Extensive lending by China

Over the past 15 years, China has fuelled one of the most dramatic and geographically far-reaching surges in official peacetime lending in history

More than 100 predominantly low-income countries have taken out Chinese loans to finance infrastructure projects, expand their productive capacity in mining or other primary commodities, or support government spending in general

Underestimated debts

  • While China in 2016 joined the ranks of countries reporting to the Bank for International Settlements, the lending from development banks in China is not broken down by the counterparty in the BIS data
  • Emerging-market borrowing from China is seldom in the form of securities issued in international capital markets, so it also does not appear in databases at the World Bank and elsewhere
  • These accounting deficiencies mean that many developing and emerging-market countries’ external debts are currently underestimated in varying degrees
  • The international policy community is also in the dark about the incidence or nature of any bilateral debt restructuring agreements between China and its many low-income borrowers

What does this lead to?

  • Because these are mostly dollar debts, missing the China connection leads to underestimating balance sheets’ vulnerability to currency risk
  • If the initial increases in external borrowing were underestimated, there is also reason to suspect that the magnitude of the ongoing reversal in capital flows may be larger than is generally believed
  • The aftermath of commodity price booms and surges in new loans to commodity producers is littered with defaults and other debt-servicing difficulties

Demand-supply estimations of borrowings

  • On the demand side, the loan surge was facilitated by many low-income countries’ comparatively clean balance sheets
  • The Heavily Indebted Poor Countries (HPIC) Initiative by the Paris Club of official creditors and multilateral institutions had written off (forgiven) a substantial share of the prior external debts
  • On the supply side, because there was little or no prior credit exposure to these countries, and because some of the major official creditors were not ready to return to development lending following the HPIC Initiative write-offs, a vacuum in official lending emerged and China filled it

Way forward

Widespread debt-servicing difficulties are on the rise among many of the world’s poorest countries

Borrowers’ external debt obligations may have reached the point where repayment difficulties have begun to emerge, leaving China’s development banks with considerable exposure to risky or non-performing sovereign loans

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