Economists say China’s loans are causing debt burden, ‘hidden default’ for developing countries

China’s practice of issuing credit to developing countries has led to an increased debt burden for them, as well as many “hidden flaws”, economists from the World Bank and the Kiel Institute for Development have said. world economy in their recent article. In their research, the authors described China’s state-owned bank defaults as “hidden” not only because the terms under which they are issued are shrouded in secrecy, but also because the restructuring process is opaque and its terms remain mostly hidden from an audience. wider audience.

According to the research, conducted by Professor Christoph Trebesch of the Kiel Institute, the number of defaults on Chinese credit exceeds the number of those encountered by Paris Club borrowers – 71 against 68 cases. Researchers also believe that up to 50% of credit issued by China is not reflected in official debt statistics due to the secrecy surrounding loan terms. However, despite credits being issued on such terms, economists said China’s lending program has delivered some benefits as it has enabled developing countries to borrow money for infrastructure development.

But they also pointed to another problem with Chinese credits. They said that instead of reducing the number of loans during the restructuring, lenders generally tend to change the terms of interest payments and delay them. Economists have noted that this was largely the approach practiced by Western lenders in the 1980s and that it led to nations being overburdened with credit and prevented them from repaying.

Trebesch and his colleagues at the World Bank therefore warned that even though China’s lending spree has passed its peak, problems for its borrowers could still wait with more defaults on the horizon. The study says that history has shown that over-indebtedness can only be solved through “deep debt relief”, that is, a reduction in the debt burden and interest rates.

“If Chinese lenders repeat the mistakes of previous eras, a decade of recurring payment problems and serial debt reschedulings on China’s loans could lie ahead,” the research paper says.

China uses secrecy clauses to trap nations’ debt

Meanwhile, it’s worth mentioning that it was previously revealed that China is using a “well-thought-out strategy” to trap countries’ debt with secrecy clauses. The International Forum for Law and Security (IFFRAS) has reported that China is shockingly using confidentiality clauses preventing borrowers from revealing the terms and conditions of the pledge or even the existence of the debt itself.

He found that Chinese credit conditions remain heavily skewed in favor of Chinese lenders over other creditors. IFFRAS pointed out that the credit offered contains guarantee agreements, no Paris Club clauses, clauses allowing lenders to influence the domestic and foreign policies of debtors, etc. and the lending country, who otherwise have a legitimate right to know. The lender also has the discretion to cancel the loans or demand full repayment before the due date at will.

(Picture: AP)

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