Tonga, a nation of 170 islands and just over 100,000 people, is carrying a heavier Chinese debt burden than any other nation except Djibouti, the strategic port at the mouth of the Red Sea.

Official figures show Tonga owes China US$108 million or about 25% of its GDP, but hidden debts raise the total to closer to 40%.

In Djibouti, hidden financing raises its Chinese debt burden from 88% to over 100% of its GDP. The International Monetary Fund believed that 88% was unsustainable.

A careful study tracking almost 5,000 Chinese loans and grants to 150 nations shows that the total advances to emerging nations have reached US$530 billion, only about half of which have ever been officially reported.

The total surpasses lending by the World Bank or the IMF, although US private lending is greater. The study says its estimates are conservative; Chinese balance-of-payments figures suggest total outstanding loans are US$650 billion.

The study, which is published by the Kiel Institute for the World Economy and includes renowned Harvard economist Carmen Reinhart among its three authors, argues that China has sown the seeds for a debt crisis almost identical to that which left much of Africa, Latin America and Asia facing waves of economic depression and sovereign default through the 1980s. In Latin America, the ’80s are known as the ‘lost decade’.

‘The two lending booms can largely be seen as twins’, the study says.

This time, like the last, the lending is mainly advanced by banks in US dollars, maturities are short, and interest rates are high enough to imply lenders are taking on risk. Then, as now, much of the lending was not revealed in official reports. The study notes that many of the same countries are involved.

The last lending boom collapsed when commodity prices, export revenues and economic growth slumped across those countries which had gone on a borrowing spree.

The report says the problem of hidden Chinese debts is greatest in crisis countries such as Venezuela, Zimbabwe and Iran. Indeed, China has reported no lending to those countries to the Bank for International Settlements.

Official lending to developing countries from advanced national aid programs or multilateral bodies such as the World Bank is typically concessional, with long maturities, below-market rates and a grant component of at least 25%. China’s lending includes premium interest rates, is for short terms, and is frequently secured by collateral over commodity export revenue. Only 15% of Chinese lending is concessional.

‘China’s overseas loans share many features with French, German and British 19th century foreign lending, which also tended to be market based, partially collateralized by commodity income, and characterized by a close link of political and commercial interests’, the report says.

One explanation for the fact that loans are not reported to the BIS is that China often uses what is known as ‘circular’ lending to minimise the danger of default.

‘For risky debtors, China’s state-owned policy banks often choose not to transfer any money to accounts controlled by the recipient government. Instead, the loans are disbursed directly to the Chinese contractor firm that implements the construction project abroad—a closed circle. The loans thus remain within the Chinese financial system, making it harder for recipient countries to misuse the money.’

The study’s debt figures include Chinese loans to both the public and private sectors, although it finds that private loans are less than 10% of the total. Low-income countries are the most exposed. Congo, Cambodia, Niger, Laos, Zambia, Samoa and Vanuatu each have debts to China in excess of 20% of their economy. Most of the countries with the greatest exposure are also recipients of funding from China’s Belt and Road Initiative. Besides nations already listed, they include Mongolia, Kyrgyz Republic and Pakistan.

Among the countries most affected, the ‘hidden’ portion of their Chinese borrowing significantly increases their overall debt level. This affects a few dozen countries, particularly Asian countries close to China’s borders and resource-rich African countries. The commercial nature of Chinese lending means the debt-service burdens in these countries are much worse than generally realised.

There are already signs of trouble, with debt restructuring and defaults passing undocumented by the ratings agencies. The study estimates that China has engaged in at least 140 external debt restructurings and write-offs with emerging countries since the early 2000s. It notes that rating agencies don’t record defaults to official creditors.

Tonga is among the countries whose debts have been restructured. When it was struggling to make a US$14 million principal payment late last year, China agreed to defer payment for five years in return for Tonga signing up as a participant in the BRI.

The study says the debt boom is slowing, although it’s hard to gauge how rapidly. Lending to low-income countries is still proceeding at a rapid rate. Much will depend on what happens with the Chinese economy, commodity prices and global interest rates.

While the precedent of the 1980s debt crisis showed it was the borrowing nations that suffered the most, it also affected lenders. With most of the lending channelled through China’s state-owned policy banks, there’s potential for the overseas lending to be affected by China’s troublesome domestic debt dynamics.

The World Bank has also sounded a warning about China’s lending to low-income countries. Its recent and comprehensive review of the BRI warned that the positive gains for the participant countries are in danger of being undone by unsustainable debts.

The review puts the total size of China’s BRI commitments at US$575 billion across 70 countries. The World Bank looked closely at 43 of these countries, and found 12 were expected to increase their debt vulnerability as a result of the BRI investment over the medium term, with most of these already at risk before the BRI began.

If they’re managed properly, the World Bank says the investments envisaged under the BRI would have the potential to reduce poverty levels significantly, but it cautions that many nations lack the capacity to implement US$1-billion-plus infrastructure projects which are a magnet for corruption.