Executive Summary
China’s growing role in international finance has remained obscure, mostly due to a lack of data and transparency. The authors’ research, based on a comprehensive new data set, reveals that between 1949 and 2017, the state and its subsidiaries lent about $1.5 trillion to more than 150 countries across the globe — much of which has been hidden from public view. They found that China tends to lend at market terms, meaning at interest rates that are close to those in private capital markets, rather than the concessional rates offered by other official entities, such as the World Bank or IMF. And their analysis found that 50% of China’s loans to developing countries go unreported, which distorts the views of the official and private sectors in three material ways: 1) Official surveillance work is hampered when parts of a country’s debt are unknown. 2) Private sectors will misprice debt contracts, such as sovereign bonds, if they fail to grasp the true scope of a government’s debts — a problem that’s compounded by the collateral clauses in many Chinese official loans, meaning that China will get preferential treatment when it comes to repayments. And 3) Forecasters of global economic activity are missing an important swing factor influencing aggregate global demand.
While China’s role in global trade is highly publicized and politically polarizing, its growing influence in international finance has remained more obscure, mostly due to a lack of data and transparency. Over the past two decades, China has become a major global lender, with outstanding claims now exceeding more than 5% of global GDP. Almost all of this lending is official, coming from the government and state-controlled entities.
Our research, based on a comprehensive new data set, shows that China has extended many more loans to developing countries than previously known. This systematic underreporting of Chinese loans has created a “hidden debt” problem – meaning that debtor countries and international institutions alike have an incomplete picture on how much countries around the world owe to China and under which conditions.
In total, the Chinese state and its subsidiaries have lent about $1.5 trillion in direct loans and trade credits to more than 150 countries around the globe. This has turned China into the world’s largest official creditor — surpassing traditional, official lenders such as the World Bank, the IMF, or all OECD creditor governments combined.
Despite the large size of China’s overseas lending boom, no official data exists on the resulting debt flows and stocks. China does not report on its international lending, and Chinese loans literally fall through the cracks of traditional data-gathering institutions. For example, credit rating agencies, such as Moody’s or Standard & Poor’s, or data providers, such as Bloomberg, focus on private creditors, but China’s lending is state sponsored, and therefore off their radar screen. Debtor countries themselves often do not collect data on debt owed by state-owned companies, which are the main recipients of Chinese loans. In addition, China is not a member of the Paris Club (an informal group of creditor nations) or the OECD, both of which collect data on lending by official creditors.
To address this lack of knowledge, we embarked on a multi-year data-gathering effort. We compiled data from hundreds of primary and secondary sources, put together by academic institutions, think tanks, and government agencies (including historical information from the Central Intelligence Agency). The resulting database provided the first comprehensive picture of China’s overseas debt stocks and flows worldwide, including nearly 2,000 loans and nearly 3,000 grants from the founding of the People’s Republic in 1949 to 2017. Most Chinese loans have helped finance large-scale investments in infrastructure, energy, and mining.
What We Learned About China’s Overseas Lending
Our data show that almost all of China’s lending is undertaken by the government and various state-owned entities, such as public enterprises and public banks. China’s overseas lending boom is unique in comparison to capital outflows from the United States or Europe, which are largely privately driven. We also show that China tends to lend at market terms, meaning at interest rates that are close to those in private capital markets. Other official entities, such as the World Bank, typically lend at concessional, below-market interest rates, and longer maturities. In addition, many Chinese loans are backed by collateral, meaning that debt repayments are secured by revenues, such as those coming from commodity exports.
The People’s Republic has always been an active international lender. In the 1950s and 1960s, when it lent money to other Communist states, China accounted for a small share of world GDP, so the lending had little or no impact on the pattern of global capital flows. Today, Chinese lending is substantial across the globe. The last comparable surge in state-driven capital outflows was the U.S. lending to war-ravaged Europe in the aftermath of World War II, including programs such as the Marshall Plan. But even then, about 90% of the $100 billion (in today’s dollars) spent in Europe comprised grants and aid. Very little came at market terms and with strings attached such as collateral.
