Monday, August 17, 2020

What are Taiwan, China, and the United States Doing in Somaliland?

Typical sign for Taiwan's representative offices
(revised August 20). Taiwan has been courting Somaliland, a breakaway region of the failed state of Somalia. As Wikipedia puts it, "Somaliland, officially the Republic of Somaliland, is a self-declared state, internationally considered to be part of Somalia." 

Some were wondering if China would react with a heavy hand.

I originally thought they would ignore it. But that didn't happen. As Eric Olander has noted at the China Africa project: China's response was delayed and so far remains rhetorical, but they took (sharp) notice.  

Why did China not ignore this new office, as it has Taiwan's establishment of representative offices around the world? This is not simply a Taiwan-Somaliland-China-Somalia dispute. It involves the US. And it involves Hong Kong. 

What Happened in Somaliland?

What happened in Somaliland was Taiwan's establishment of a representative office, not an embassy. This is common practice for Taiwan around the world in the countries that have switched recognition (i.e. official diplomatic ties) from Taiwan to Beijing. (The photo here is courtesy of Wikipedia and shows a similar office in the UK.)

Taiwan has had a representative office just like this since 1979 in Washington, DC and in 12 other locations around the United States. It has similar offices in at least 57 other countries that are important for Taiwan's trade and consular activities. 

Beijing doesn't fight these, aside from pressure to have them located in commercial centers (e.g. Lagos, in Nigeria's case) rather than diplomatic capitals (Abuja). After all, despite the tension of geopolitics, the island and the east coast of China 100 miles away have had their own thick web of family and business ties: around $180 billion in cumulative investment from Taiwan into China as of 2019. The world has welcomed investors from Taiwan, and trade with Taiwan, just as China has. 

It's no doubt annoying to Beijing, but the office established in Somaliland (a region of the legally recognized state of Somalia) is juridically no different than the 12 regional offices Taiwan has in the United States. Or the dozens of similar representation offices in Nigeria, South Africa and around the world. It was not the act of a sovereign state. 

Diplomatic recognition with a real, internationally recognized sovereign state, is a different kettle of fish. And Taiwan gaining an official seat in international organizations that are reserved for states: that's politics, not commerce. That's why Beijing fights with tooth and nail to keep Taiwan out of international organizations. It's not just de facto recognition, it's de jure.

Then why did Beijing react so strongly this time? It's about the United States, and it's about Hong Kong. Somaliland (like Hong Kong) was originally a British colony, “one of Britain’s least rewarding possessions”.  The timing of the Taiwan courtship, and the US connection to this, has to be seen against the background of China's recent crackdown on Hong Kong's hopes for increased autonomy.

About the United States role, here's Taiwan's press release on the opening of the office: "Taiwan’s Minister of Foreign Affairs Joseph Wu (吳釗燮) posted on Twitter on Aug. 9 to welcome [the arrival of Taiwan's representative in Somaliland] and thank the U.S. National Security Council for its positive feedback on the emerging ties between Taiwan and Somaliland."

It's helpful also to remember--especially these days as we seem to be sliding blindly into a new Cold War--how the Taiwan-China diplomatic struggle came about, and the role the United States played. So here's a quick history lesson.

Appendix: Short History of US-China-Taiwan Relations and Why it Matters for Africa

I lived in Taiwan from 1979 to 1980 doing four hours a day of intensive Mandarin and teaching English to support myself. I remember this as one of the happiest years of my life. But my time in Taiwan was also a time of great uncertainty for the island. 

At the end of 1978 the United States had finally established diplomatic ties with Beijing, breaking them with the Republic of China (Taiwan). The US withdrew the large military garrison we had established there. No one was sure what would happen next.

It seems to be largely forgotten in Washington today that the "Taiwan issue" was jointly created by Japan, which took the island of Taiwan from China in 1895 after attacking the crumbling Qing empire (see 1895 Treaty of Shimonoseki) and the United States, which used our naval forces to (peacefully) intervene in the Chinese civil war during the 1950s.

Here's a quick reprise of our US role. 

In 1945, after losing World War II, Japan returned the island of Taiwan to China, then governed by the Kuomintang (KMT, the National People's Party), which was fighting a civil war against the Chinese Communist Party (CCP). 

In 1949, when the communists were about to win the war in China, the KMT fled to Taiwan, 100 miles offshore. 

