Exposing China’s Overseas Lending

Oct 31, 2018 Carmen M. Reinhart

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.

CAMBRIDGE – 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.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Already have an account? Log in

Support High-Quality Commentary

US President-elect Joe Biden may have promised a “return to normalcy,” but the truth is that there is no going back. The world is changing in fundamental ways, and the actions the world takes in the next few years will be critical to lay the groundwork for a sustainable, secure, and prosperous future.

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world’s foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Subscribe Now

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 5 in all 5 Comments on this article

Paul Friesen Nov 7, 2018

I'm reserving judgment on this. Lack of transparency does not necessarily indicate a problem. Perhaps the Chinese just figure 'western' based talking heads don't really need to know what they are doing.

The 'west' has failed miserably to help the poor countries of the world industrialize. A few countries did industrialize using large amounts of aid - South Korea, Hong Kong, Taiwan, and Israel all received massive amounts of aid compared to what was offered to other countries. Other countries received comparatively tiny amounts, and often it was not even aimed at industrialization. "Small is beautiful" became the predominant ideology. They were also offered loans, but often with completely unrealistic expectations. Often, some kleptocrat was able to just take what was lent and leave the rest of the country to try to pay it off.

I doubt if China will do worse than that, and just possibly, it will do better. It seems to have understood that gains in other countries can help it, too. If done right, the "belt and road" initiative could succeed in creating a web of countries, all industrializing together, linked by trade. I don't know if China is doing it right or if it might just repeat the failed "western" initiative. I will wait and see.
A new reply to this comment has been posted.
Richard Turgeon Nov 1, 2018

The China Securities Depository & Clearing Corp shows nearly all companies listed on Chinese exchanges as having pledged some shares as collateral against bank loans. The value of loans secured by shares is estimated at RMB 4.5 trillion. With many stocks in China now down 30%, banks are beginning to liquidating shares which acts only to worsen the situation.
A new reply to this comment has been posted.
Godfree Roberts Oct 31, 2018

The total warfare on all fronts is being waged against Beijing, assisted and amplified by the corporate media. The empire’s propaganda machine is in overdrive, churning out fake news and lies on a 24/7 basis to smear and demonize China. One of such lies is the alleged neo-colonization of developing countries through debt traps sprung by China.

ADB data shows that the Asia-Pacific region needs an annual investment of $1.7 trillion for infrastructure development. That amount of money cannot be provided by any single country alone, and China is no exception.

SRI LANKA

Lie : Western media have spun tall tales that Sri Lanka, with Chinese loans up to its eyeballs, used 90% of government revenue to service Chinese debts and was forced to “cough up a port” to Beijing.

Fact : China accounted for only ONE-EIGHTH of Sri Lanka’s $65 billion debts. Beijing didn’t demand immediate payment of loans falling due from Colombo. Instead, China acceded to Sri Lanka’s request to restructure the loans. Colombo OFFERED to settle the loans past due by giving a 70% equity in the LOSS-MAKING Hambantota port to a Chinese company. To bring the port up to the operational level, the Chinese company has to spend another $700 million. No competing offer from other parties to take over the port was received before and after the restructuring proposal was completed.

PAKISTAN

Lie : Pakistan is entrapped and over-burdened by China’s massive loans to build China-Pakistan Economic Corridor or CPEC, and has to go cap in hand to IMF for money to overcome its chronic balance of payment deficit.

Fact : Islamabad has gone to IMF for loans 12 times over the last 30 years. IMF loan conditionalities mandating privatization and free current and capital accounts have stifled economic growth and facilitated capital flight in Pakistan for over a quarter of a century. According to the State Bank of Pakistan, the nation’s debt servicing in 2017 aggregated $5 billion, of which only $500 million or about 10% went to China. If we look at the loan portfolio, some 60% of foreign loans are owed to multilateral foreign institutions (42%) and members of the Paris Club (18%). The Chinese preferential loans constitute about 10% of the total. In addition, all Chinese loans for CPEC come with a 5-year repayment moratorium. The first loans aren’t repayable until 2022, and capped at $2 billion per year.

