KARACHI -- A staggering $385 billion of Chinese debt to other countries has been hidden from the World Bank and IMF thanks to the way the loans are structured, U.S.-based AidData said on Wednesday in its latest version of the Global Chinese Official Finance Dataset. The report also alleges that a major portion of Chinese development financing in Pakistan is composed of expensive loans.
The AidData report claims Beijing has made its overseas development finance nontransparent. It says that China systematically underreports its debt to the World Bank's Debtor Reporting System by lending money to private companies in lower middle income countries by using special purpose vehicles (SPVs), rather than to state institutions.
This makes it difficult for debtors and multilateral lenders to assess the costs and benefits of participating in the Belt and Road Initiative. It also heightens the possibility of debtors falling into debt traps with only one way to climb out: by selling geopolitically important assets to China.
The report further says that due to debt spending by China under the banner of the Belt and Road Initiative, 42 countries now have levels of public debt exposure to China in excess of 10% of GDP. For instance, the China Exim Bank-financed China-Laos railway project, valued at $5.9 billion -- equivalent to roughly one-third of Laos' GDP -- is funded exclusively with hidden debt.
Bradley C. Parks, executive director of AidData at the College of William and Mary, said the World Bank and the IMF are already aware of this problem. He told Nikkei Asia that this new report has quantified the scale of the problem.
"We estimate that an average government is underreporting its actual and potential repayment obligations to China by an amount that is equivalent to 5.8% of its GDP, based on individual underreporting estimates for 165 countries," said Parks, who is also one of the co-authors of the report.
The report also makes some interesting revelations about Chinese development financing in Pakistan in the context of the China-Pakistan Economic Corridor (CPEC), the $50 billion Pakistan component of Belt and Road.
As per the report, between 2000 and 2017, China made total commitments worth $34.3 billion for development financing in Pakistan, out of which at least $27.8 billion has been official commercial-like loans with limited concessions.
This report also says Chinese loans to Pakistan are expensive compared to loans provided by Organization for Economic Cooperation and Development's Development Assistance Committee (OECD-DAC) and multilateral creditors to Pakistan. The average Chinese loan to Pakistan, it says, has an interest rate of 3.76%, a maturity period of 13.2 years and a grace period of 4.3 years.
"As a point of comparison, a typical loan from an OECD-DAC lender like Germany, France or Japan carries a 1.1% interest rate and a repayment period of 28 years, much generous than what China has offered to Islamabad," Ammar Malik, a senior AidData research scientist who leads the Tracking Underreported Financial Flows program, told Nikkei.
Despite the high cost, lower-middle-income countries like Pakistan accept the loans offered by China to private entities in their countries. Experts believe that these countries accept the loans because they do not appear in their balance sheets.
The Yuxi-Mohan railway between China and Laos under construction in May 2019 in China's Yunnan Province. © Getty Images
"Borrowing via special purpose vehicles and joint ventures -- under off-balance sheet arrangements -- provides a way for a low-income or middle-income government to facilitate the implementation of large public infrastructure projects without going red in terms of debt limits," Parks said.
While the AidData report is based on data available till 2017, experts believe that there have not been any major changes in the pricing of loans from public institutions in China. "Beijing's state-owned banks have consistently given priority to profitable, revenue-generating projects. Chinese state-owned banks are yield-maximizing surrogates of the state," Parks said.
Despite the release of this report, the Chinese development financing pattern in Pakistan is unlikely to change.
"In the 10th JCC (Joint Cooperation Committee) meeting of CPEC (last week), Pakistan decided against renegotiating the terms of $15 billion energy projects, which were initially deemed expensive, because Pakistan needs China's finance," an official linked with CPEC projects in Pakistan told Nikkei on condition of anonymity.
The official added that Pakistan will continue to rely on Beijing for development financing, even if its terms are not concessional, because G-7 nations and other creditors are not very generous when it comes to financially supporting Pakistan.
Jeremy Garlick, associate professor of international relations at the University of Economics Prague, said Pakistan has been short of cash and looking for investments for decades. "The Chinese loans are rather expensive, but Pakistan has actively sought them. It is not as if the Chinese are imposing them upon Pakistan," he told Nikkei.
accidentaljurist on September 30th, 2021 at 09:38 UTC »
Quoting from the AidData report, in the abstract, the authors say:
On page 44, the report states:
The term that describes this practice in the private commercial world is called shadow banking. The tl;dr is that this practice entails the provision of financial services through non-bank financial entities, like SPVs, insurance companies, hedge funds, money market funds, private equity, etc. The purpose of such practices is to avoid liabilities on capital, lending and liquidity regulatory controls that tie the hands of banks but not other non-bank entities.
One doesn't need to be an expert to understand, especially after the 2008/09 financial crisis, why controls over minimum amounts of capital and liquidity are needed. These regulations require banks to keep a minimum amount of liquid assets relative to their total liabilities so that (a) a bank doesn't have a sudden collapse when "bad" debts which have metastasised gets called up and (b) the bank's debt problems don't spillover into other banks.
But it is rather surprising that the Chinese-banks and financial institutions have relied so much on off-balance sheet financing for sovereign loans, which are not subject to the same kind of capital and liquidity requirements at the international level, unless they are receiving some sort of developmental aid with conditions attached.
PHATsakk43 on September 29th, 2021 at 22:12 UTC »
This will quickly turn into a China problem if investors start dumping bonds from states with OBOR projects which could quickly spiral into default.
Does anyone know what the repayment currency requirements are for these loans? Local currency, RMB, or dollars? I can’t imagine Beijing would negotiate repayment in the host nation’s currency for obvious reasons.
HariSeldonOlivaw on September 29th, 2021 at 22:00 UTC »
It seems that much of the debt load coming out of China's Belt and Road initiative (OBOR) is actually not transparent at all, and so folks have been missing or failing to track debt loads. China obviously argues that it is not creating debt traps, and some have supported this claim. Yet public debt exposure to China keeps going up and up, and many of the OBOR projects in places like Pakistan are financed by expensive loans. This quote is huge:
That's a gigantic amount of money; for many countries, that's more than their annual deficit, which means their repayment obligations can be enough to double their deficit (or worse). China is obviously going to have more financial pressure levers on countries through this lending, including if it can utilize them behind closed doors (since this is nontransparent). This report may end up galvanizing or supporting the U.S. and EU push to provide their own "counter" to OBOR, for countries who might have thought China would be easier to work with, if only because those countries may be afraid to be more beholden to China in the end because of the loans being more expensive.