The ‘hidden debt’ in China’s loans to countries is putting the world economy at risk. Experts warn that this could result in a worse-than-expected economic slowdown.

China has been lending money to countries and island nations to build and upgrade their infrastructure. However, the United States and Australia have raised concerns about the Chinese-debt trap in countries such as in Maldives, Sri Lanka, Cuba, Bangladesh and Pacific Island nations

According to Carmen Reinhart, a professor at the Kennedy School of Government at Harvard University, a lack of transparency would also affect investors who are considering bonds issued by countries. The secrecy would also hinder the work of organizations like the International Monetary Fund (IMF), which are helping the countries with their debt.

Last month, at the Nomura Investment Forum in Singapore, Reinhart said China’s rise as global creditor also means 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,” she explained.

German Development Minister Gerd Muller had also stated the same earlier this year when he visited Africa. Muller had warned emerging economies against becoming ‘too dependent on loans’ from China. He said Chinese investments in developing nations and emerging economies are often rather opaque with ‘strings attached’ to loans.

Reinhart said the limited information hinders investors in making investment decisions about bonds issued by those countries.

“There is some information about the size and timing of Chinese loans from the financial press and a variety of private and academic sources, but information about loans’ terms and conditions is scarce to nonexistent.”

The current president of the World Bank, David Malpass in a speech in 2018 had shed light on Chinese loans to Venezuela, which was denominated in barrels of oil.

“This has the effect of masking the exact amount of payments that China made to Venezuelan officials and that Venezuelans are expected to make to China in the future.” Malpass added that if you ask China for its terms and condition, you will not find them.

China Venezuela Oil loans Oil workers gather by an oil well operated by Venezuela's state-owned oil company PDVSA in Morichal, Venezuela, on July 28, 2011. Photo: AFP/Getty Images

The World Bank holds debt transparency critical. It said borrowers need comprehensive and timely debt data to make informed decisions.