MALDIVES

Lie: Chinese loans to build/upgrade airports and bridges are almost 100 % of the archipelago’s GDP of $4.6 billion. Maldives pays $92 million in interest to China every year, equivalent to 10% of the nation’s annual budget.

Fact : China’s loans to Maldives are at most ONE-FIFTH of the nation’s GDP. Other principal creditors include the Gulf States, India and multilateral institutions, which together make up close to one-half of Maldives’ GDP.

The $92 million interest payment by Maldives is to ALL the country’s creditors, NOT just China. Interest paid to China each year is no more than $20 million. Male’s total annual interest bill of $92 million represents 10% of the operating expenditure, but only 5% of the total budget which includes both operating and capital expenditures.Given Maldives’ puny GDP, any major infrastructures such as airports mathematically amount to a large proportion of its GDP. The other alternative is not to build the infrastructures needed to boost growth. Maldives has experienced ballooning fiscal as well as balance of payment deficits precisely because its primary export earnings and tax revenue from fisheries are declining. Upgrading of airports to accommodate large jumbo jets to bring in a fast-growing number of tourists, especially from China, has become a must.

MALAYSIA

The new Malaysian government, a product of National Endowment for Democracy’s long game of regime change, has set out from Day 1 to paint the previous PM Najib as a kleptocrat who ran up staggering debts for vanity projects funded and built by China as part of the Belt and Road Initiative.

The Finance Minister claimed Malaysia’s national or external debts have exceeded a whopping 1 trillion Malaysian Ringgit or RM (equivalent to USD 240 billion), representing a high 74% of GDP. That figure was then used as a pretext by the new administration to cancel the $15-billion East Coast Railway project.

The RM 1 trillion debt claim can’t stand up to the barest of scrutiny. First of all, the amount includes contingent liabilities of RM 400 billion, namely guarantees by the federal government of third-party loans and lease payments. Such computation deviates from IMF methodology and convention. Even the major rating agencies disagree with the number.

Second, out of the RM 936 billion external or national debts, RM 741 billion are actually debts owed by private banks and businesses to foreign entities. The Malaysian government does NOT guarantee or bear any responsibility for such private-sector borrowings.

The true external debts of the federal government are about RM 170 billion or a modest 13% of GDP. Of that amount, China accounts for no more than ONE-FIFTH.

The real motivation and ultimate agenda of the new Mahathir administration in walking away from Chinese projects in Malaysia isn’t difficult to surmise.

AFRICA

“Of the 16 African countries rated by the IMF as in debt distress or at high risk of being so, on average 15% of their debt is owed to China. China is therefore on average a less significant lender in debt crisis countries than across the whole continent.” https://jubileedebt.org.uk

According to William Nyirenda, former Minister of Housing and Utilities of Libya, who is now a research fellow with the Center for Global Development, China only accounts for 2% of the $6 trillion external debt owned by African countries, with the main creditors being the World Bank, the IMF, and the Paris Club member states. According to the 2017 annual report by the Sri Lankan central bank, the country had a total external debt of $51.8 billion, out of which only 10.6% was financed by China, and 61% of China financed debts came with lower interest rates than the prevailing rates.
- Paul Friesen Nov 5, 2018
  
  Thanks for this. I have kept a copy
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
P. Kamath Oct 31, 2018

China has never been a philotropist nation. Its dealings were never transparent. Many nations who have borrowed have fallen into debt-trap. Mynmar, Sri Lanka, Maldives and soon the new prey-to be, Pakistan .
Because it couldn't meet financial payments, Sri Lanka was forced to lease an entire port of Hambanakota for a lease of 99 years ! So there are others too in the list!
A new reply to this comment has been posted.