Is China Hiding its Overseas Lending? Horn, Reinhart and Trebesch's "Hidden Loans" and Hidden Data

This week the Wall Street Journal, in its March 30, 2020 article “Hidden Chinese Lending Puts Emerging-Market Economies at Risk,” revived debate about Chinese “hidden loans”, referring to a June 2019 working paper authored by Sebastian Horn, Carmen Reinhart and Christoph Trebesch (HRT), “China’s Overseas Lending.”

The HRT paper cites the China Africa Research Initiative – SAIS-CARI – as one of the many sources for its compiled estimates of China’s overseas loans between 2000 and 2017. A number of African countries do have worrying debt concerns, and China is a substantial lender on the continent. However, we take issue with the “hidden lending” analysis done by HRT, and specifically for Africa.

HRT appears to have significantly overestimated lending to a group of countries while possibly underestimating lending to others. Our annual estimates for signed Chinese loan commitments to various countries are available on our website. The researchers have not released their own “hidden data”, but Figure A3 in their Appendix (reproduced below as Fig. 1) provides a list of their “30 top recipients of Chinese loans as of 2017” among the 106 countries in their database. This figure includes 14 African countries (listed also in Table 1).

Fig. 1: HRT Appendix Figure A3: Debt Owed to China Versus Debt Owed to Other Official Creditors

This graph is clearly not based on SAIS-CARI’s Africa data. When we compiled our own list of the 14 top recipients of Chinese loan commitments for African countries during this same period (Table 1), we see a number of sharp discrepancies.  On the one hand, our data suggests that the researchers erred in estimating Chinese lending to Djibouti, Mozambique, Niger, South Sudan and Sierra Leone as among the highest in the world. Between 2000 and 2017, Chinese loan commitments were only USD 224 million to Sierra Leone, and USD 158 million to South Sudan, for example.

On the other hand, our list includes a number of borrowers that are not included on their top-30 list of recipients of Chinese loans globally. As Table 1 below indicates, according to SAIS-CARI data, Sudan, Nigeria, (Ghana, Egypt and the Democratic Republic of the Congo all appear to have borrowed more from China than Mozambique, Djibouti, Niger, Sierra Leone or South Sudan, but do not appear on the HRT list. We hasten to say that this does not mean that we believe these countries to be among the top-30 Chinese borrowers world wide, but simply that in Africa, they are among the top recipients.

Interestingly, this points to some numbers being overestimated, and others possibly underestimated – but without access to the Kiel team’s granular data, it is difficult for us to pinpoint precisely where calculations diverge. Whereas HRT assert that nearly half of Chinese lending to the developing world is “hidden”, HRT’s Appendix Figure A3 suggests to us that nearly half of their Africa data is flawed, perhaps significantly so.

Loan Commitments versus Disbursements: The Nigeria Case

One of the possible reasons why the HRT research team may be overestimating “hidden lending” (i.e. debt that “is not picked up by official statistics of the IMF, World Bank or BIS”) is because they are not fully taking into account the difference between loan commitments and disbursements. For example, the Wall Street Journal highlights Nigeria as a case of “hidden lending,” suggesting that Nigerian government statistics–which state that Nigeria’s outstanding external debt to China was about $1.9 billion by the end of 2017–are in error. “In reality,” the Wall Street Journal article said, “the total debts Nigeria owed to China were more than double that amount, according to the research.”

We disagree. Our data, which tracks loan commitments, does estimate that Nigeria signed about $5 billion worth of loans with Chinese financiers between 2000 and 2017. (Technical Appendix 1 below elaborates). However, there is no “hidden” lending here. The difference between loan commitments and the amount of external debt owed to China is accounted for entirely by two factors: (1) the amount of debt Nigeria has already repaid, and (2) the lag between loan signing and disbursement (i.e. the moment when the committed loan actually becomes a debt on Nigeria’s books). Loan commitments do not become debts all at once, and some are never disbursed at all.

In February 2020 researchers at the IMF voiced veiled criticism of the Horn, Reinhart and Trebisch estimates. We agree with the IMF:  Horn, Reinhart and Trebesch have definitely overestimated some of the African debt to China, and possibly underestimated it in other cases. Without access to their data, however, it is impossible to know which way these mistakes tip the scales. But some of HRT’s “hidden loans” are apparently hiding in plain sight.