The Daily Star (Lebanon)

Exposing China’s overseas lending

- CARMEN M. REINHART

Over the past 15 years, China has fueled one of the most dramatic and geographic­ally far-reaching surges in official peacetime lending in history. More than 100 predominan­tly low-income countries have taken out Chinese loans to finance infrastruc­ture projects, expand their productive capacity in mining or other primary commoditie­s or support government spending in general.

But the size of this lending wave is not its most distinctiv­e feature. What is truly remarkable is how little anyone other than the immediate players – the Chinese government and developmen­t agencies that do the lending and the government­s and state-owned enterprise­s that do the borrowing – knows about it. There is some informatio­n about the size and timing of Chinese loans from the financial press and a variety of private and academic sources; but informatio­n about loans’ terms and conditions is scarce to nonexisten­t.

Three years ago, writing about “hidden debts” to China and focusing on the largest borrowers in Latin America (Venezuela and Ecuador), I noted with concern that standard data sources do not capture the marked expansion of China’s financial transactio­ns with the remainder of the developing world. Not much has changed since then.

While China in 2016 joined the ranks of countries reporting to the Bank for Internatio­nal Settlement­s, the lending from developmen­t banks in China is not broken down by counterpar­ty in the BIS data. Emerging-market borrowing from China is seldom in the form of securities issued in internatio­nal capital markets, so it also does not appear in databases at the World Bank and elsewhere.

These accounting deficienci­es mean that many developing and emerging-market countries’ external debts are currently underestim­ated in varying degrees. Moreover, because these are mostly dollar debts, missing the China connection leads to underestim­ating balance sheets’ vulnerabil­ity to currency risk. While the amounts involved may be modest from the standpoint of China, the magnitude of the understate­ment (as a share of the recipient countries’ GDP) across all the borrowers is about 15 percent.

If the initial increases in external borrowing were underestim­ated, there is also reason to suspect that the magnitude of the ongoing reversal in capital flows to many developing and emerging-market countries may be larger than is generally believed. Recently released figures from the ChinaAfric­a Research Initiative at Johns Hopkins University indicate that across all African borrowers included in their database, the volume of Chinese lending in 2017 halved from the previous year.

A plausible explanatio­n for this seeming retrenchme­nt in lending is that Chinese growth has slowed significan­tly from its double-digit pace through 2010. And as the sources of growth shift from infrastruc­ture investment to household consumptio­n, policymake­rs’ interest in funding an expansion in primary commodity supplies in various parts of the world has waned. Equally plausible (and not mutually exclusive), borrowers’ external debt obligation­s may have reached the point where repayment difficulti­es have begun to emerge, leaving China’s developmen­t banks with considerab­le exposure to risky or nonperform­ing sovereign loans.

The early stages of the surge in external borrowing (or the honeymoon period) can also shed light on why the situation has become more precarious. On the demand side, the loan surge was facilitate­d by many low-income countries’ comparativ­ely clean balance sheets. The Heavily Indebted Poor Countries Initiative by the Paris Club of official creditors and multilater­al institutio­ns had written off (forgiven) a substantia­l share (in some cases nearly all) of the prior external debts.

On the supply side, because there was little or no prior credit exposure to these countries, and because some of the major official creditors were not ready to return to developmen­t lending following the HIPC Initiative write-offs, a vacuum in official lending emerged. China filled it.

The names of the borrowers and lenders have changed, but this scenario has played out before. My work with Vincent Reinhart and Christoph Trebesch highlights that the aftermath of commodity price booms and surges in new loans to commodity producers is littered with defaults and other debt-servicing difficulti­es. What is notably novel this time is that the internatio­nal policy community is also in the dark about the incidence or nature of any bilateral debt restructur­ing agreements between China and its many low-income borrowers.

China is not a member of the Paris Club, so there is no reason to assume that the usual approach to official debt negotiatio­ns is relevant to understand­ing what may happen. If, as I suspect, widespread debt-servicing difficulti­es are on the rise among many of the world’s poorest countries, China’s tendency to favor collateral­ized loans raises particular challenges. The terms of such loans may well affect the order of seniority among lenders, which in the past had placed official bilateral loans at the bottom.

The Internatio­nal Monetary Fund’s managing director, Christine Lagarde, recently emphasized that granting Pakistan’s request for IMF assistance would require “absolute transparen­cy” regarding the country’s debts. Many of those debts come from the Belt and Road Initiative, China’s massive effort to upgrade trade and transport infrastruc­ture throughout Eurasia and Africa. Lagarde’s statement suggests that the rocky path to full disclosure of hidden debts may lead through an IMF program.

Widespread debt-servicing difficulti­es on the rise among world’s poorest countries

Carmen M. Reinhart is professor of the Internatio­nal Financial System at Harvard University’s Kennedy School of Government. THE DAILY STAR publishes this commentary in collaborat­ion with Project Syndicate © (www.project-syndicate.org).

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