A new study has found under-reported debts of at least $ 385 billion owed by various countries to China over the past two decades, and that a third of projects under the Belt and Road Initiative the Route “encountered major implementation problems.
Hidden debts, which have escaped the scrutiny of international lenders such as the World Bank and International Monetary Fund (IMF), and rating agencies, mean borrowing countries may have to repay more than they realize .
The discoveries are a four-year study by AidData, an international development research laboratory based at William & Mary’s Global Research Institute in the United States.
“China’s debt burden is significantly greater than that of research institutes, rating agencies or intergovernmental organizations whose supervisory responsibilities were previously understood,” the study said.
The reason for this is a growing number of agreements concluded not directly between governments through central banks, but through often opaque agreements with a range of funding institutions, hence “the burden of the debt was kept off the public balance sheets â.
The study indicates that nearly 70% of China’s overseas loans “are now directed to state-owned enterprises, state-owned banks, special-purpose vehicles, joint ventures, and private sector institutions in recipient countries.” rather than sovereign borrowers who are central government institutions. .
According to Brad Parks, executive director of AidData and co-author of the report, “the problem of hidden debt gets worse over time.”
Most of the hidden debt has arisen 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% of the BRI infrastructure project portfolio encountered major implementation issues, such as corruption scandals, labor law violations, environmental risks, and public protests. .
AidData studied 13,427 Chinese-funded projects in 165 countries worth $ 843 billion over an 18-year period and found that the average government “under-declares its actual and potential repayment obligations to China d ‘an amount equivalent to 5.8% of its GDP. “
Collectively, these under-reported debts are worth approximately $ 385 billion.
Forty-two developing countries, including Laos, Papua New Guinea, Maldives, Brunei, Cambodia and Myanmar, now have levels of public debt exposure to China exceeding 10% of GDP, according to the study.
The study’s authors said Beijing used debt rather than aid “to establish a dominant position in the international development finance market.” Since the introduction of the BIS in 2013, China has maintained a loan-to-grant ratio of 31 to 1. â.
Beijing’s loans to low- and middle-income countries are made on less generous terms than loans from other multinational lenders and creditors.
âA typical loan from China has an interest rate of 4.2% and a repayment period of less than 10 yearsâ, compared to a typical loan with an interest rate of 1.1% and a period 28-year repayment period from countries like Germany, France or Japan.
“It’s very much comparable to global borrowing practices,” said Soumya Bhowmick, associate researcher at the Observer Research Foundation in Kolkata, India, who was not involved in the study.
“This is particularly worrying because countries which are grappling with the double whammy of high public external debt, as well as high volumes of debt to China, highlight the precarious situation of their own public finances,” did he declare.
However, as developing countries desperately seek cash to finance their infrastructure projects, they seem to have no choice but to turn to Chinese lenders whose preferred risk mitigation tool is collateralisation, or the use of precious assets or natural resources of the borrowing country.
Laos, for example, had to sell part of its national electricity grid to China in 2020 in exchange for debt relief from Chinese creditors.
According to the study, Laos’ overall level of exposure to debt to China is equivalent to 64.8% of its GDP, including 35.4% of GDP in hidden debt linked to the China-Laos mega rail project. The $ 6 billion railroad is slated to open in December.
The Philippines also had to place domestic assets as collateral in a 2018 loan agreement with China to finance a large irrigation project dubbed the Chico river project.
âBeijing is more willing to finance projects in countries at risk than other official creditors, but it is also more aggressive than its peers to position itself at the top of the repayment line (via the guarantee),â AidData said.
Forty of China’s 50 largest loans have been guaranteed, and China has quickly stepped up lending to resource-rich countries that suffer from high levels of corruption.
Corruption scandals, labor law violations, environmental hazards and public protests have ravaged BRI projects, according to the study.
Part of a project to build the East Coast Rail Link connecting Kuala Lumpur and Kota Bharu in Malaysia, funded by China Eximbank, was canceled in 2018 after allegations of artificial cost inflation and corruption.
BRI infrastructure projects also take much longer to implement. A project to build Vietnam’s first elevated railway line to Hanoi suffered years of delays and a budget that has exploded by 60%.
“Host country policy makers are putting large-scale BRI projects on the back burner due to issues of corruption and overpricing, as well as major shifts in public opinion that make it difficult to maintain close relations with China,” he said. explained Brooke Russell, associate director at AidData and one of the report’s other co-authors.
The Chinese Foreign Ministry said in a statement quoted by Reuters that since its launch, the BIS has “consistently upheld the principles of shared consultation, shared contributions and shared benefits.”
Currently, China exceeds spending by the United States and other great powers by more than 2 to 1 in overseas development. In an average year during the BIS era, China spent $ 85 billion on its overseas development program, compared to $ 37 billion for the United States.
The study’s authors warned, however, that China would soon face higher levels of competition in the global infrastructure finance market.
At a meeting of the industrialized G7 nations in June, the United States and its allies announced a spending plan to rival China’s influence called Build Back Better World (B3W) that promises to fund projects of financially and environmentally sustainable global infrastructure.
The EU also recently announced its Global Gateway Initiative which analysts say is likely to collide head-on with the BRI.
“It remains to be seen whether ‘buyer’s remorse’ among BRI participating countries will undermine the long-term sustainability of China’s global infrastructure initiative, but it is clear that Beijing needs to address the concerns of the BRI. host countries in order to maintain support for the BRI, âAidData said. Russell said.
Reported by BenarNews, an online news service affiliated with RFA.