The State Department’s annual fiscal transparency report, published on Tuesday, came with a new rule: any government that lends money abroad must now make the terms of those loans public, including the liabilities and the collateral behind them. Then the report turned to the world’s largest sovereign lender and found it wanting. The two moves belong together, and the second one explains the first.
The new requirement is buried in a document that most of Washington will not read, but it is aimed at a specific target. Chinese banks and state-owned enterprises hold claims across Asia, Africa, and Latin America, and the terms of those claims are largely hidden. The report said China’s lack of transparency related to its foreign claims, including loans and other obligations held by state-owned and private commercial banks and state-owned enterprises, obscures the scale and terms of many sovereign liabilities, undermines accurate risk assessment, and increases the likelihood of unexpected defaults or debt restructuring in emerging markets.
The officials did not say the rule was written with China in mind. They did not need to. Among the governments the report assesses, China is the one that both lends abroad and keeps its loan book secret. The requirement applies to lenders, and the chapter on China is where the warning lands.
What the report found
China passed some of the checklist: the enacted budget, year-end report, and executive budget proposal are published; basic procurement and extraction awards are disclosed; the sovereign wealth fund has a legal framework. The failures are in the places that matter most to creditors. Not all major state-owned enterprises publish audited financial statements, and they do not disclose their debt holdings. Budget documents do not say what is allocated to the SOEs or what they earn. The government runs off-budget accounts that no auditor touches. The state audit body falls short of the independence standards the report demands. And the foreign claims, the single most important item for any lender trying to price risk, are simply not visible.
The systemic argument is the serious one. When a lender as large as China hides the terms of its loans, nobody can tell which borrowers are overextended until one of them defaults. Hidden collateral clauses can give Beijing claims on ports, mines, or power grids that no balance sheet shows. Surprise restructurings hit everyone: the borrower, the other creditors, the market. Transparency is not a favor to China’s critics; it is the basic information a functioning debt market needs. The report is saying that Chinese lending, at its current scale, is a blind spot in the global financial system, and blind spots are where crises start.
The skeptic’s case is worth keeping. The fiscal transparency report has no enforcement mechanism. It cannot fine anyone, and China has shrugged at far harsher criticism than this. The report itself acknowledges that dozens of governments fail the test every year, and most face no consequences. Washington’s own record on fiscal disclosure is not the point here, but it is true that a report card from a rival superpower, in the middle of a trade war, will be read as a political document in Beijing no matter how technical its language.
What the report does accomplish is measurement, and measurement is the first step of any campaign. Washington is moving China’s lending practices out of the development-economics folder and into the national-security file, and it is building the evidentiary record in public, one annual report at a time. The new requirement means that next year, and every year after, China’s loan book will be assessed against a standard it does not meet. That is how a case is built, and how a consensus is formed, long before anyone sanctions a single Chinese bank. The hidden loans are no longer hidden from the report. They are now on the record, and the record is the point.
Sources: South China Morning Post, US State Department