China’s Loans To Other Countries Lack Transparency: World Economy Could Get Affected

Chinese loans are expected to be greater than estimated, causing hidden debt. This could cause a worse slowdown, as per experts. Lack of proper transparency could affect the IMF or investors purchasing bonds of that country, as per Carmen Reinhart of Harvard. She stated that while China was a global loan provider, its loan details weren’t available publically. Thus, the IMF or World Bank couldn’t report this income, leading to lower debt expectations.

Debt sustainability studies could be affected this way. Analyzing debt burdens of countries for borrowing strategy recommendations could be negated, leading to debt distress. For example, if the IMF performed debt sustainability measures for Pakistan, it had no clue of how much the country owed China. This could also hinder investors as they would underestimate lending risks via bonds.

Cuba, Bangladesh, Ecuador, Venezuela, Ukraine, and Sri Lanka needed loan restructuring several times on loans from China. Official statistics are maintained by the IMF and World Bank. However, China accounts for another 50% extra loans which aren’t tracked. China isn’t a part of the Paris Club that tracks loans. China has often required public assets as debt collateral for its loans. World Bank and IMF have appealed for greater transparency as citizens could hold their government accountable.

Transparency is required for better economic development. When debts aren’t revealed, everybody faces a problem. Debt uncertainty can even block them from additional funding. Kaho Yu of Verisk Maplecroft stated that this could drag down a developing country’s economic growth.

China has saddled countries with massive debt via its Belt & Road initiative that stretches to Europe, Asia, and Africa with connectivity via multiple routes. Over $440 billion has been spent in funding via CDB and EIBC. The latter has provided loans for 1800 projects for $149 billion while the former provided $190 billion for 600 projects.

Lack of adequate transparency has caused concerns about viability. Several countries are unable to pay back the loans, like Sri Lanka. This could be a form of debt trap diplomacy, where territory or assets have to be handed over. Chinese loans could slow down moving forward as more risks lie ahead with a slowing economy. Rafferty of EIU stated that China’s FX reserves were shrinking, slowing its financing abilities.