World Indebtedness to Munificent China

"Many poor governments could not take on any more loans. So [China] got creative."

"[Instead loans were handed to a] constellation of sectors other than central government [often backed by a government guarantee]."

"The contracts are murky, and governments themselves don't know the exact monetary values they owe to China."

"What we're seeing right now with the Belt and Road Initiative is buyers' remorse."

"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."

Brad Parks, executive director, AidData, U.S.-based research firm

"These debts, for the most part, do not appear on government balance sheets in LMICs [low and middle-income countries]."

"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."

"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 collaterization]."

AidData report

 

Chinese President Xi Jinping, in response to criticism, promised in 2019 that his country's ambitious Belt and Road Initiative would be subject to increased transparency in program financial stability and that there would be "zero tolerance for corruption". Of course, China's ruling Communist Party fails to equate sharp business practise with corruption. They're just going about their transactions in fairly unconventional ways that also happen to screen them from too much unwanted scrutiny. Until a reviewer who knows what to look for reveals the presence of unscrupulous methodology.

A total of one hundred, sixty-five countries are now indebted to China. Which had unveiled a bold new plan to resurrect a modern, improved "Silk Road" of enhanced trade opportunities where all roads lead inevitably to China. A vast network of highways, bridges and other communication infrastructure was to be built in low- and medium-income countries who badly needed modernized transport infrastructure and China made an irresistible offer to build and finance them on a loan basis with tantalizing terms.

Those countries that took the bait are now in a position of facing a total of $385 billion in hidden debts through their participation in the BRI. In the case of 42 poorer countries, debt exceeding ten percent of their individual GDP has become their reality. There are some loans revealed through AidData research that have been under-reported to the World Bank, are off the public balance sheets through a system of special purpose and semi-private loans.

The revelations by that research indicate that loans are "substantially greater" than the data in possession of research institutions, credit rating agencies or intergovernmental organizations with surveillance responsibilities "previously understood" to be the case, according to the study. The World Bank and International Monetary Fund, were said to be aware of problems, but the report gave substance to the scale of just how much was beyond their purview, going under-reported.

 

 

China's overseas lending dramatically underwent change from government-to-government loans to the point where close to 70 percent of the financing was transferred to state-owned companies, banks, joint ventures, private institutions and special purpose vehicles. Which resulted in an estimated $385 billion of debt under-reported with the lenders no longer central government bodies attached to strict transparency.

When Beijing originally developed its BRI in 2013 with a view of investing in global infrastructure hundreds of countries across Central Asia and Africa including low- to middle-income countries, signed up for the investment program launched by President Xi Jinping. Some of those same countries anxious not to miss an opportunity to advance their trade potentials are now rethinking their original enthusiasm. Laos, Papua New Guinea, the Maldives Brunei, Cambodia and Myanmar are part of the list of nations owing debt in excess of ten percent of their GDP.

 

The Yuxi-Mohan railway between China and Laos under construction in May 2019 in China's Yunnan Province.   Getty Images

 

Part of the debt accumulated by Laos as 'hidden debt' was found to be quite significant through research, where the $5.9 billion China-Laos railway project funded entirely with unofficial debt is equivalent to about a third of the impecunious country's GDP. China focused on  countries rich in resources with corruption at high levels for increased loan provisions. The report notes that 35 percent of BRI projects were rife with corruption, faced labour violations, environmental pollution, and public protests.

Countries with traditionally poor performance on conventional measures of credit-worthiness saw China increasing its provisions of loans there in comparison to other international lenders; at the same time imposing much higher interest rates, alongside shorter repayment periods. Of the 50 largest loans, forty were collateralized, generally against future commodity exports. Whatever the scenario, China came out winning, its client countries hooked and sunk.

The arrangement for Pakistan saw Chinese loans with average interest rates of 3.76 percent -- in comparison to an OECD-linked loan rate of 1.1 percent. "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", explained Peter Call, a research fellow at the Australia-based Lowy Institute.  The Center for Global Development in 2018 found Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro Pakistan and Tajikistan owing over half of all their foreign debt to Beijing.

China systematically underreports its debt to the World Bank's Debtor Reporting System by lending money through special purpose vehicles, a study reveals. (Source photos by AP and Reuters)