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“Debt Book Diplomacy” Across BRI: ‘Hidden Debts’ Reveal Risks Of China’s Lending-Spree

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Via Zerohedge

Authored by Gordon Watts via The Asia Times,

For many poor nations, it is a long and winding road to ‘debt’ and ‘corruption.’ A journey littered with economic potholes in the shape of China’s signature foreign policy project which was unveiled by President Xi Jinping six years ago.

 

In short, the US$1 trillion Belt and Road Initiative, along with other foreign funding, has become a magical mystery tour, baffling the World Bank and the International Monetary Fund. Or, according to critics, a diplomatic car crash waiting to happen.

“Compared with China’s dominance in world trade, its expanding role in global finance is poorly documented and understood,” a report released last week by the Kiel Institute for the World Economy stated.

“Over the past decades, China has exported record amounts of capital to the rest of the world. Many of these financial flows are not reported to the IMF, the BIS [the Bank for International Settlements] or the World Bank,” authors Sebastian Horn, of Munich’s Ludwig Maximilian University,  Carmen M Reinhart, of the Harvard Kennedy School in the United States, and Christoph Trebesch, of the Kiel Institute for the World Economyin Germany, wrote.

“‘Hidden debts’ to China are especially significant for about three dozen developing countries, and distort the risk assessment in both policy surveillance and the market pricing of sovereign debt,” the working paper added.

The study then went on to highlight that China is now the world’s largest creditor.

A breakdown of the numbers showed that lending soared to around US$5 trillion by 2018 from roughly $500 billion in 2000, which dwarfs World Bank and IMF credit lines.

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“This dramatic increase in Chinese official lending and investment is almost unprecedented in peacetime history,” the report revealed. “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,” the report revealed.

“Our new dataset covers a total of 1,974 Chinese loans and 2,947 Chinese grants to 152 countries from 1949 to 2017. We find that about one-half of China’s overseas loans to the developing world are ‘hidden,’” it continued.

A main challenge to explore China’s large-scale official lending boom is its opacity. Unlike the United States, the Chinese government does not release data on its lending activities abroad or those of its government entities. No data is therefore available from the creditor side,” the working paper added.

Indeed, the lack of transparency has become an issue with the Belt and Road Initiative. Launched in a fanfare of state-media hype in 2013, the BRI is epic in scale and has become an extension of China’s global ambitions.

Controversy

Crucial to the program are strands of the ‘New Silk Road’ superhighways connecting the world’s second-largest economy with 70 nations and 4.4 billion people across Asia, Africa, the Middle East and Europe in a maze of multi-billion-dollar infrastructure projects, including a web of digital links.

Yet in the past 18 months, the venture has been mired in controversy after being branded a “debt trap” by the US and its key Western allies.

“Similarly, China does not provide details on its Belt and Road Initiative and its direct lending activities,” the study by the Kiel Institute pointed out.

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“Apart from the aforementioned omissions in reporting to the Paris Club, China does not divulge data on its official flows with the OECD’s Creditor Reporting System, and it is not part of the OECD [Organisation for Economic Co-operation and Development] Export Credit Group, which provides data on long- and short-term trade credit flows,” it continued.

“With regard to cross-border banking, China recently joined the list of countries reporting to the BIS, but the data [has] not [been] made available on a bilateral basis and the coverage is incomplete. Taken together, these data limitations make it very challenging to do rigorous empirical work on China’s official capital exports,” the report added.

A graphic from the Kiel Institute for the World Economy report.

Last year, a comprehensive study released by the Center for Global Development, a Washington-based think tank, singled out 23 countries prone to “debt distress.”

Of the group, Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan were rated in the “high risk” category.

Sri Lanka was another after it handed over control of the Hambantota Port to China’s state-owned Merchants Port Holdings at the end of 2017 under the weight of massive loans.

Stung by phrases such as “debt book diplomacy,” Beijing has again pledged to increase transparency when it comes to commercial funding.

During a keynote speech at the annual BRI Forum in the National Convention Center in Beijing, Xi addressed mounting concerns in front of foreign dignitaries.

“The Belt and Road is an initiative for economic cooperation, instead of a geopolitical alliance or military league, and it is an open and inclusive process rather than an exclusive bloc or ‘China club’,” he said in April.

“Everything should be done in a transparent way and we should have zero tolerance for corruption.”

Since then, the ruling Communist Party has announced plans to expand its anti-corruption campaign to BRI projects.

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In the past, the Central Commission for Discipline Inspection had limited involvement in the program but that is starting to change.

“How can you strike hard on corruption here at home and give a free hand to Chinese people and business groups [that are] reckless abroad,” La Yifan, the director-general for international co-operation at the CCDI, told the Financial Times last week. “Part of the campaign is to go after corruption and stolen assets abroad.

“[We aim to] create a network of law enforcement of all these Belt and Road countries,” he added.

So, will this long and winding road finally have flashing warning signs of “debt” and “corruption?” Or will this continue to be a highway to economic hell? BRI nations might want to buckle up for a bumpy ride.



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