By Brian Spegele and Anna Isaac
A hidden pile of debt threatens dozens of emerging-market
countries as the global economy stalls and commodity prices
tumble.
An estimated $200 billion of emerging-market debt owed to China
has gone unreported in official statistics in recent years. The
money is upending assumptions made by yield-hungry investors who
have poured roughly $2 trillion into risky emerging markets over
the last decade.
Even before the market crash, some borrowers were buckling under
their debts to China. Pakistan turned to the International Monetary
Fund in 2018 for a bailout. Sri Lanka was forced to cede China
control of a strategically located port to shore up state
finances.
U.S. and European economists are drawing parallels to the 1980s
debt crisis that shattered growth in Latin America. A global
recession would magnify the problem, economists and investors
say.
Since the start of the year, dollar-denominated government bond
prices have fallen by around 50% or more for some resource-rich
countries like Angola and Ecuador that also owe heavy debts to
China. An index tracking emerging-market sovereign bond performance
has fallen around 16% while more than $80 billion has flowed out of
emerging-markets stocks and bonds since the market turmoil began,
according to the Institute of International Finance.
China's rise as a trading and manufacturing power has been
extensively studied over the last four decades, but its impact as a
financial power is less understood. Exactly how much China has lent
is kept under wraps by state-run banks such as China Development
Bank and the countries receiving the loans. China's opaque lending
can lead investors and organizations to underestimate the risk they
are taking when they make loans to these countries or buy their
bonds, leading them to lend at rates that might be too low given
the potential losses. These include global investors and
multilateral lenders such as the World Bank.
Investors "have to be very, very leery of what's going on," said
Carmen Reinhart, a Harvard University economist and former IMF
official who has studied China's lending practices.
Ms. Reinhart, one of the most influential U.S. economists on
financial crises, was part of a team that over the last two years
pieced together a data set of Chinese loans. A resulting study by
Ms. Reinhart and economists Sebastian Horn and Christoph Trebesch
concluded more than $200 billion of Chinese overseas loans--around
half of all its cross-border lending--was hidden from public view.
Around a dozen of the poorest countries owed debts to China equal
to 20% or more of their annual GDP, the research estimated.
"The problem gets most acute in crisis situations," said Mr.
Trebesch.
Much of the growth can be traced to China's sprawling "Belt and
Road" initiative, which seeks to open up new trade routes, expand
overseas opportunities for Chinese firms and deepen the country's
strategic influence through the financing and building of
infrastructure.
Large commodity exporters that seek to sell to China are among
the roughly 70 countries taking part in China's program, many of
which took on Chinese debt during the boom in commodities prices,
but whose finances are particularly vulnerable to plunging
commodity markets today.
"The debt burden from these projects is very quickly going to
become unsustainable for many, many, many countries," said Danny
Russel, the State Department's top diplomat for East Asia affairs
under President Obama. "This is scary stuff."
Nigeria, Africa's largest economy and which depends heavily on
oil exports, was one such recipient. Official statistics have
presented China as a modest financier for Nigeria in recent years.
By the end of 2017, Nigerian government statistics show external
debt owed to China was under $2 billion.
In reality, the total debts Nigeria owed to China were more than
double that amount, according to the research. Chinese loans have
financed infrastructure such as a light-rail project for the
capital city of Abuja. Last year, China also committed $629 million
in financing for the country's first deep-sea port. Nigeria's
government is trying to borrow an additional $17 billion from the
state-controlled Export-Import Bank of China.
China's lending, most of which is done in dollars, starkly
contrasts that of multinational institutions such as the World
Bank. While these groups lend money at below-market rates, China
tends to lend at commercial rates, at times securing loans with a
country's oil or other natural resources.
Parallels to the 1980s debt crisis in Latin America -- which
spurred a "lost decade" of growth for Mexico and others -- concern
economists today. Just like the earlier case, a prolonged
commodities boom fueled lending to resource-rich developing
nations. Some economists say China's opaqueness in its lending is
reminiscent of the syndicated U.S. bank loans that crippled Latin
America decades ago.
"The thing about the Chinese lending is it's not transparent,"
said Kevin Daly, investment manager for emerging-market debt at
Aberdeen Standard Investments Inc. "Countries that do borrow from
the Chinese, when you meet with their officials they do offer you a
figure, but they don't offer you details of the breakdown or the
repayment schedule."
Southeast Asia has proven a particular focus for Belt and Road
projects. Malaysian debts owed to China are estimated to have
surged from less than a billion dollars when the initiative
launched to more than $12 billion at the end of 2017. In Indonesia,
a $4.5 billion loan agreement with China Development Bank is
helping the country to push ahead with its first high-speed rail
project.
An economic crisis in Pakistan exemplified the risks. As a
showcase of the Belt and Road program, China planned a $62 billion
building spree across Pakistan, with China-backed ports, railways
and other infrastructure to boost growth.
But Pakistani officials now say they hadn't properly assessed
Pakistan's fiscal outlook when accepting Chinese loans and
projects, which required the use of Chinese contractors in exchange
for financing. Chinese-financed power plants, for instance, placed
onerous financial obligations on the government, and contributed to
a debt crunch that forced Pakistan to seek a bailout from the IMF.
Islamabad denies that its debt problem is related to China.
China's government has also denied engaging in what critics call
"debt-trap diplomacy." State-run lenders China Development Bank and
the Export-Import Bank of China didn't respond for comment.
China's actions have garnered deeper scrutiny among U.S.
officials, with the Trump administration nominating a critic of
China's foreign lending practices to lead the World Bank. David
Malpass has used the position as the institution's president to
continue pushing China for more transparency, recently criticizing
what he described as nondisclosure agreements written into Chinese
foreign lending contracts.
"So, as the IMF or the World Bank goes into a developing country
and says, 'What are your debts?', the country can't tell you
because they have a nondisclosure clause that's really tightly
written," Mr. Malpass said in February.
U.S. criticism comes against the backdrop of an intensifying
rivalry between the world's two biggest economies, which the
coronavirus crisis has only inflamed. A specific concern, current
and former U.S. officials say, is that China uses indebtedness of
weaker neighbors to gain leverage over them and pursue strategic
aims.
A global recession may lead indebted countries to seek new terms
with Chinese lenders, investors say, although it is too early to
know how China will respond. Domestic economic constraints in China
stemming from the coronavirus may make China less willing to roll
over debts as they mature, which could exacerbate emerging-market
liquidity challenges.
"China itself is also still recovering from a very huge shock,"
said Esther Law, senior investment manager for emerging-markets
debt at asset manager Amundi SA. The country "has lots of demands
on its resources now."
--Saeed Shah contributed to this article.
Write to Brian Spegele at brian.spegele@wsj.com and Anna Isaac
at anna.isaac@wsj.com
(END) Dow Jones Newswires
March 30, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.