Working Paper: CEPR ID: DP13867
Authors: Sebastian Horn; Carmen M. Reinhart; Christoph Trebesch
Abstract: Compared with China’s dominance in world trade, its expanding role in global finance is poorly documented and understood. Over the past decades, China has exported record amounts of capital to the rest of the world. Many of these financial flows are not reported to the IMF, the BIS or the World Bank. “Hidden debts” to China are especially significant for about three dozen developing countries, and distort the risk assessment in both policy surveillance and the market pricing of sovereign debt. We establish the size, destination, and characteristics of China’s overseas lending. We identify three key distinguishing features. First, almost all of China’s lending and investment abroad is official. As a result, the standard “push” and “pull” drivers of private cross-border flows do not play the same role in this case. Second, the documentation of China’s capital exports is (at best) opaque. China does not report on its official lending and there is no comprehensive standardized data on Chinese overseas debt stocks and flows. Third, the type of flows is tailored by recipient. Advanced and higher middle-income countries tend to receive portfolio debt flows, via sovereign bond purchases of the People’s Bank of China. Lower income developing economies mostly receive direct loans from China’s state-owned banks, often at market rates and backed by collateral such as oil. Our new dataset covers a total of 1,974 Chinese loans and 2,947 Chinese grants to 152 countries from 1949 to 2017. We find that about one half of China’s overseas loans to the developing world are “hidden”.
Keywords: China; International capital flows; Official finance; Hidden debts; Sovereign risk; Belt and Road Initiative
JEL Codes: F21; F34; F42; F6; G15; H63; N25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| China's official lending practices (F34) | characteristics of the loans (H81) |
| lack of transparency in Chinese lending (F34) | underreporting of debts (F34) |
| underreporting of debts (F34) | assessment of debt sustainability (F34) |
| lack of standardized reporting on Chinese lending (F34) | financial health of recipient nations (F35) |
| terms of Chinese loans resembling commercial loans (F34) | repayment capacity of borrowers (G51) |
| China's lending practices (F34) | debt burdens in recipient countries (F34) |
| China's capital flows (F21) | domestic economic variables in China (P24) |