China owed $385bn – including ‘hidden debt’ from poorer nations, says report

Researchers have identified debts of at least $385bn (£286bn) owed by 165 countries to China for ”belt and road initiative” (BRI) projects, with loans systematically underreported to international bodies such as the World Bank.




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Photograph: Xinhua/Rex/Shutterstock

The four-year study by US-based research lab AidData said the debt burdens were kept off the public balance sheets through the use of special purpose and semi-private loans, and were “substantially larger than research institutions, credit rating agencies, or intergovernmental organisations with surveillance responsibilities previously understood”.




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Photo taken in December 2020 shows the construction site at the Luang Prabang station in Laos, part of the BRI China-Laos railway project.

It found 42 low-to-middle income countries (LMICs) had debt exposure to China exceeding 10% of their GDP, including Laos, Papua New Guinea, the Maldives, Brunei, Cambodia and Myanmar.

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Laos had significant proportions of its debt classed by AidData as “hidden”, the report revealed. The $5.9bn China-Laos railway project is funded entirely with unofficial debt equivalent to about a third of its GDP.

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The BRI was launched in 2013 as Xi Jinping’s signature international investment programme. Hundreds of predominately low-to-middle income countries have signed up for Chinese loans towards massive infrastructure projects, but it is now facing competition from the G7’s “build back better world” infrastructure initiative.

In the report, AidData examined more than 13,000 BRI projects worth more than $843bn in 165 countries between 2000 and 2017. It found China’s overseas lending had dramatically shifted from government-to-government loans during the pre-BRI era, to almost 70% now going to state-owned companies and banks, joint ventures, private institutions, and special purpose vehicles (SPVs).

This had led to extensive underreporting of repayment obligations – to an estimated $385bn – because the primary borrowers are no longer central government institutions with stricter reporting requirements.

“These debts, for the most part, do not appear on government balance sheets in LMICs,” the report said. “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.”

AidData said global organisations such as the World Bank and International Monetary Fund were aware of the problem generally but the report quantified the alarming scale.




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Egypt’s new administrative capital, partly funded by the BRI, east of Cairo. Photograph: Khaled Elfiqi/EPA

Amid growing controversy around the initiative, and pushback from some governments that have sought to scrap or renegotiate projects, BRI lending has slowed in recent years, but the earlier debts remain. In 2019, Xi pledged to increase transparency and financial stability in the programme, and to have a “zero tolerance for corruption”.

While hundreds of countries have signed up to the BRI, there have been long-running concerns about transparency, and suggestions that massive loans to high-risk countries were enabling “debt book diplomacy” in some – but not all – regions, forcing them to cede ownership or control of major assets to Beijing in lieu of repayment.

However, the report noted asset seizure in lieu of repayment was only allowed in direct government loans, while the increasingly frequent arrangements made via SPVs and other semi-private mechanisms saw repayments taken from the revenue generated by the funded projects.

The shift towards the latter increased the risk to Chinese lenders, but the report said it was a “necessary work-around” if the lenders wanted to fulfil Xi’s BRI goals, because many countries were already laden with debt and not officially able to take on much more.

“Many poor governments could not take on any more loans,” AidData executive director Brad Parks told AFP. “So [China] got creative.”

Peter Cai, a research fellow at the Australia-based Lowy Institute, said it would be difficult to enforce the debt repayments, particularly where there was civil unrest or poor governance. “There’s always a problem of enforceability,” he said.

The report also found China had rapidly scaled up its provision of loans to resource-rich countries that have high levels of corruption, and 35% of BRI projects had faced issues of corruption, labour violations, environmental pollution and public protests.

“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 collateralisation),” the report said, noting 40 of the 50 largest loans were collateralised, often against future commodity exports.

Russia secured loans and export credits worth $125bn, mostly contracted by Russian state-owned oil and gas enterprises, collateralised with the proceeds from oil and gas sales to China. Venezuela secured $86bn in non-concessional and semi-concessional debt from China’s state-owned policy and commercial banks, mostly through loans collateralised against future oil exports.

AidData said a separate but related finding showed Beijing was disproportionately lending to countries that performed poorly on conventional measures of credit worthiness, in contrast to other international lenders, but demanded far higher interest rates with shorter repayment periods.

Cai noted the case of Pakistan, which Asia Nikkei reported had Chinese loans with average interest rates of 3.76%, compared with a typical OECD-linked loan’s rate of 1.1%.

“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,” he said.

China’s foreign ministry said in a statement that “not all debts are unsustainable”, adding that since its launch the BRI had “consistently upheld principles of shared consultation, shared contributions and shared benefits”.

Additional reporting by AFP

Source: Thanks msn.com