In 1950, after the outbreak of the Korean War, the US established a naval blockade between Taiwan and mainland China, sending the Seventh Fleet to patrol the Taiwan straits. We then signed a mutual defense treaty with the KMT in Taiwan. We organized an international trade embargo against China that lasted for 21 years (Nixon lifted it in 1971). And between 1949 and 1971, the United States blocked Beijing from taking the China seat in the United Nations, keeping the KMT government artificially propped up as "China". 

So why does all this Cold War history matter for Africans? 

First, it was largely the African governments of countries emerging from colonialism in the 1960s that provided the votes in 1971 that enabled Beijing to be seated at the United Nations. The 54 legally recognized countries on the African continent were (and remain) hugely important in China's diplomacy. 

Second, the Cold War, of course, is no longer a distant memory. And the fingerprints of the Trump administration are not a mystery in the Somaliland story.

Let's hope that the ripples from this little story in far away Somaliland do not go down in history as one of the first shots of something worse than a cold war. 

It can't be repeated often enough that in the Cold War as it was fought across Africa--from Mozambique to South Africa, from the Congo to Angola--there were no winners when the elephants fought. The grass was trampled.

This post was revised on August 20 to reflect the Chinese reaction to Taiwan's move and to note the relationship between current events in Hong Kong and Somaliland's historical status as a British colony. 


Monday, August 3, 2020

Guest Post – Investment in Africa: China vs “traditional partners” – Part 2

This guest post, the second of two, is by Dr. Thierry Pairault, research director at France's Centre National de la Recherche Scientifique (CNRS). [1]

In the first part of this post, I used Eurostat (the statistical office of the European Commission) statistical data issued in March 2020 to assess the investment efforts of traditional partners in comparison with China. My conclusion was twofold. It was, of course, the confirmation of the importance of China's role with the caveat about the effects of offshore financial centres. I will discuss this further in the first section of this post. Secondly, it appeared that the traditional partners had by no means forsaken Africa as a narrative repeated ad nauseam would have it. The question is therefore whether or not European countries show a preference for Africa. That will be the second point I will address.

Offshore Financial Centres

There is no single, clear and objective criterion for identifying a country as a tax haven or an offshore financial centre. What will often distinguish such a haven will be that it enables companies (but also individuals) to carry out tax and financial operations otherwise considered fraudulent in their own country or in a third country.

In the case of the Netherlands, a report commissioned in 2016 by the Dutch Ministry of Foreign Affairs concluded that at least one third of companies operating in developing countries’ extractive sector were directly or indirectly financed or owned by Dutch shell companies on behalf of multinationals. These multinationals, from a wide range of countries, used these shell companies for the sole purpose of avoiding corporate income taxes payable to developing country governments. According to Eurostat, in this highly opaque background, during the six years 2013-2018, almost a third of Dutch investment flows were intended for war-torn Libya. Regardless of the statistical weight of flows labelled as Dutch, it is impossible to ascribe them to any specific country or even to consider them as genuine investments. 

Hong Kong is not only a tax haven but also a judicial haven (a territory, which is not subject to the laws commonly accepted in most other countries). It is also a bridge through which China has more easily connected with the outside world. Official Chinese statistics reveal that, at the end of 2018, 81% of China's outward FDI stock (present value of accumulated annual FDI flows) is reportedly held in tax havens, of which Hong Kong accounts for more than two thirds (69%). This phenomenon is not expected to stop in the coming years even if the share of annual flows decreases slightly. Hong Kong statistics tell us how these funds are then redirected from the former colony.

Hong Kong's outward direct investment statistics are published online by the Census and Statistics Department, Table 1 gives the figures for the last four years (2015,  2016, 2017 and 2018). These figures show a very significant distribution of destinations (see Table 2). The first thing to note is that, despite the change in tax rules benefiting foreign companies on the Chinese mainland, the old practice of round-tripping seems to be perpetuated to such an extent that 62% of Hong Kong's FDI flows in 2018 were rerouted to mainland China. It is also noteworthy that 44% of Hong Kong's FDI stock has been accumulated in tax, banking, and even judicial havens (offshore havens), including the Netherlands. This means that only 11% of Hong Kong's FDI stock has been accrued in countries other than China and the six mentioned tax havens, i.e. accrued in 190 countries, 54 of which are African. Furthermore, only 2.5% of Hong Kong's total FDI stock is invested in the manufacturing sector. As such, the potential impact on the industrialisation of the African continent would be very limited, even if a small boost might be significant in some countries. 

