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

In a March 30, 2020 article, “Hidden Chinese Lending Puts Emerging-Market Economies at Risk,” the Wall Street Journal revived debate about Chinese overseas lending, referring to a June 2019 working paper authored by Sebastian Horn, Carmen Reinhart, and Christoph Trebesch (HRT), “China’s Overseas Lending.” This paper, an impressive effort to assemble and analyze a wide range of information on Chinese capital flows, has become well-known for its argument that “half of China’s overseas loans to the developing world are ‘hidden’.”

The HRT paper raised important issues about China’s lack of transparency in their global lending. We appreciate their contributions to these ongoing debates, which have only become more salient as the developing world enters a new, COVID-19-fueled debt crisis.

However, we take issue with the “hidden lending” analysis done by HRT, specifically for Africa. The authors’ argument that half of China’s overseas loans are “hidden” rests primarily on a comparison of their estimates of Chinese loan commitment data between 2000 and 2017 to the Debtor Reporting System (DRS)’s confidential and unpublished Chinese loan commitment data for the same period, held by the World Bank. The paper cites the China Africa Research Initiative – SAIS-CARI – as one of the many sources for its estimates of China’s overseas loan commitments.

A number of African countries do have worrying debt concerns, and China is a substantial lender on the continent. However, HRT appear to have overestimated lending to some countries while underestimating lending to others. Our annual estimates for signed Chinese loan commitments to African governments and their state-owned enterprises are available on our website. The researchers have not released their own data on Chinese loan commitments, although their data set of debt stocks can be found here. These debt stocks were computed by the authors based on their commitment data, using assumptions about loan terms – interest rates, grace periods, and maturities.

In the original version of this post, we based our analysis on Figure A3 in their Appendix (reproduced below from the original paper), which they described as providing a list of their “30 top recipients of Chinese loans as of 2017”. This figure, ordered by percent of debtor GDP, included 14 African countries.

Although HRT assembled this graph to argue that their data is similar to ours, this new graph underscores our point. We believe that some numbers that lie behind the Kiel paper’s analysis are being overestimated, and others underestimated. Some of these differences are clearly significant. Importantly, our differences include most of the countries with the largest loan commitments, highlighted in the two red boxes which we have added above.

Borrower Debt: Loan Commitments versus Disbursements

Loan commitments do not become debts all at once, and some are never disbursed at all. Disbursements of Chinese loans can be particularly slow. Misunderstandings of the difference between loan commitments and disbursements still remain quite common, even among financial reporters covering China-Africa issues. For example, the Wall Street Journal story relied on HRT’s research to highlight Nigeria as a case of “hidden lending.” The reporters suggested 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 believe this assessment is wrong. Our data, which tracks officially-signed loan commitments, does estimate that Nigeria signed about $5 billion worth of loans with Chinese financiers between 2000 and 2017. (Appendix 1 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).

We appreciate that HRT have (as they note in their “response to critics”) now downwardly adjusted their estimate of Nigerian debt to China by US$ 2.6 billion. However, we believe that this example may only be the start of some necessary adjustments to their debt data.

[1]  i.e. in order to find the outstanding balance on a loan in 2017, we divide the interest payment made in 2018 by the interest rate.