implicit forms of host government liability protection. That is basically
blurring the distinction between private and public debt,” Parks said.
The report
was released as international debate rages over fears that China has pushed
developing countries into so-called debt traps, which could ultimately result
in Beijing seizing assets when debts are not repaid.
Some
critics argue that the concerns have been wildly overblown amid broader fears
over the expansion of Chinese interests abroad under Xi.
A 2020
study by the China Africa Research Initiative at the Johns Hopkins University
found that between 2000 and 2019 China cancelled $3.4bn of debt in Africa and a
further $15bn was restructured or refinanced. No assets were seized.
Parks said,
however, that while the “media myth that has developed over time is that the
Chinese like to collateralise on physical, illiquid assets”, the latest
research suggests that collateralisation of liquid assets is common.
“It is true
that Chinese state-owned lenders have a strong preference for
collateralisation: we find 44 per cent of the overall lending portfolio was
collateralised, and when the stakes are really high, that’s when they turn to
collateral,” he said.
“What’s
happening is that the Chinese state-owned bank is set on requiring the borrower
to maintain a minimum cash balance in an offshore bank account, or an escrow
account, that the lender itself controls.”
Such
contingent liabilities from the hidden debts loomed “almost like a phantom
menace” for many countries, Parks said.
“If you’re
in a finance ministry in a developing country the challenge of managing hidden
Chinese debt is less about knowing that you will need to service undisclosed
debts with known monetary values to China. It is more about not knowing the
monetary value of debts to China that you may or may not have to service in the
future,” Parks said.
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