Financial experts have warned that even more dangerous than a growing debt –is one shrouded in secrecy.
However, a new study has found that about half of China’s loans to developing countries are ‘hidden.’
According to a CNBC World Economy report, because of the hidden debt, China’s loans to other countries are considered higher.
Such “hidden” debt means that the borrowing isn’t reported to or recorded by official institutions such as the International Monetary Fund (IMF), or the World Bank, the report outlined.
CNBC went on to point out that for 50 developing countries which have borrowed from China, that debt has increased on average from less than 1% of their GDP in 2015 to more than 15% in 2017, according to estimates by the study’s researchers.
“Advanced and higher middle income countries tend to receive portfolio debt flows, via sovereign bond purchases of the People’s Bank of China,” the report said.
As a result, many advanced countries have become highly indebted towards the Chinese government.”
It further added that “lower income developing economies mostly receive direct loans from China’s state owned banks, often at market rates and backed by collateral such as oil.”
Much of the lending is done through two policy banks — China Development Bank and Export-Import Bank of China.
Estimates suggest that China now accounts for a quarter of total bank lending to emerging markets, according to the study.
China has been criticized for saddling many countries with debt through its Belt and Road Initiative — a mammoth global infrastructure investment plan to build rail, road, sea and other routes stretching from China to Central Asia, Africa and Europe.
The documentation of China’s lending has been at best described as “opaque,” the report said, with such transactions “missed even by the most ambitious recent attempts to measure international capital flows.”
The problem of this hidden debt is particularly “severe” in countries such as Venezuela, Iran and Zimbabwe, the report said.
Hidden debt could be an issue in tackling debt sustainability in such developing economies if the exact amounts owed to China aren’t known, which the World Bank and IMF have previously flagged.
That effort includes analyzing countries’ debt burdens, and coming up with recommendations for a borrowing strategy that limits the risk of debt distress.
China’s practice of lending to those countries also differs from other lenders such as the World Bank, adding to the challenge of helping them resolve their debt problems.
While the official institutions lend to developing countries at below-market interest rates, China often lends at market rates and at shorter loan periods, the study noted.
The Asian giant, too, often demands collateral that requires repayment in kind, such as oil exports — adding to the opaque nature of those loans.
Last year, the World Bank referred to one such instance of Chinese loans to Venezuela, which were denominated in barrels of oil.
In addition, “Almost all of China’s overseas lending is extended via Chinese state-owned entities and the recipients also tend to be state-owned enterprises,” the report said.
“As a result, the debtor countries themselves have an incomplete picture on how much they have borrowed from China and under which conditions,” researchers wrote in the report.
The region’s most indebted to China are countries in central and Far East Asia, such as Laos and Cambodia, with those in Latin America next on the list.
Debt flows to Eastern Europe are smaller, but credit amounts extended to Europe are increasing, according to the report.
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