Thursday, September 30, 2021

China owed US$385B in loans from 165 countries, including 'hidden debt' from poor nations: report


China owed US$385B in loans from 165 countries, including 'hidden debt' from poor nations: report

The study found 42 low to middle-income countries, such as Laos, Papua New Guinea, the Maldives, owe debt to China exceeding 10% of their of their GDP

Sep 30, 2021

The loans are “substantially greater” than research institutions, credit rating agencies or intergovernmental organizations with surveillance responsibilities “previously understood,” reads the study published on Wednesday

Global organizations such as the World Bank and International Monetary Fund were aware of the problem, AidData stated, but the report quantified the scale of how much went underreported.

Over 13,000 BRI projects worth more than US$843 billion had been analyzed in 165 countries between 2000 and 2017. AidData found that China’s overseas lending had dramatically changed from government-to-government loans, to almost 70 per cent of the financing going to state-owned companies, banks, joint ventures, private institutions and special purpose vehicles (SPVs)

Loans instead were handed to “constellation of actors other than central governments” but often backed by a government guarantee, he explained.

“The contracts are murky, and governments themselves don’t know the exact monetary values they owe to China,” he said.

As a result, an estimated US$385 billion of debt went underreported as the main borrowers were no longer central government bodies, bound by strict transparency requirements.

“These debts, for the most part, do not appear on government balance sheets in LMICs,” the report said. “However, most of them benefit from explicit or implicit forms of host government liability protection, which has blurred the distinction between private and public debt and introduced major public financial management challenges to LMICs.”

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The Chinese government developed the belt-and-road initiative (BRI) in 2013 to invest in global infrastructure in several countries and international bodies. Hundreds of countries, including several low to middle-income ones across Central Asia and Africa, signed up for Chinese President Xi Jinping’s signature investment programme but the accumulating debt has prompted some to rethink the deal.

Countries including Laos, Papua New Guinea, the Maldives, Brunei, Cambodia and Myanmar are included in the list of nations owing debt exceeding 10 per cent of their GDP to China, the report found.

AidData classified significant portions of the debt accumulated by Laos as ‘hidden debt’, the report stated. The US$5.9 billion China-Laos railway project is funded entirely with unofficial debt equivalent to approximately third of the country’s GDP.\

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The report also found that China increased provision of loans to countries rich in resources with high-levels of corruption and noted that 35 per cent of BRI projects had issues of corruption, faced labour violations, environmental pollution and public protests.

In a separate finding, AidData found that Beijing was lending more to countries with poor performance on conventional measures of credit worthiness compared to other international lenders, but required much higher interest rates with shorter repayment period.

“Beijing is more willing to bankroll projects in risky countries than other official creditors, but it is also more aggressive than its peers at positioning itself at the front of the repayment line (via collateralization),” the report said. Forty of the 50 largest loans were also collateralized, usually against future commodity exports'.

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Pakistan, for example, had Chinese loans with average interest rates of 3.76 per cent, compared with a typical OECD (Organization for Economic Co-Operation and Development)-linked loan’s rate of 1.1 per cent.

“A lot of banks wouldn’t even lend to Pakistan. If you’re able to secure a loan you have to pay the higher risk premium,” Peter Cai, a research fellow at the Australia-based Lowy Institute told the Guardian.

In 2018, the Center for Global Development found that Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan – countries among the poorest in their respective regions — will owe more than half all their foreign debt to China.

Several experts have suggested that the massive loans to high-risk countries has resulted in  “debt book diplomacy,” in which the indebted cede ownership or control of major assets to Beijing.

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Sri Lanka’s government, for example, leased a port to a Chinese company for 99 years after struggling to make payments, the Guardian reported.

The report noted asset seizure in lieu of repayment was only allowed in direct government loans, but increasing arrangements made with SPVs and other semi-private lenders led to repayments withdrawn from the revenue created by the funded projects.

The criticisms around the transparency and reports of corruptions within the BRI projects have ignited pushback from some governments with buyers remorse, slowing down BRI lending in recent years.

“What we’re seeing right now with the Belt and Road Initiative is buyers’ remorse,” Parks told France24.

“Many foreign leaders who were initially eager to jump on the BRI bandwagon are now suspending or cancelling Chinese infrastructure projects because of debt sustainability concerns.”

In 2019, Xi promised to increase transparency in financial stability in the programme, pledging “zero tolerance for corruption.”

The Group of Seven nations, which include France, Canada, Germany, Italy, Japan, U.S., and the U.K., announced a green initiative in June to counter Xi’s growing assertiveness as a result of the global infrastructure scheme.

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