WASHINGTON/TOKYO -- A debt relief scheme worked out by global financial leaders for the poorest nations has raised concerns as it fails to address China's "hidden loans" extended through state-controlled lenders and Beijing's demand for secrecy from debtors.
Finance ministers and central bankers from the Group of 20 leading economies on Wednesday agreed to extend its debt service freeze for poor countries by six months beyond the end of 2020, a move designed to prevent heavily indebted governments from defaulting.
Still, this was half the yearlong extension the 73 eligible countries had asked for. The decision was largely driven by China's refusal to provide relief for loans by the China Development Bank, which it claims is a commercial lender despite being owned 100% by the Chinese government.
China's stance has raised concerns that debtor countries would use the money that is freed up to repay the Chinese bank instead of investing in their own economies. The bloc decided to set a shorter window for debt relief so it could better monitor the situation.
"This G-20 meeting was a compete failure," said an official from the International Monetary Fund.
Some of these countries, like Zambia and Mozambique, face debt equivalent to over 100% of their gross domestic product. The World Bank considers 33 of the 73 countries to either be in external debt distress, or at a high risk for it.
The 73 countries together owe $744 billion to the World Bank and other foreign actors. Official government loans from a G-20 member accounts for $178 billion, 63% of which comes from China. Certain countries like the Republic of the Congo and Djibouti owe 50% to 60% of its total external debt to China.
Lending by the China Development Bank is closely tied to Beijing's Belt and Road infrastructure-building initiative. The Chinese government has been criticized in recent years for drowning developing countries in debt, then taking control of assets like natural resources or ports when they fail to repay. For example, there is concern Kenya will be forced to hand over control of its Mombasa port, the largest in East Africa, if it falls behind Chinese loan payments for a railroad.
Chinese financing also carries an interest rate of over 3%, compared with the roughly 1% for World Bank and IMF loans.
The G-20 is requiring countries to disclose information on their external debt in exchange for the six-month freeze. But Chinese lending "comes with a lot of confidentiality requirements, so recipients can't make details about rates or collateral public," said a source at the World Bank.
Just 44 of the eligible countries had applied for the debt freeze as of Oct. 6. Many heavily indebted countries like Bangladesh, Cambodia and Kenya have not applied.
According to a team, which includes World Bank chief economist Carmen Reinhart, China has lent $385 billion to developing countries, including $200 billion in hidden debt. Although much of this lending technically came from private-sector actors, they are believed to be a piece of national policy.
"This could become a problem for Japan as well," said an official at Japan's Finance Ministry. Japan is responsible for 15% of official bilateral loans to the 73 countries, making it the largest creditor after China. If major emerging nations like Brazil and Turkey fall into distress, advanced economies would suffer a hit as well.
The G-20 plans to create new rules geared toward debt reduction next month in an attempt to bring China into the fray on debt relief for developing countries.