On the borrower side, debt is accumulating fast: For the 50 main developing country recipients, we estimate that the average stock of debt owed to China has increased from less than 1% of debtor country GDP in 2005 to more than 15% in 2017. A dozen of these countries owe debt of at least 20% of their nominal GDP to China (Djibouti, Tonga, Maldives, the Republic of the Congo, Kyrgyzstan, Cambodia, Niger, Laos, Zambia, Samoa, Vanuatu, and Mongolia).
Maybe more importantly, our analysis reveals that 50% of China’s loans to developing countries go unreported, meaning that these debt stocks do not appear in the “gold standard” data sources provided by the World Bank, the IMF, or credit-rating agencies. The unreported lending from China has grown to more than $200 billion USD as of 2016.
Hidden Debts and Hidden Risks
Failing to account for these “hidden debts” to China distorts the views of the official and private sectors in three material ways. First, official surveillance work is hampered when parts of a country’s debt are not known. Assessing repayment burdens and financial risks requires detailed knowledge on all outstanding debt instruments.
Second, the private sector will misprice debt contracts, such as sovereign bonds, if it fails to grasp the true scope of debts that a government owes. This problem is aggravated by the fact that many Chinese official loans have collateral clauses, so that China may be treated preferentially in case of repayment problems. As a result, private investors and other competing creditors may underestimate the risk of default on their claims.
And, third, forecasters of global economic activity who are unaware of surges and stops of Chinese lending miss an important swing factor influencing aggregate global demand. One could look to the lending surge of the 1970s, when resource-rich, low-income countries received large amounts of syndicated bank loans from the U.S., Europe, and Japan, for a relevant precedent. That lending cycle ended badly once commodity prices and economic growth slumped, and dozens of developing countries went into default during the bust that followed.
But developing country loans are just one element of China’s overseas lending activities. When adding portfolio debts (including the $1 trillion of U.S. Treasury debt purchased by China’s central bank) and trade credits (to buy goods and services), the Chinese government’s aggregate claims to the rest of the world exceed $5 trillion in total. In other words, countries worldwide owed more than 6% of world GDP in debt to China as of 2017.
Yet another important element to China’s presence in global finance is the growing network of swap lines by the People’s Bank of China (PBoC). Central bank swap lines can be understood as standing lines of credit, where central banks agree on exchanging their currencies to facilitate trade settlements and to address liquidity needs. As of 2018, the PBoC has signed swap agreements with more than 40 central banks (ranging from Argentina to Ukraine), providing the right to exchange more than U.S. $550 billion of their own currencies for Chinese currency (the renminbi or RMB). As a result, nations facing financial strains can turn to China before the international financial institutions, including the IMF. Since 2013, Argentina, Mongolia, Pakistan, Russia and Turkey all have made use of their RMB swap lines in periods of market distress.
Why does this matter? IMF lending is transparent, and it is usually conditioned on a plan to improve national policies. This is not necessarily the case for Chinese lending, which gives rise to important questions of creditor seniority. For example, if a nation indebted to China turns to the IMF, officials should be aware that any funds the IMF disburses may be used to pay another official creditor, China, rather than be used to blunt market strains.
Looking ahead, we find that credit outflows from China have slowed markedly since 2015, in parallel to China’s ongoing domestic economic slowdown. We’ve also documented a recent surge in the number of credit events on Chinese loans, which have not appeared in the reports of international credit rating agencies. Since 2011, two dozen developing countries have restructured their debt to China. This recent increase in the incidence of sovereign debt restructurings of Chinese debt may have a benign interpretation, but given the slower growth and lower commodity prices of recent years, it may well be a sign of brewing liquidity and solvency problems in numerous developing countries. Against this backdrop, much more work is needed to analyze the characteristics and potential impact of China’s lending around the world. If China’s role in international finance continues in the shadows, global risk assessments and country surveillance work will remain dangerously incomplete.
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How Much Money Does the World Owe China? - Harvard Business Review
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