China vs Africa

In a previous post in the CARI Blog (China in Africa: Much Ado about Investment) and elsewhere, I made it clear that China's investment in Africa is a very small percentage of Chinese outward investment. The same is true for all other countries investing in Africa: according to UNCTAD, in 2019, only 2.9% of global FDI flows went to this continent of 54 countries. This is not a one-time drop since Africa's inward FDI stock was only 2.6% of the world stock in 2019. No wonder. Most FDI originates from developed countries (76%) which invest primarily in other developed countries (67%). The question then is whether traditional partners treat Africa differently from the way it treats China (see Table 3).

In Table 3, I have included only European countries with a colonial past in Africa, except for the Netherlands because of its investments' uncertain origin (see supra). For comparison, I have added the USA and Japan for which Eurostat gives figures. In 2018, the stock of European direct investment (28 countries) in Africa was one and a half times higher than that of the same 28 countries in China. The stocks of France, the United Kingdom, Italy and Spain in Africa would have been about two and a half times higher than their investment stock in China. As for Portugal, while it invests in Africa, it recorded no investments in China. 

Conversely the German FDI stock in China is about six times higher than in Africa. Belgium, for its part, expresses an infinitesimal preference for China, but neither Africa nor China are important targets for its FDIs. As a rule, northern and eastern European countries (with the exception of Germany) hardly invest in Africa or China. Except for Belgium, European countries that invest preferentially in Africa are maritime countries with an African colonial past. 

I would posit that history and geography are therefore very significant factors in explaining such a situation. Therefore, it comes as no surprise that the United States and Japan are targeting China instead of Africa for investment: both were much more active players in China before 1949 than European countries (except the United Kingdom). 

The question that might now arise is whether comparisons between countries or groups of countries still make sense from an economic point of view when multinationals, including Chinese ones, enjoy de facto autonomy that international institutions can hardly control.

Friday, July 31, 2020

Guest Post – Investment in Africa: China vs “traditional partners” – Part 1

This guest post, the first of two, is by Dr. Thierry Pairault, research director at France's Centre National de la Recherche Scientifique (CNRS). [1]

The highly active and multifarious presence of Chinese companies in Africa and the unrelenting reiteration of a perfectly crafted narrative, have all contributed to the feeling that former colonial powers and other developed countries have disengaged from Africa. Until recently, the lack of Western investment statistics in African countries to compare with China's own statistics and reports of China’s investment and financing (see my post on CARI blog China in Africa: Much Ado about Investment) had convinced Africans of this abandonment. However, in June 2019, Eurostat (the statistical office of the European Commission) published its most recent Foreign Direct Investment (FDI) statistics, referenced in an earlier paper (Investissements en Afrique : La Chine et les « partenaires traditionnels »). On 20 March 2020, Eurostat updated these statistics on European direct investment abroad. In this note I will briefly compare these statistics with those produced by MOFCOM and the Chinese State Bureau of Statistics.

According to Eurostat, in 2018, if I eliminate the Netherlands (internationally known as a tax haven, hence whose FDI is not properly Dutch), France continues to have the largest stock of FDI in Africa (€46 billion). This primacy could very soon be breached by China, which ranks second with a stock lower by only 5 billion euros (€41 billion). The USA are still in third place (extrapolated from 2017 figures because 2018 statistics are still unavailable) ahead of the United Kingdom (€2 million less than China), Italy (€15 million less than China), Germany (€29 million less than China). Luxembourg and Cyprus operate systems similar to the Netherlands, albeit to a lesser degree.

China's expansion is, indeed, very striking, as shown in Table 1. However, it cannot be concluded that traditional partners no longer invest in Africa because Western investors, in order to maintain a given level of investment stock, must at the very least reinvest some of their profits, but also replenish obsolete capital. Indeed, what we are witnessing is NOT that traditional partners have abandoned Africa, but that Africa has gained a new and powerful partner - China.

To go further in the analysis, I undertook a suite of principal component analyses to better understand the structure of the data and to better appreciate the proximity [correlation or lack thereof] between observations. These analyses reported in the above-mentioned paper showed that China's behaviour was just as “capitalist” and “mercantile” as that of Western countries, especially European ones. However, the traditional partners do not favour all the African countries receiving their FDI in the same way... I selected 25 African countries that either had in 2017 FDI stock of at least 1% of the European investment stock or that held a stock of at least 1% of Chinese investment. The year 2017 has been selected here and not the year 2018 for which many statistics are still missing.

