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A new study found under-reported debts of at least $385 billion owed by different countries to China in the past two decades, and that one-third of projects under the Belt and Road Initiative have run into major implementation problems.
The hidden debts, which slipped through the scrutiny of international lenders such as the World Bank and the International Monetary Fund (IMF), and credit rating agencies, mean borrowing countries may have to repay more than they think.
The findings are from a four-year study by AidData, an international development research lab based at William & Mary’s Global Research Institute in the United States.
“Chinese debt burdens are substantially larger than research institutions, credit rating agencies, or intergovernmental organizations with surveillance responsibilities previously understood,” the study said.
The reason is an increasing number of deals struck not directly between governments through central banks but through often opaque arrangements with a range of financing institutions, hence “the debt burdens were kept off the public balance sheets.”
The study said that nearly 70 percent of China’s overseas lending “is now directed to state-owned companies, state-owned banks, special purpose vehicles, joint ventures, and private sector institutions in recipient countries” rather than sovereign borrowers which are central government institutions.
According to Brad Parks, AidData’s executive director and a co-author of the report, “the hidden debt problem is getting worse over time.”
Most of the hidden debts occurred in projects under the Belt and Road Initiative (BRI), China’s ambitious international development program and President Xi Jinping’s brainchild. It was launched in 2013 under the original name One Belt, One Road.
The study also found that 35 percent of the BRI infrastructure project portfolio has encountered major implementation problems – such as corruption scandals, labor violations, environmental hazards and public protests.
‘Loanshark practices’
AidData studied 13,427 China-funded projects across 165 countries valued at $843 billion over an 18-year period and found that the average government “is under-reporting its actual and potential repayment obligations to China by an amount that is equivalent to 5.8 percent of its GDP.”
Collectively, these under-reported debts are valued at about $385 billion.
Forty-two developing countries, including Laos, Papua New Guinea, the Maldives, Brunei, Cambodia and Myanmar, now have levels of public debt exposure to China in excess of 10 percent of GDP, the study said.
The authors of the study said that Beijing has used debt rather than aid “to establish a dominant position in the international development finance market. Since the BRI was introduced in 2013, China has maintained a 31-to-1 ratio of loans to grants.”
Beijing’s lending to low- and middle-income countries is provided on less generous terms than loans from other lenders and multinational creditors.
“A typical loan from China has a 4.2 percent interest rate and a repayment period of less than 10 years,” compared to a typical loan with a 1.1 percent interest rate and a repayment period of 28 years from countries such as Germany, France or Japan.
“This is quite comparable to loanshark practices at the global level,” said Soumya Bhowmick, associate fellow at the Observer Research Foundation in Kolkata, India, who was not involved in the study.
“This is particularly worrisome because countries which are grappling with the double whammy of high public external debt, as well as high volumes of debt owed to China, highlight the precarious situation of their own public finances,” he said.
However, as developing countries are desperate to find money to finance their infrastructure projects, they seem to have no choice but reach out to Chinese lenders whose favorite risk mitigation tool is collaterization, or the use of the borrowing country’s valuable assets or natural resources.
Laos, for example, had to sell part of its national electricity grid to China in 2020 in exchange to debt relief from Chinese creditors.
Laos’ overall level of debt exposure to China is equivalent to 64.8 percent of its GDP, including 35.4 percent of GDP worth of hidden debt that comes with the China-Laos railway mega project, according to the study. The $6 billion railway is to open in December.
‘Implementation problems’
The Philippines, too, had to place national assets as collateral in a 2018 loan agreement with China to finance a large irrigation project dubbed the Chico River project.
“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 collateralization),” AidData said.
Forty of the 50 largest loans by China were collateralized and China has rapidly scaled up the provision of loans to resource-rich countries that suffer from high levels of corruption.
Corruption scandals, labor violations, environmental hazards, and public protests have blighted BRI projects, the study found.
A part of a project to build the East Coast Rail Link connecting Kuala Lumpur and Kota Bharu in Malaysia, funded by China Eximbank, was cancelled in 2018 after allegations of artificial cost inflation and corruption. The project resumed a year later after renegotiations led to a deal slashing construction costs by almost a third.
BRI infrastructure projects are also taking substantially longer to implement. A project to build Vietnam’s first elevated railway line in Hanoi suffered from years of delay and a budget ballooning by 60 percent.
“Host country policymakers are mothballing high-profile BRI projects because of corruption and overpricing concerns, as well as major changes in public sentiment that make it difficult to maintain close relations with China,” said Brooke Russell, an associate director at AidData and one of the other co-authors of the report.
China’s foreign ministry said in a statement cited by Reuters that since its launch, the BRI had “consistently upheld principles of shared consultation, shared contributions and shared benefits.”
Currently, China is outspending the U.S. and other major powers by more than 2-to-1 on overseas development. In an average year during the BRI era, China spent $85 billion on their overseas development program as compared to the U.S.’s $37 billion.
Authors of the study, however, warned that China would soon face higher levels of competition in the global infrastructure finance market.
At a meeting of the G7 industrialized nations in June, the U.S. and its allies announced a spending plan to rival China’s influence called Build Back Better World (B3W) which promises to fund global infrastructure projects that are financially and environmentally sustainable.
The E.U. recently also announced its Global Gateway Initiative which analysts say is likely to collide head-on with the BRI.
“It remains to be seen if ‘buyer’s remorse’ among BRI participant countries will undermine the long-run sustainability of China’s global infrastructure initiative, but clearly Beijing needs to address the concerns of host countries in order to sustain support for the BRI,” AidData’s Russell said.
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