Commentary on Political Economy

Wednesday 29 September 2021

 ‘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

A section of the China-Laos railway under construction near Luang Prabang, Laos in 2018

The China-Laos railway under construction near Luang Prabang, Laos in 2018. Concern is mounting that Beijing will seize assets from countries pushed into ‘debt traps’ with China © Taylor Weidman/Bloomberg


September 28, 2021 11:01 pm by Edward White in Seoul

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.


The graveyard of empires calls to China

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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