These 25 countries benefitted from a total of 96% of the European stock of FDI in Africa and 89% of the Chinese stock.  In other words, European investment was targeted at a smaller number of African countries as compared to Chinese investment. If I assume European investment to be purely economic, the question arises as to whether the greater dispersal of Chinese investment might also be expressing more political (for instance, building a client network for support within UN agencies) than economic objectives. As far as Western countries are concerned, I selected only those with an investment stock in Africa of more than ten billion euros (Germany, the United States, France, Italy and the United Kingdom) for comparison with China. The results are shown in Table 2, Map 1.

Table 2. – Recipient countries and main investor countries

In 2017, three countries climb to the top of the investor countries’ list with the most first, second and third places: China (with twenty places) followed by France (with nineteen places) and the United States (with fourteen places). China's advance is even clearer if I only take into account the number of recipient countries where it tops the list of investor countries (eleven), while France tops the list with eight and the United States with three. This growing Chinese preeminence is politically very important from an African political point of view; however, France and the United States remain the most important investors from an economic point of view. 

It should be noted, however, that a high ranking does not always mean more investment. For example, China is the leading investor in Namibia, but its investment stock there is very small – only a quarter of its investment stock in Algeria. In Algeria, however, China only ranks fourth. It should also be noted that China has taken over the position of a “traditional partner” which today is relegated to second or even third place (e.g., France, Italy, and the United Kingdom). 

Special mention should be made of Algeria, which has distanced itself from France (third-largest FDI stock) without being economically lured by China (fourth-largest stock); instead it has opened its doors to both the United States (second-largest stock) and Italy (first-largest stock) which hold a large share of the exploitation and distribution of its oil and gas resources. China's breakthrough is also still very limited in Egypt, Morocco and Tunisia. In fact, North Africa does not appear to be a privileged land for investments by Chinese companies – even in the case of Egypt, which is nevertheless endowed with a "Chinese" special economic zone, the only one in Africa that is reputed to function to the satisfaction of the parties [2].

A final point:  one must avoid any absolutist interpretation of both the Eurostat data and the findings they suggest. Generally speaking, available FDI statistics are not yet very reliable; they capture financial flows that may underestimate actual investment. Furthermore, if one has doubts about the quality and comprehensiveness of Eurostat's FDI statistics and those of UN Comtrade, similar doubts about the quality of those produced in China should also be entertained. For the former, the role of tax havens, as in the case of the Netherlands clearly skews their FDI figures. In the case of China, statistics do not tell us the amount of investment that goes through offshore financial centres (starting with Hong Kong) possibly en route to Africa.

Saturday, July 18, 2020

Did Benn Steil Get it Wrong About China's Intentions for BRI Debt Relief?

On April 15, 2020, the G-20 announced a response to Covid-19's economic distress:  an unprecedented agreement to suspend official bilateral debt service payments for the world's low income countries for the remainder of 2020. The G-20 finance ministers are meeting again and there's one question everyone will be wondering:

Does China intend to live up to its Covid-19 pledge on debt relief? 

One of the most influential stories about Chinese debt relief intentions was an April 24 piece on Foreign Affairs' website, "Chinese Debt Could Cause Emerging Markets to Implode," by prominent Council on Foreign Relations economists Benn Steil and Benjamin Della Rocca.

Steil and Della Rocca argued that China had “added caveats that make a mockery” of its G-20 debt relief commitment.  Beijing planned to exclude hundreds of large Belt and Road Initiative (BRI) loans in low income countries, they charged.

Their source for their analysis was an op-ed in the English language Global Times, widely seen as a source of official views. The op-ed was by Song Wei.

Song, who works at a Chinese think-tank under the Ministry of Commerce, was a Fulbright Fellow a few years ago at Columbia University. She writes frequently on Chinese foreign aid and on African issues.

Her piece on Africa's debt problems was clearly written before the G-20 announcement and did not reference it.  She made the unremarkable point that only China's interest-free loans were eligible for debt write-offs. But then she added that “preferential loans are not applicable for debt relief.”

This was confusing. And I can understand why Steil and Della Rocca misunderstood Song's statement.

So let us (belatedly) help them out.

In April, our team (myself, Kevin Acker, and Yufan Huang) was deeply immersed in the final stages of researching and writing our latest Johns Hopkins University SAIS-CARI working paper:  "Debt Relief with Chinese Characteristics"(June 2020). We had collected and analyzed dozens of examples of debt relief, including China Eximbank's (the sole source of preferential loans in China) restructuring of a number of concessional and preferential loans between 2000 and 2018.

