What is the real story of China’s “hidden debt”?

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Deborah Brautigam and Yufan Huang

ON SEPTEMBER 29, AidData, A RESEARCH LABORATORY by William & Mary, released a detailed look at its new data on China’s global lending, Banking on the Belt and Road. The report drew a lot of comments.

Yet most people will probably only read the headlines: that $ 385 billion of the alleged $ 676 billion in Chinese loans to developing countries between 2000 and 2017 went unreported to the World Bank.

“The average government,” the authors argue, “under-declares its actual and potential repayment obligations to China by an amount equivalent to 5.8% of its GDP.”

How worried should observers be about this claim? The AidData team made their data public, allowing others to examine the underlying data. In this backgrounder, we examine the data underlying AidData’s findings.

While we agree with many points in their article, our own analysis of the data puts their main conclusions in a very different light. By providing averages, without discussing outliers, and by allocating the entire Chinese loan for joint ventures to the host government partner alone, the report is unduly alarmist.

Three countries account for 61 percent of undisclosed debt to the World Bank. Of the $ 385 billion AidData calculated as undisclosed Chinese loans to the World Bank, 61% – $ 235 billion – was committed in just three countries: Venezuela, Russia and Kazakhstan. Venezuela is not a World Bank borrower and therefore is not required to report its borrowings.

AidData’s methodology includes the full value of a Chinese loan to a joint venture investment as “under-reported debt” of the host government, contrary to World Bank guidelines.

About US $ 153 billion has been loaned to Joint Ventures (JVs) and Special Purpose Vehicles (SPVs), limited liability companies formed for specific projects.

Some of these are majority owned by host governments, but in several important cases they are controlled by private companies – ExxonMobil, for example – with modest holdings from host governments. The World Bank does not classify these latter loans as public debt (unless it has a government guarantee) and does not require borrowing governments to report them.

Finally, the median figure for “under-reported debt” is 1.8% of GDP. AidData reports, instead, the average figure of 5.8% of GDP. This is skewed by several very large outliers such as 49.7 percent for Equatorial Guinea, 30.6 percent for the Republic of Congo and 21.1 percent for Venezuela.

NEW DATA
A LOAN-BY-LOAN DATA SET ON Chinese global loans like the one compiled by AidData is a major contribution. Data (for Africa, at least) seems to be very important for the four years it took to collect and clean it.

This data release follows the World Bank’s decision in July 2020 to release, for the first time, information detailing what each of its borrowers owes public and private creditors, by creditor country.

This means that the World Bank’s International Debt Statistics (IDS), an online repository and annual publication of information on debt held by all World Bank borrowing countries, now contains data on debt obligations. loan, outstanding debt and debt service by creditor country.

Yet aggregate World Bank data gives no details on how loans are used, which banks issued them, or which entity borrowed them.

The AidData report includes these details for 165 borrowing countries and territories, and is a major boost to much-needed transparency on Chinese development finance.

At the China-Africa Research Initiative (CARI) at Johns Hopkins University and researchers at Boston University, we maintain two similar public databases for loans to Chinese loans, but each with a purpose narrower than AidData.

WHAT ARE “UNDER REPORTED” AND “HIDDEN” LOANS?
AidData introduced two distinct concepts in this document. The first, “underreported” loans, refers to loans that are not reported to the World Bank’s debtor reporting system, the source of IDS data. Most of the takeaways from the report refer to these “underreported” loans.

The second, “hidden” loans, refers to the set of loans granted to host country public enterprises, public banks and SPVs with some degree of host government ownership but without state guarantees. We discuss them separately below.

It is important to stress that despite its reputation for secrecy, it is not the Chinese government that is “underreporting” or “hiding” these loans.

There is no global creditors reporting system for China to use. While members of the Paris-based OECD, an organization of 38 wealthy democracies, are required to report their loans to the OECD’s creditors reporting system, China is not a member of the OECD. “Under-reported” loans. AidData has counted $ 385 billion in “underreported” debt.

“Underreported” means that loans are, according to AidData’s assessment, not correctly reported by borrowers to the only global debt reporting repository, the World Bank’s IDS.

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