Chinese loans leave developing countries $ 385 billion in hidden debt

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Railway workers inspect a Kenya Railways freight train before it departs from the port station in Mombasa, Kenya on Saturday, September 1, 2018.

Bloomberg | Getty Images

China’s Belt and Road Initiative has caused dozens of low- and middle-income countries to accumulate $ 385 billion in “hidden debt” to Beijing, according to a new study.

AidData, an international development research lab based at Virginia’s College of William & Mary, analyzed 13,427 Chinese development projects worth a combined $ 843 billion in 165 countries, over an 18-year period up to the end of 2017.

China has provided record amounts of funding to developing countries over the past two decades, supporting both public and private sector projects. The Belt and Road Initiative is President Xi Jinping’s flagship foreign policy initiative; Launched in 2013 to invest in nearly 70 countries and international organizations, it has propelled China to global dominance in international development finance.

The United States plans to develop a similar program in South America, and the EU announced in September that it is launching a global ‘Global Gateway’ program, as the two regions seek to challenge financial and geopolitical influence. China’s massive impact in the developing world.

Chinese President Xi Jinping and South African President Cyril Ramaphosa (not pictured) deliver remarks at the opening ceremony of the high-level dialogue between South African and Chinese scientists between scientists from the two countries, the July 24, 2018, in Pretoria, South Africa.

Sheng Jiapeng | China Information Service | VCG

China currently spends at least twice as much on international development funding as the United States and other major economic powers, according to AidData report – about $ 85 billion per year.

However, this often takes the form of debt rather than aid, and this imbalance has accelerated in recent years. Since the introduction of the Belt and Road, China has provided 31 loans for 1 grant, according to the report.

The modalities of financing transactions remain somewhat opaque, with a lack of detailed information causing investor reluctance in recent years in some low- and middle-income countries, such as Zambia.

China has long denied pushing developing countries into so-called debt traps, which could pave the way for Beijing to seize assets as collateral for unpaid debts.

However, concerns have been expressed since the inception of the Belt and Road (BRI) that loans may be higher than those officially reported in many low- and middle-income countries. AidData collectively estimates that underreported debt is worth around $ 385 billion.

CNBC has contacted the Chinese embassies in London and Washington for comment on AidData’s report.

“During the pre-BIS era, the majority of Chinese overseas loans went to sovereign borrowers (ie central government institutions),” the researchers said.

“However, a major transition has taken place since then: nearly 70% of Chinese loans abroad are now going to state-owned enterprises, state-owned banks, special-purpose vehicles, joint ventures and private sector institutions.”

These debts often do not appear on the balance sheets of country governments, but many of them are guaranteed by their governments, blurring the lines between private and public debt and creating fiscal challenges for countries. These guarantees can be explicit or implicit, in the sense that public or political pressure could force the government to bail out a financially troubled company.

The researchers found that these countries’ debts to China are significantly larger than estimated by international research institutions, credit rating agencies or intergovernmental organizations. The report claims that 42 countries now have a public debt to China that exceeds 10% of their GDP.

“These debts are systematically underreported to the World Bank’s Debtor Notification System (DRS) because, in many cases, central government institutions in LMICs [lower- and middle-income countries] are not the primary borrowers responsible for the repayment, ”the report said.

“We estimate that the average government under-declares its actual and potential repayment obligations to China by an amount equivalent to 5.8% of its GDP.”

This would collectively represent around $ 385 billion, and AidData suggested that managing these hidden debts has become a “major challenge” for many affected countries.

“The problem of ‘hidden debt’ is less about governments knowing that they will have to repay undisclosed debts (with known monetary values) to China than it is about governments that do not know about the monetary value of debts to China that they may or may not have to pay for service in the future, ”the researchers added.

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