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Opinion This crisis has taught us the true cost of doing business with China

Chinese President Xi Jinping visits a port in China's Zhejiang Province last month.
Chinese President Xi Jinping visits a port in China's Zhejiang Province last month. (Ju Peng/Xinhua News Agency via AP)

Through the coronavirus crisis, the whole world is learning, the hard way, the true cost of doing business with China.

Reflexively secretive, that country’s communist rulers withheld or played down critical information about the virus until it was too late to prevent the pathogen from spreading from Wuhan via the transportation systems and industrial supply chains that link the People’s Republic to everywhere else.

Public health is not the only area in which China’s insistence on playing by its own nontransparent rules may threaten international stability. Global finances, especially those of the world’s poorer countries, face what might be called Chinese secrecy risk, too.

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At issue are hundreds of billions of dollars in loans that China extended to less developed nations in the past two decades, possibly more than the World Bank and other multilateral development banks combined, with little or no exposure to the kind of public scrutiny that Western governments, multilateral institutions and private banks generally accept when making loans.

Global Opinions writer Josh Rogin has obtained a 2018 U.S. diplomatic cable urging Washington to better support a Chinese lab researching bat coronaviruses. (Video: The Washington Post)

With their commodity exports plummeting amid the global economic crash, debtors to China in Africa and Asia may soon be faced with a horrible choice: Impoverish their people to pay debt service to China or default and forfeit key national assets, which they posted as collateral to Beijing. Many experts liken the situation to the “Third World” debt crisis that hammered the global south in the 1970s and 1980s.

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The world’s public and private sector institutions can only guess at the scope and consequences of this problem without clear information about who owes China how much and on what terms.

The origins of China’s overseas lending spree lie in its need to find profitable uses for its vast reserves of dollar export earnings while also seeking to gain political influence in strategic, resource-rich regions of the world. Its centerpiece is President Xi Jinping’s Belt and Road Initiative whereby Beijing has financed infrastructure projects in Laos, Pakistan and Nigeria, among other countries.

In a sense, China’s conduct resembles past U.S.-led Western development-finance efforts — with one crucial exception. Generally, the West upheld a distinction between “soft” official lending, done under concessionary terms, and private bank lending, which included market interest rates and collateral.

China, however, uses state banks to lend to governments, or, often, government corporations, at market rates. Hungry for cash and — until now — confident they could pay China back through future growth, African and Asian nations took the deal. Corrupt officials may have regarded China’s secretive ways — including nondisclosure clauses in loan agreements — as an added attraction. Fraud and waste plague many Chinese-backed projects.

Yet because of its hybrid official-commercial character, Chinese state-bank lending falls outside the purview of two key international monitors: the Paris Club for government-to-government credits and the Institute for International Finance for private-bank-to-government funding.

Harvard economist Carmen Reinhart and two colleagues, Sebastian Horn and Christoph Trebesch, from Germany’s Kiel Institute for the World Economy, spent two years scrubbing previously untapped data sources and found that China had loaned $400 billion to 106 developing and emerging-market countries through 2017 — half of which does not show up in debt-burden data from multilateral organizations and credit-rating agencies.

Fifty developing countries owe at least 15 percent of their respective GDPs to Chinese state banks, the study found; 12 of these owed more than 20 percent.

Zambia may soon have to forfeit collateral — its third-largest copper mine — in return for debt relief from China, according to the Wall Street Journal. There is precedent: In 2018, Sri Lanka had to give China a 99-year lease on a port because it couldn’t pay the construction loan.

Western governments and financial journalists have been calling attention to this ticking bomb for years, urging China to join the Paris Club and assume the transparency obligations that go with it. China has insisted instead on dealing with its debtors one-on-one.

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China modified that stand slightly amid the coronavirus crisis by agreeing to the Group of 20 governments’ very limited moratorium on debt service for the world’s 76 poorest countries through the end of 2020.

With so much obscurity surrounding what nations actually owe China, there is a real risk to the United States and Western creditors, public and private, that cash debt relief they provide poor countries will end up funneled to Beijing’s banks. And broader restructuring would still require major changes in Beijing’s policies.

There can be no effective and coordinated international response to the financial crisis facing the whole world, especially its poorest nations, unless and until China agrees to come completely clean about its overseas lending.

Having failed to meet its global public health responsibilities, Beijing must not be allowed to get away with nondisclosure and self-centeredness in global finance.

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Read more:

The Post’s View: How China’s authoritarian system made the pandemic worse

Fareed Zakaria: The U.S. and China’s blame game isn’t saving any lives

John Pomfret: Does the future still belong to the U.S. and China?

Wess Mitchell: Covid-19 is a chance for the U.S. and Europe to unite on China

Isaac Stone Fish: Why do we keep treating China as a source of reliable information?

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