A Global Creditor On the Rise: How China’s Hidden Loans Are Threatening Emerging Market Economies and Beyond

In an effort to expand its global financial clout, Beijing has been lending extensively to developing countries; however, its lack of transparency is causing problems for the local economies and other stakeholders.

By Lorraine Zhu

Launched in 2013, China’s Belt and Road Initiative is an ambitious infrastructure development and investment blueprint that aims to revive its ancient Silk Road along countries in Asia, Eastern Europe, and Africa. As the initiative helps expand Chinese businesses abroad, it has also allowed the country to wield its financial clout as a rising global creditor. Yet, Beijing has remained opaque about the size of its debt. It is estimated that $200 billion worth of loans to emerging market economies have been omitted from official reporting in recent years.

These hidden loans often come with non-disclosure agreements in order to prevent borrowers from revealing the actual size of their debt to the international community, including the World Bank and the International Monetary Fund. The loans are huge in size: Of the $200 billion worth of unreported loans, the debts owed by the poorest countries to China were up to 20% of their annual GDP. Likewise, while institutions such as the World Bank typically lend to developing countries at below-market rates, Chinese loans are often priced at much higher commercial rates, and collateralized by the borrowers’ natural resources.

The hidden nature of Chinese loans are threatening emerging market economies in several ways. First, the lack of transparency raises doubts about the long-term viability of the loans and the projects they finance. For instance, Pakistan was listed by the Center for Global Development, a U.S.-based think tank, among the eight countries involved in debt sustainability issues that resulted from taking on Chinese debt to finance Belt and Road projects. Pakistan currently owes $6.7 billion in commercial debt to be repaid over the next three years. The massive amount of loans resulted in a debt crunch in the South Asian country, prompting it to seek a bailout from the IMF in 2018. Second, as details of the loans – from actual debt figures to repayment schedules – are shielded from public sight, it also makes room for China to exploit natural resource-rich borrowers. Nigeria, for example, is the largest economy in Africa and is heavily reliant on oil exports. By the end of 2017, Nigeria reported $2 billion of debt owed to the Chinese government, secured with oil and other natural resources. Its actual debts, however, could be much higher in reality. Nigeria is also seeking to borrow an additional $17 billion from the Export-Import Bank of China.

The lack of transparency of Chinese lending is causing problems for other stakeholders as well. A direct impact of such hidden loans is the exposure of global investors and financial institutions to higher risk. Without knowing the exact amount of debt on these emerging market economies’ balance sheets, investors could be taking on additional risk when buying their sovereign bonds. Organizations such as the World Bank and the IMF could be lending at rates that are too low to compensate for the actual potential losses. These problems are exacerbated by the recent coronavirus pandemic. Since January, cumulative capital outflows from emerging markets have reached $86.28 billion as investors dump risky emerging market debt and rush for cash and safe haven assets. A looming global recession, along with a contraction of China’s domestic economy due to coronavirus shutdowns, could potentially cause a further liquidity crunch on emerging market economies. □

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