Steil and Della Rocca wouldn't have known -- as we did by then -- that the Chinese term “债务减免” (debt reduction and cancellation) is often mistranslated into English as “debt relief”.

So when we saw the same piece in Global Times, we read the statement "preferential loans are not available for debt relief" differently. Song Wei was simply stating something most China-Africa watchers already knew: Africans should not expect debt write downs or cancellation of anything but interest-free loans, consistent with China's debt cancellation actions in Africa over the past 20 years. Other loans would not be cancelled.

Notwithstanding this confusion, Song's article had plenty of other information that clarified her point.

Most importantly, she described how rescheduling and payment delays (i.e. debt service suspensions like the G-20 pledge) were among the many non-write off measures available for China Eximbank’s preferential loans:
"If any debtors encounter difficulties to pay on time, there may be tailored plans including rescheduling [emphasis added]… adding grants to help bring projects back to life, conducting debt-equity swaps, or hiring Chinese firms to assist operations. . . adopting such measures to help the projects get back on track and gain profit has advantages over simply offering write-offs which may only solve issues on the surface and are unsustainable." 

So clearly, although we still do not have much detail on what has happened in the first month of the DSSI, Song Wei's op-ed is not evidence of a Chinese plan to renege on its G-20 commitments.

Unfortunately, Steil and Della Rocca's piece was cited as the source for other articles, for example "China Squeezes Debt Repayments From Virus-Hit Nations" (Asia Times, May 5). But what's sad--and more important--is the way this piece has become part of the conventional wisdom.

Just two days ago David Leonardt, a NYT columnist I follow and respect, wrote that China has "tried to squeeze low income countries for debt payments during the pandemic."

No evidence or links provided, but look closer: Leonardt's charge is simply a clear restatement of the Asia Times headline, which is based on Steil and Della Rocca's piece, which, I hope I've shown, was in error.


If China was simply more transparent none of this would be necessary. But until then, we'll keep trying to tell "the real story".

Thursday, June 25, 2020

Putting a Dollar Amount on Chinese Loans to Low Income Countries


The Diplomat has published the analysis Yufan Huang and I did of the World Bank's data on outstanding debt in the 68 low income countries that are eligible to benefit from the G-20 Debt Service Suspension Initiative (DSSI).

Slicing and Dicing the Data
Here are some of the highlights.
  • The World Bank is still the largest creditor in poor countries (US$106 billion). But Chinese is very close (US$104 billion). In sub-Saharan Africa, China (US$62 billion) has outspent the World Bank (US$60 billion) as the biggest official lender to Africa’s poor countries. However, if Angola is removed from the data, the World Bank remains the largest creditor for low-income countries in Africa ($43 billion by China vs $59 billion by the World Bank). 
  • Creditors are owed about $43 billion in total debt service in 2020, and 30 percent of that is owed to China, more than to any other creditor.
  • However, Angola owed China US$19 billion and Pakistan owed US$16 billion. These two made up 34% of the Chinese debt for all the 72 low-income countries.  Half of all the debt service due to China this year is owed by just these two countries (US$6.45 billion).  
Mixing loans from Taipei (Republic of China) and Beijing (People's Republic of China)

We didn't note this in our piece for The Diplomat, but comparing our data at a granular level with the World Bank's figures, we found that, ironically, in some countries they were including debts actually owed to Taiwan as China. This was the case for part of the debt listed as due to "China" in Liberia, the Central African Republic, and all the debt listed as "China" in Burkina Faso between 2014 and 2018. Burkina Faso only established diplomatic relations with China in 2018 and so did not qualify for any official lending. Beijing is happy to claim that Taiwan is an integral part of China, but will loans from Taipei be honored as Chinese loans?

Wednesday, April 1, 2020

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

This post, co-written by CARI's Director, Prof. Deborah BRAUTIGAM, and CARI's Research Manager, Kevin ACKER, was originally published on April 1, 2020. It was revised and updated on May 14, 2020 on the basis of a conversation with Horn, Reinhart, and Trebesch (HRT), and a “response to critics” HRT have published on the Center for Global Development blog.

Photo credit: Shutterstock
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.

Note: We have added the red box to this graph reproduced from Horn, Reinhart, and Trebesch, “China’s Overseas Lending,” July 3, 2019.

We pointed out in our original post that this graph was clearly not based on SAIS-CARI’s Africa data. When we compiled our own list of the top recipients of Chinese loan commitments for African countries during this same period, we saw a number of sharp discrepancies.  

