China’s hidden debt diplomacy

China, world 2^nd largest economy may have been quite diplomatic in managing huge undisclosed debts as revealed by Christoph Trebesch, a  co-author at the Kiel Institute for the World Economy

The West still hasn’t understood how profoundly China’s rise has changed the international financial system,” professor and economist Christoph Trebesch told Germany’s Spiegel in an interview following the release of a new report on China’s “hidden debt,” which Trebesch co-authored at the Kiel Institute for the World Economy.

According to the report, the amount of foreign debt held by China is 50% greater than previously thought, making it the largest official creditor in the world. More than twice the size of the International Monetary Fund and the World Bank combined, says The Economist.

The value of China’s outbound credit lines has surged from virtually nil in 2000 to over $700 billion today but China has kept much of that debt “hidden” by not reporting it to bodies like the IMF. The Fund’s managing director Christine Lagarde has highlighted the lack of transparency in Chinese loans many times before.

Credit rating agencies like Moody’s and Standard and Poor’s aren’t privy to the debt either because they only track sovereign loans issued by banks or bondholders while most of China’s foreign loans are issued by the government itself.

Opponents of China’s lending practices have long accused Beijing of engaging in debt diplomacy, with Xi Jinping’s famous Belt and Road Initiative (BRI) frequently criticized as “economic colonialism” that risks trapping developing nations in debt. Djibouti, for example, is carrying a Chinese debt equivalent to 70% of its GDP. China’s top 50 borrowers owe a value equivalent to over 15% of their respective GDPs.

The world’s seen this before, in the 1970’s, when banks from the U.S. and Europe issued commodity-backed loans to emerging economies in Africa and Latin America. When those commodity prices tanked the economies spiralled deeper into debt.

According to The Economist, many of the recipients of new loans from China were also granted debt relief by Western creditors after defaulting on previous loans. China, too, has offered restructuring plans and write offs on over 140 of its foreign loans in the past decade, but other times it has seized strategic assets as collateral – such as the Hambantota port in Sri Lanka.

As China seeks to rein in the risk of its own domestic debt and offset the drag of its slowing economy, the country’s outbound lending might slowdown. Some debtors, meanwhile, have already started to pushback against China’s aggressive lending schemes. But there’s still a lot of Chinese-issued sovereign debt out there waiting to mature. Apparently, about 50% more than we realize.