Why does China hide its overseas lending, and why do borrowing countries accept hidden loans?

China has emerged as the world’s largest official creditor and there is ongoing debate around the nature and impact of its growing financial influence. Chinese lending is unique in that half of its overseas loans are unreported to credit markets, potentially concealing the true financial health of borrowers and China’s role in sovereign debt markets. This paper argues that China’s decision to extend hidden loans is driven by both the interests of the Chinese state and debtor governments. First, China has a geopolitical interest in avoiding international opposition to its lending, particularly to rogue states. Second, borrowing countries stand to benefit from hidden loans when they face domestic opposition to Chinese intervention or fear credit market punishment if they take on excessive debt.

I test the determinants of hidden lending using recently released data on China’s reported and unreported overseas lending. I use a seemingly unrelated regression to demonstrate that a country is more likely to receive a hidden loan when it has an existing conflict with a Western power or is at risk of losing access to traditional credit markets. This is the first study of hidden lending on the sovereign debt market and the results have implications for international relations and political economy research into China’s global influence.