China’s ‘secret loans’ put the brakes on G-20 debt relief plans

WASHINGTON / TOKYO – A debt relief program devised by world financial leaders for poorer countries has raised concerns as it fails to respond to China’s “hidden loans” from lenders controlled by the State and Beijing’s demand for secrecy from debtors.

Finance ministers and central bankers from the Group of 20 major economies agreed on Wednesday to extend the debt service freeze for poor countries for six months beyond the end of 2020, a move designed to prevent heavily indebted governments to fail.

Still, that was half of the one-year extension requested by the 73 eligible countries. The move was prompted largely by China’s refusal to provide loan relief from the Development Bank of China, which it claims is a commercial lender despite being 100% owned by the Chinese government.

China’s stance has raised concerns that debtor countries will use the freed up money to pay off the Chinese bank instead of investing in their own savings. The bloc has decided to set a shorter window for debt relief so that it can better monitor the situation.

“This meeting of the G-20 has been a total failure,” said an official of the International Monetary Fund.

Some of these countries, like Zambia and Mozambique, face debt equivalent to more than 100% of their gross domestic product. The World Bank considers that 33 of the 73 countries are either in external debt distress or at high risk.

The 73 countries together owe $ 744 billion to the World Bank and other foreign players. Official loans from the government of a G-20 member amount to $ 178 billion, 63% of which comes from China. Some countries like the Republic of Congo and Djibouti owe 50% to 60% of its total foreign debt to China.

The loans from the Development Bank of China are closely linked to the Beijing Belt and Road infrastructure construction initiative. The Chinese government has been criticized in recent years for drowning developing countries in debt and then taking control of assets like natural resources or ports when they fail to repay. For example, there are fears that Kenya could be forced to cede control of its port of Mombasa, the largest in East Africa, if it falls behind on repayments on a Chinese loan for a road iron.

Chinese financing also carries an interest rate above 3%, against around 1% for loans from the World Bank and the IMF.

The G-20 is asking countries to disclose information about their external debt in exchange for the six-month freeze. But Chinese loans “come with a lot of confidentiality requirements, so recipients can’t make details of rates or guarantees public,” a source told the World Bank.

Only 44 of the eligible countries had requested a debt freeze as of October 6. Many heavily indebted countries like Bangladesh, Cambodia and Kenya did not apply.

According to a team, which includes World Bank chief economist Carmen Reinhart, China has loaned $ 385 billion to developing countries, including $ 200 billion in hidden debt. Although a large part of these loans technically come from private sector actors, they are believed to be part of national policy.

“It could also become a problem for Japan,” said an official from Japan’s finance ministry. Japan is responsible for 15% of official bilateral loans to 73 countries, making it the second largest creditor after China. If large emerging countries like Brazil and Turkey fell into distress, advanced economies would suffer as well.

The G-20 plans to create new rules focused on debt reduction next month with the aim of getting China to participate in debt relief for developing countries.

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