ONE-HALF OF CHINA’S nearly $150 billion of loans to Sub-Saharan African countries since 2000 are hidden, according to a recently published AidData working paper written by Kathleen Brown of Leiden University.
Africa is heavily indebted to China. One of every five dollars borrowed by African governments is owed to a Chinese lender. Hidden debt potentially puts the region more in hock — and thus obligated to Beijing — than realised, as well as posing a threat to global financial stability.
The AidData research lab at William and Mary university in the United States maintains a comprehensive database on China’s global financing activity through government institutions and state-owned entities.
Middle- and low-income economies are notorious for keeping debt off the books and out of sight so that international lenders do not penalise them for being over-indebted or breaking loan conditionalities. Mozambique, for example, concealed $2.2 billion in private bank loans to avoid hitting its internal public debt limits, although it is the World Bank’s debt-to-GDP thresholds that are most relevant.
Beijing is far from forthcoming about the credit it extends internationally. It considers external finance information state secrets and does not report its credit activity to the World Bank’s Debtor Reporting System (DRS), which acts as the global clearing house for such information.
Thus, recipient governments can hide their Chinese borrowings from international view by simply omitting them from their reporting to the DRS. Brown concludes that while some of this is accidental, most is intentional.
She suggests that publically undisclosed Chinese lending in Sub-Saharan Africa is intended to enable recipient governments to keep up payments on foreign debt, continue to buy Chinese imports and keep any threat of a balance of payments crisis at bay.
A separate report in the Financial Times, which reports similar undeclared lending to Asian and Latin American countries, suggests the hidden loans are also intended to prevent defaults on other Chinese Belt and Road infrastructure lending. (This Bystander has previously noted AidData’s analysis of Beijing’s BRI lending.)
China has had plenty of scope to extend its sway in Africa through hidden lending. So far this century, every country on the continent has experienced IMF and World Bank debt stability programs limiting external borrowing and sovereign debt levels.
Brown finds that governments hide an additional 2 percentage points of their Chinese loans as external debt to GDP moves 3.25 percentage points closer to Word Bank thresholds. The exception is when a country is under an IMF programme. Governments then hide less debt because they are more likely to be caught out by the Fund’s rigorous auditing of national accounts.
One implication is that Beijing’s loan recipients see China as a means to keep the IMF at arm’s length. However, that does nothing to reduce a country’s debt-crisis risk. Sri Lanka offers an extreme example of the consequences of the political and economic meltdown that a debt crisis can unleash.
For China, supplying unreported credit provides a way to undermine the influence and reach of the IMF and World Bank as Beijing develops an alternative international financial architecture. Other research has shown that it is common for Chinese lenders to put ‘no reporting’ clauses into loan agreements with middle- and low-income countries,
That the Global South is an active manager of international credit markets by strategically hiding its debt from international financial institutions suggests Beijing is achieving some modest success in that goal.
However, increased exposure to countries borrowing too far beyond their capacity to repay is the price that Chinese financial institutions and state-owned entities are paying. Given the headwinds buffeting the Chinese economy, that looks like an unsustainably high price, as Beijing is starting to acknowledge.