After the original version of this blog post was posted, we engaged in a productive conversation with the Kiel papers’ authors. They informed us that they had made a mistake in the note for Figure A3. The figure does not show the 30 top recipients of Chinese loans as of 2017. Rather, it shows the 30 countries with the highest Chinese debt to GDP ratios. They noted that they have now revised this language in a new draft of their paper.

Even once this misunderstanding was clarified, it remains clear from Figure A1 below, included in their CGD blog response, that in some cases their data on commitments still differs significantly from ours. The HRT researchers have published their estimates of borrowers’ Chinese debt stocks on their personal websites. However, as of May 12, they have not published their estimates of Chinese loan commitment data. Therefore, it is difficult for us to pinpoint precisely where or why these calculations diverge. Furthermore, HRT note that their data includes loan commitments to private borrowers. CARI data is limited to loan commitments to African governments and their state-owned enterprises, which is roughly equivalent to “public and publicly guaranteed” (PPG) borrowing, and specifically does not include private borrowers. This further clouds the comparison.

Note: We have added the red boxes to this graph reproduced from Horn, Reinhart, and Trebesch, “China’s Overseas Lending: A Response to Our Critics” (May 2020). HRT note that although they have estimates on public and publicly guaranteed Chinese loan commitments, their data in this graph also includes Chinese loan commitments to private borrowers, which our data excludes.

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.

* * *

In February 2020 researchers at the IMF voiced veiled criticism of the Horn, Reinhart and Trebesch estimates. We agree with the IMF. The Horn, Reinhart and Trebesch estimates of the debt that African governments owe to China are calculated from their unpublished loan commitment data. From what we can see in their new Table A1, we believe that they have overestimated some of the African “debt” to China (the IMF’s main concern regarding low-income borrowers) and underestimated it in other cases. 

Furthermore, because the World Bank’s Debtor Reporting System data used by HRT are not publicly available, we are not able to independently verify discrepancies between DRS data and our own estimates of aggregate commitment amounts. Since this is the core of HRT’s argument that 50 percent of Chinese loans are "hidden", this remains a very important missing puzzle piece. Without access to both sets of “hidden” data on loan commitments, however, it is impossible to know which way these apparent mistakes tip the scales.

Appendix 1: Commitments and Disbursements: the Nigeria Case

Thanks to Nigeria’s highly transparent Debt Management Office (DMO), we can track repayments and disbursements annually for each loan Nigeria has signed with China. Tracking repayment is easy: the DMO lists the amount of debt service paid on each loan in each year, separated into principal and interest payments. To calculate disbursement (as these amounts are not usually made public), we take advantage of SAIS-CARI’s data on interest rates. Using the interest rate, we can calculate the amount outstanding on each individual loan from the interest payment made on that outstanding balance the following year. We then compare the year of loan commitment from SAIS-CARI data with the schedule of repayment as published by the DMO. 

The data show that it can take up to 7 years from the year of loan signing for loans to be fully disbursed. Some projects move even more slowly, with disbursements beginning years after loan signing. This means that a loan signed in 2020 may not be fully disbursed until 2027 (at which point the commitment becomes the same as the debt).

Take the Chinese loan for the 78 km Abuja Light Rail Project, signed in 2012 for USD 500 million. Based on the interest payment of USD 2.7 million in 2013 and the interest rate of 2.5%, only USD 109 million was disbursed in the first year. Therefore, to count the full amount of the loan in 2012 would be to overestimate Nigeria’s debt to China by USD 391 million. 

The loan for the hydroelectric project in Zungeru is another good example. Originally signed in 2013 for USD 984 million, the project was repeatedly delayed, and Nigeria did not start servicing this loan until 2017. In 2018, only USD 4.2 million was paid in interest on this loan, suggesting that by 2017 only USD 168 million had been disbursed.

As shown in table 2 below, many of the loan commitments China made to Nigeria from 2000-2017 were not fully disbursed by 2017, in addition to the loans mentioned above. Based on our calculations, the outstanding balance of Nigeria’s debt stock to China was USD 1.94 billion, which almost perfectly matches Nigeria’s self-reported figure of USD 1.93 billion. The discrepancy with the total loan commitments of USD 5.3 billion is accounted for by the USD 580 million that had already been repaid, and the USD 2.8 billion that had yet to be disbursed. “Hidden lending” is not a problem in Nigeria, and we wonder how much of a problem it actually is in other countries.

[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.