How much has China lent to the poorest countries?

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Over the last 15 years, China has spawned one of the most spectacular and geographically deepest outbreaks of official peacetime lending. More than 100 mostly low-income countries have taken out Chinese loans to finance infrastructure projects, increase their production capacity in extractive industries or other primary products, or support public spending in general.

But the size of this loan wave is not its most distinctive feature. What is truly remarkable is that almost none other than the immediate actors – the Chinese government and the development agencies that provide the loans, and the governments and the SOEs that take out the loans – know about it. There is information on the size and timing of Chinese borrowings in the financial press and various private and academic sources, but information on the terms of such borrowings is scarce or non-existent.

Three years ago, talking about "hidden debts" vis-à-vis China and about the biggest borrowers of Latin America (Venezuela and Ecuador), I found with concern that the sources of Standard data did not reflect the marked expansion of China's financial transactions with the rest of the United States. developing world. Little has changed since then. While China joined the ranks of the countries reporting to the Bank for International Settlements in 2016, China's development bank loans are not broken down by counterpart in the BIS data. Bonds in emerging markets from China rarely take the form of securities issued on international capital markets. They do not appear in the databases of the World Bank or elsewhere.

These accounting deficiencies mean that the external debts of many developing and emerging countries are underestimated to varying degrees. Moreover, since it is mainly a dollar debt, losing the connection with China leads to underestimating the vulnerability of balance sheets to currency risk. Although the amounts at stake may be modest from China's point of view, the magnitude of underestimation (as a percentage of recipient countries' gross domestic product) for all borrowers is about 15%.

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While initial increases in external borrowing were underestimated, there is also reason to believe that the magnitude of the continued reversal of capital flows to many developing and emerging markets could be greater than expected. The recently released figures from the Johns Hopkins University's China-Africa Research Initiative indicate that, out of all the African borrowers included in their database, the volume of Chinese loans in 2017 has halved compared to the previous year.

A plausible explanation for this apparent contraction in lending is that Chinese growth has slowed considerably since 2010, when it recorded double-digit growth. supplies in various parts of the world have decreased. Just as plausibly (and not mutually exclusive), borrowers' external debt obligations may have reached the point where repayment difficulties began to appear, leaving Chinese development banks with significant exposure to risky sovereign loans. or not productive.

The early stages of booming external borrowing (or the honeymoon period) may also explain why the situation has become more precarious. On the demand side, the rise in lending has been facilitated by the relatively healthy balance sheets of many low-income countries. Heavily indebted poor countries, or HPICs, the Paris Club initiative of public creditors and multilateral institutions have written off (canceled) a substantial share (in almost all cases) of previous external debts. On the supply side, since there was previously little or no credit risk to these countries and some of the major official creditors were not ready to take over the loans in the past. development as a result of the delisting of the HPIC initiative, a void in official loans has emerged. China has filled it. The names of borrowers and lenders have changed, but this scenario was played before. My work with Vincent Reinhart and Christoph Trebesch shows that the consequences of soaring commodity prices and rising new lending to commodity producers are fraught with failures and other debt servicing problems. What is particularly innovative this time is that the international community of policymakers is also unaware of the impact or the nature of any bilateral debt restructuring agreement between China and its many low-income borrowers.

Since China is not a member of the Paris Club, there is therefore no reason to believe that the usual approach to formal debt negotiations is relevant to understanding what can happen. If, as I suspect, many of the world's poorest countries face widespread debt service difficulties, China's tendency to prefer secured lending poses particular problems. The terms of these loans may well affect the seniority of lenders, generally placing official bilateral loans at the bottom of the hierarchy.

The Managing Director of the International Monetary Fund, Christine Lagarde, recently pointed out that in order to respond to Pakistan's request to the IMF, "absolute transparency" would be needed with regard to the country's debt. Much of this debt comes from the Belt and Road Initiative, China's massive effort to improve trade and transport infrastructure in Eurasia and Africa. Lagarde's statement suggests that the path to full disclosure of hidden debt could go through an IMF program.

Carmen M. Reinhart is Professor of International Financial Systems at the Kennedy School of Government at Harvard University.
Copyright: Project Syndicate, 2018.