China owes $385 billion – including ‘hidden debt’ from poorer nations, report says | China

Researchers have identified at least $385 billion (£286 billion) in debt owed by 165 countries to China Belt and Road Initiative (BRI) projects., with loans being systematically underreported to international bodies such as the World Bank.

The four-year study by US-based research lab AidData says that the use of ring-fenced and semi-private loans kept the debt burden off public balance sheets and “was significantly greater than that of any research institute, rating agency, or intergovernmental organization with previously understood oversight responsibilities.”

It turned out that 42 low-middle-income countries (LMICs) were exposed to debt China account for more than 10% of their GDP, including Laos, Papua New Guinea, the Maldives, Brunei, Cambodia and Myanmar.

Laos had significant chunks of its debt classified as “hidden” by AidData, the report revealed. The $5.9 billion China-Laos railway project is funded entirely with unofficial debt equivalent to about a third of GDP.

The BRI was launched in 2013 as Xi Jinping’s signature international investment program. Hundreds of mostly low- and middle-income countries have signed up for Chinese loans for massive infrastructure projects, but they now face competition from the G7.rebuild a better world” infrastructure initiative.

In the report, AidData examined more than 13,000 BRI projects worth more than $843 billion between 2000 and 2017, now to state-owned companies and banks, joint ventures, private institutions and special purpose vehicles (SPVs).

This had resulted in extensive underreporting of repayment obligations – at an estimated US$385 billion – as the primary borrowers are no longer central government institutions with stricter reporting requirements.

“For the most part, this debt does not appear on the government balance sheets of LMICs,” the report said. “Nevertheless, 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 has presented LMICs with major public financial management challenges.”

AidData said global organizations like the World Bank and the International Monetary Fund are generally aware of the problem, but the report quantifies the alarming magnitude.

Egypt’s new administrative capital, partly funded by the BRI, east of Cairo. Photo: Khaled Elfiqi/EPA

Amid growing controversy over the initiative and resistance from some governments trying to scrap or renegotiate projects, BRI lending has slowed in recent years, but previous debts remain. In 2019, Xi vowed to increase the program’s transparency and financial stability and to have “zero tolerance for corruption.”

While more than 100 Countries have joined the BRI, there have been long-standing concerns about transparency and proposals that it would allow massive lending to high-risk countries “Debt Book Diplomacy” in some – but not all – Regions forcing them to cede ownership or control of large assets to Beijing in lieu of repayment.

However, the report found that only direct government loans allowed asset confiscation in lieu of repayment, while the increasingly common arrangements through SPVs and other semi-private mechanisms involved repayments out of the proceeds of the funded projects.

The shift towards the latter increased the risk for Chinese lenders, but the report said it was a “necessary workaround” if lenders were to meet Xi’s BRI targets, as many countries are already burdened with debt and officially unable be able to accommodate them much more.

“Many poor governments were unable to borrow,” AidData executive director Brad Parks told AFP. “So [China] become creative.”

Peter Cai, a research fellow at the Australia-based Lowy Institute, said debt repayments are difficult to get through, especially in times of civil unrest or poor governance. “There’s always an issue of enforceability,” he said.

The report also found that China had rapidly expanded its lending to resource-rich countries with high levels of corruption, and 35% of BRI projects faced problems such as corruption, labor rights violations, environmental pollution and public protests.

“Beijing is more willing than other official lenders to fund projects in risky countries, but it is also more aggressive than its peers in positioning itself at the top of the repayment line (via collateral),” the report said , which names 40 of the 50 largest loans were collateralised, often against future commodity exports.

Russia secured $125 billion worth of loans and export credits, mostly originated by Russian state oil and gas companies and backed by the proceeds of oil and gas sales to China. Venezuela secured $86 billion in non-concessional and semi-concessional debt from China’s state political and commercial banks, mostly through loans backed by future oil exports.

AidData said a separate but related finding shows that Beijing, unlike other international lenders, disproportionately lends to countries that score poorly on conventional creditworthiness measures but charge far higher interest rates with shorter repayment periods.

Cai mentioned the case of Pakistan, where Asia Nikkei reported that there were Chinese loans with average interest rates of 3.76%, compared to a typical rate for OECD-linked loans of 1.1%.

“Many banks would not even lend money to Pakistan. If you can secure a loan, you have to pay the higher risk premium,” he said.

China’s foreign ministry said in a statement that “not all debt is unsustainable,” adding that since its inception, the BRI has “consistently upheld the principles of joint consultation, joint contribution and joint benefit.”

Additional coverage from AFP

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