Ex­pos­ing China’s over­seas lend­ing

China has fu­eled an un­prece­dented surge in of­fi­cial lend­ing over the past 15 years. The most re­mark­able fea­ture of this wave of credit, how­ever, is not its size, but its dan­ger­ous lack of trans­parency.

Financial Nigeria Magazine - - Contents - Car­men M. Rein­hart is Pro­fes­sor of the In­ter­na­tional Fi­nan­cial Sys­tem at Har­vard Univer­sity's Kennedy School of Gov­ern­ment. Copy­right: Project Syn­di­cate

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 one hun­dred 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%.

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 (HIPC) 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 write­offs, 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 debt­ser­vic­ing dif­fi­cul­ties are on the rise among many of the world’s poor­est coun­tries, China’s ten­dency to favour 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.

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.

Car­men Rein­hart

Chi­nese Pres­i­dent Xi Jin­ping with some African lead­ers

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