China's BRI stranglehold: $385 bn worth of Chinese debt unreported by countries, says a new finding

Some 42 countries now have levels of public debt exposure to China in excess of 10% of GDP, says a US-based research group.

According to AidData, during the pre-Belt and Road Initiative era, China and the US were overseas spending rivals.

However, China is now outspending the US and other major powers on a more than 2-to-1 basis, with its overseas development programme commitments hovering around $85 billion a year, compared to the US $37 billion.

According to the authors of the report, ‘Banking on the Belt and Road’, their findings demonstrate that "Beijing has used debt rather than aid to establish a dominant position in the international development finance market. Since the BRI was introduced in 2013, China has maintained a 31-to-1 ratio of loans to grants.”

Before the BRI was introduced by President Xi Jinping, the country’s “policy banks”—China Eximbank and China Development Bank—led the expansion in overseas lending.

But from 2013, state-owned commercial banks—including Bank of China, the Industrial and Commercial Bank of China, and China Construction Bank, have been the main players, which saw their overseas lending activities increasing five-fold during the first five years of BRI.

The number of “mega-projects”, financed with loans worth $500 million or more, approved each year also tripled during the BRI era, the report said.

It finds that as China has financed bigger projects and taken on higher levels of credit risk, it has also put in place stronger repayment safeguards.

While in the early 2000s, 31% of the country’s overseas lending portfolio benefited from credit insurance, a pledge of collateral, or a third-party repayment guarantee, this figure now stands at nearly 60%.

When the stakes are especially high, collateralization is Beijing’s “go-to” risk mitigation tool: 40 of the 50 largest loans from Chinese state-owned creditors to overseas borrowers are collateralized, say the authors.

Another key finding is that Beijing’s lending to low-income and middle-income countries is provided on less generous terms than loans from OECD-DAC (the Development Assistance Committee of the Organization for Economic Cooperation and Development) and multilateral creditors.

A typical loan from China has a 4.2% interest rate and a repayment period of less than 10 years. In comparison, a typical loan from an OECD-DAC lender like Germany, France, or Japan carries a 1.1% interest rate and a repayment period of 28 years.

Prior to the BRI era, most of China’s overseas lending was directed to sovereign borrowers—central government institutions. But with the BRI, nearly 70% of China’s overseas lending is now directed to state-owned companies, state-owned banks, special purpose vehicles, joint ventures, and private sector institutions in recipient countries.

These debts, for the most part, do not appear on their government balance sheets. However, most of them benefit from explicit or implicit forms of host government liability protection, “which has blurred the distinction between private and public debt and created major public financial management challenges for developing countries”, it says.

“Chinese debt burdens are substantially larger than research institutions, credit rating agencies, or intergovernmental organizations with monitoring responsibilities previously understood,” the report says.

According to the report, 42 countries now have levels of public debt exposure to China in excess of 10% of GDP.

These debts are also systematically underreported to the World Bank’s Debtor Reporting System (DRS) because, in many cases, central government institutions in low-income and middle-income countries are simply not the primary borrowers responsible for repayment.

Brad Parks, AidData’s Executive Director and a co-author of the report, says “these unreported debts are worth approximately $385 billion and the hidden debt problem is getting worse over time.”

The average annual underreporting of repayment liabilities to China was $13 billion during the pre-BRI era, but now it stands at $40 billion.

“The average government is underreporting its actual and potential repayment obligations to China by an amount that is equivalent to 5.8% of its GDP,” the report says.

Painting a telling picture of the situation, Parks says that “the challenge of managing these hidden debts is less about governments knowing that they will need to service undisclosed debts to China with known monetary values than it is about governments not knowing the monetary value of debts to China that they may or may not have to service in the future.”

The report also says that 35% of the BRI infrastructure project portfolio has encountered major implementation problems—such as corruption scandals, labour violations, environmental hazards, and public protests.

“Host country policymakers are mothballing high-profile BRI projects because of corruption and overpricing concerns, as well as major changes in public sentiment that make it difficult to maintain close relations with China. It remains to be seen if ‘buyer’s remorse’ among BRI participant countries will undermine the long-run sustainability of China’s global infrastructure initiative, but clearly Beijing needs to address the concerns of host countries in order to sustain support for the BRI,” said Brooke Russell, one of the co-authors of the report.

The report comes at a time when the US and its allies are seeking to develop a viable alternative to the BRI through the Build Back Better World (B3W) initiative, announced at the G7 summit in June 2021.

The AidData report offers a bird’s-eye view of China’s geo-economic strategy before and after the introduction of the BRI in 2013. It details how spending patterns, debt levels, and project implementation problems have changed over time, leveraging insights from data that capture 13,427 projects across 165 countries worth $843 billion.

These projects were financed by more than 300 Chinese government institutions and state-owned entities. The new 2.0 Global Chinese Development Finance Dataset covers projects approved between 2000 and 2017 and implemented between 2000 and 2021. It is the most comprehensive dataset of its kind.

“Beijing’s reluctance to disclose detailed information about its overseas development finance portfolio has made it difficult for low-income and middle-income countries to objectively weigh the costs and benefits of participating in the BRI. It has also made it challenging for bilateral aid agencies and multilateral development banks to determine how they can compete—or coordinate and collaborate—with China to address issues of global concern,” says Ammar A. Malik, co-author of the report.