Should the U.S. Push for Greater Transparency About Loans China Makes to Smaller Nations at Int’l Financial Institutions? (H.R. 5932)
Do you support or oppose this bill?
What is H.R. 5932?
(Updated May 22, 2020)
This bill — the Ensuring Chinese Debt Transparency Act of 2020 — would establish that it’s U.S. policy to use America’s voice and vote at international financial institutions (such as the International Monetary Fund and the World Bank) to secure greater transparency about the terms and conditions of financing China provides to recipient nations under the rules & principles of the Paris Club. It would require the chairman of the National Advisory Council on International Monetary and Financial Policies to produce a report describing progress toward that goal and discussing the financing provided by China along with any recommendations.
The Paris Club is an informal group of 22 major creditor countries (nations that make loans to debtor countries), that work together on frameworks to reduce and restructure the debt burdens of countries that receive IMF and World Bank loans to promote sustainable growth and financial transparency. China is not a member of the Paris Club despite being the world’s largest official creditor, which leaves debtor countries and international institutions with an incomplete understanding of how much countries owe China and the terms attached to that debt.
The requirements of this bill would sunset seven years after its enactment, or 30 days after the Treasury Secretary notifies relevant congressional committees that China is in compliance with the rules of the Paris Club — whichever occurs first.
Argument in favor
A lack of transparency surrounding the amount of loans made by China to debtor nations around the world and the terms of those loans threatens the stability of the financial system and the independence of debtor nations. This bill would ensure the U.S. uses its voice and vote at international financial institutions to encourage greater transparency about Chinese loans.
Argument opposed
While it may be bipartisan, this bill is unlikely to succeed in getting China to be more transparent about its loans to debtor nations around the world unless or until China chooses to make that information available. As a result, Congress shouldn’t waste its time by trying to advance policies to promote more transparency by China.
Impact
U.S. participation in the IMF, World Bank, and other international financial institutions; China; and countries receiving loans from China.
Cost of H.R. 5932
A CBO cost estimate is unavailable.
Additional Info
In-Depth: Introduced by Rep. French Hill (R-AR) and cosponsored by Rep. Emanuel Cleaver (D-MO), this bill would make it U.S. policy to use its influence at international financial institutions to pursue greater transparency about loans made by China to debtor nations, which often aren’t tracked or disclosed.
The lack of transparency around these “hidden loans” poses a risk of precipitating an economic crisis. Carmen Reinhart, a professor at the Kennedy School of Government at Harvard University, explained at the Nomura Investment Forum in Singapore:
“China’s rise as a global creditor has also meant that there are a lot of hidden debts. That is, countries that had borrowed from China but this borrowing is not reported by the IMF, by the World Bank. So there is a tendency to think these countries had lower debt levels than what they actually have. From the vantage point of surveillance, this means that the IMF, if they’re doing debt sustainability for example for Pakistan, unless they know how much Pakistan owes China they are doing that sustainability exercise blindfolded.”
Before he became president of the World Bank, then-Under Secretary of Treasury for International Affairs David Malpass explained to a congressional committee in 2018 how these Chinese loans are hidden:
“They’re not made public, they’re not given to the international committee, but sometimes they’re not even available to certain parts inside the government itself. That’s an issue because China may make a loan, but not really want the terms of the loan to be disclosed even within the government that it’s lending to.”
The World Bank released a statement to CNBC explaining the importance of debt transparency:
“Borrowers need comprehensive and timely debt data to make informed decisions. It also allows lenders to manage lending risks more efficiently — thereby bringing down the cost of lending for everyone… In short, debt transparency is essential for economic development. So when debts are ‘hidden,’ that’s a problem for everyone — not just the World Bank or the IMF. It’s especially a problem for the citizens of countries whose hidden debt is suddenly discovered, since uncertainty can lead to higher funding costs or, in the worst case, cut them off from funding.”
A Harvard Business Review analysis from February 2020 found that “50% of China’s loans to developing countries go unreported, meaning that these debt stocks do not appear in the “gold standard” data sources provided by the World Bank, the IMF, or credit-rating agencies.” It adds:
“Looking ahead, we find that credit outflows from China have slowed markedly since 2015, in parallel to China’s ongoing domestic economic slowdown. We’ve also documented a recent surge in the number of credit events on Chinese loans, which have not appeared in the reports of international credit rating agencies. Since 2011, two dozen developing countries have restructured their debt to China. This recent increase in the incidence of sovereign debt restructurings of Chinese debt may have a benign interpretation, but given the slower growth and lower commodity prices of recent years, it may well be a sign of brewing liquidity and solvency problems in numerous developing countries. Against this backdrop, much more work is needed to analyze the characteristics and potential impact of China’s lending around the world. If China’s role in international finance continues in the shadows, global risk assessments and country surveillance work will remain dangerously incomplete.”
Media:
CNBC (Context)
Financial Times (Context)
Harvard Business Review (Context)
Summary by Eric Revell
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