China’s belt and road initiative has left many low- and middle-income countries sitting with ‘hidden debt’ totaling $ 385 billion.
New research suggests that the financial burdens of many countries related to President Xi Jinping’s distinctive foreign policy have been systematically under-reported for years. This has led to increasing ‘hidden debt’, or unknown liabilities that governments may have to pay.
The findings are part of a new report published by AidData, an international development research laboratory based at the William & Mary College in Virginia, which has more than 13,000 aid and debt-funded projects worth more than $ 843 billion in 165 countries, analyzed 18 years to end 2017.
AidData researchers estimate that existing debt arising from Chinese loans is ‘significantly larger’ than previously understood by credit rating agencies and other intergovernmental organizations with supervisory responsibilities.
‘It really took my breath away when we first discovered it [$385bn figure]”Brad Aks, executive director of the AidData team, told the Financial Times.
The borrowing rate on the Belt and Road has declined over the past two years. And this year, the US led an effort by the G7 to counter Beijing’s dominance in international development finance.
But the report highlights the lasting consequences of a sharp transition since Xi launched the Belt and Road plan in 2013.
Where in the past Chinese loans were mostly directed at sovereign lenders such as central banks, now almost 70 percent of China’s foreign debt is issued to state-owned enterprises, state-owned banks, special vehicles, joint ventures and private sector institutions.
More than 40 lower- and middle-income countries (LMICs) have now been exposed to debt exposures to China that exceed 10 percent of their national gross domestic product, according to AidData.
And the average LMIC government reports repayment obligations to China with an equivalent of nearly 6 percent of GDP.
‘This debt usually does not appear on the state’s balance sheets in developing countries. The important thing is that most of them benefit from explicit or implicit forms of liability protection against the host government. “It blurs the distinction between private and public debt,” Parks said.
The report was released while international debate raged over fears that China had driven in developing countries so-called debt traps, which could eventually lead to Beijing seizing assets when debt is not repaid.
Some critics argue that concerns have been wildly inflated amid growing fears about expanding Chinese interests abroad under Xi.
A 2020 study by the China Africa Research Initiative at Johns Hopkins University found that between 2000 and 2019, China canceled $ 3.4 billion in debt in Africa and that another $ 15 billion was restructured or refinanced. No assets were seized.
However, Parks said that although the ‘media myth that has developed over time is that the Chinese like to sponsor physical, illiquid assets’, the latest research suggests that collateralisation of liquid assets is common.
“It is true that Chinese government lenders have a strong preference for collateral: we find that 44 percent of the total loan portfolio has collateralized, and if the share is very high, it will switch to collateral,” he said.
‘What happens is that the state-owned Chinese bank requires the borrower to maintain a minimum cash balance in a foreign bank account or a savings account controlled by the borrower himself.
Such contingent liabilities due to the hidden debt have been “almost like a hypocritical threat” 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 of knowing that you have to pay unknown debts with known monetary values to China. “It’s more about not knowing the monetary value of debt to China that you may have to pay in the future,” Parks said.