New report digs into labyrinthine nature of China’s loans

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ON THE OUTSIDE of Vientiane, the capital of Laos, workers from China Railway No. 2 Engineering Group recently welded the last two 500m of “seamless rail” for the China-Laos Railway, a flagship project of the China Belt and Road Initiative (BRI). Chinese state media are celebrating the railroad, scheduled to open in December, as a feat of modern engineering. It is also a marvel of modern accounting, amassing $ 3.6 billion in debt on the state’s balance sheet but for which the Laos regime could find itself at the mercy. This financing and other “hidden debts” to China represent a third of the country’s GDP, which could well become a problem: Laos already has sovereign debts equivalent to about 60% of the GDP on its books, of which half to the country. China.

Such hidden debts plague many Chinese overseas projects, including several in Asia, which are funded in such complex ways and arranged between so many different entities, that even Chinese financial authorities struggle to keep up. On September 29, AidData, a research unit at William & Mary, a university in Virginia, released a data set that attempted to put dollar figures on China’s funding for overseas projects, including unofficial debt. which is not reported to the World Bank. AidData counted 13,427 projects for which China had provided about $ 800 billion in loans over an 18-year period from 2000. This includes $ 385 billion of what AidData calls “hidden” debt. It counted 44 countries which owe the equivalent of at least 10% of their GDP to China.

It is important to know how much countries owe China, as many of these developing countries, struggling with the pandemic, are trying to renegotiate the terms of their sovereign debts not only with China, but also with multilateral lending institutions. and other countries. In 2020, the G20, which includes China, agreed to temporarily suspend debt service payments from 73 countries and give them the opportunity to restructure their debts. But many of China’s loans are organized in ways that might not be covered by the deal. As in the case of the China-Laos Railway, loans can be made between SOEs and joint ventures without being formally guaranteed by the government (Laos separately has a sovereign bond of around $ 480 million related to the railway project. ). In some cases, governments may not even know the full extent of the loans for which they may one day become responsible.

The pace of China’s BIS lending has slowed considerably in recent years (AidData research reports loans through 2017). But there is no indication that China is considering changing the way it works with debtor countries. Many of China’s BIS loans are made with poor countries at commercial interest rates and often include collateral obligations, which conventional development finance does not. China generally solves the problems of unpaid debts by extending the terms of a loan rather than reducing the amount of the principal – “a kick in the box” as Scott Morris of the Center for Global Development, a group of reflection in Washington. . Sometimes the Chinese side takes a big stake in projects where debtors have fallen behind in payments; a decision in 2017 to take control of a port in Sri Lanka has led to accusations of “debt trap diplomacy”.

In debt-ridden Laos, a Chinese state-owned company has already taken majority control of another critical piece of infrastructure, part of the electricity grid. But Matt Mingey of Rhodium Group, a research firm, argues that the railroad represents an example of how a Chinese infrastructure loan can be not so much a “hidden” liability as it is a complicated one. The joint venture that owes $ 3.6 billion to China is already majority-owned by three Chinese state-owned companies, making the project a Chinese project that is in a foreign country. If the railroad turns out to be a financial mess, it may be China and not Laos. The “hidden debt”, then, would be similar to that which China owes to itself. This should be fairly straightforward to resolve. ■


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