A new report led by AidData, a US-based development finance research lab, reveals the ways in which Chinese lenders use contracts to gain an advantage over other creditors in developing countries, limiting the borrowers’ options for crisis management, and complicating debt renegotiation.
Researchers examined 100 contracts issued from 2000 and 2020 between Chinese lenders and 24 developing countries, including 11 from Africa, worth $36.6 billion. Lenders included the China Development Bank, the Export-Import Bank of China and state-owned commercial banks. They found that the contracts frequently contained provisions that position Chinese state-owned banks as “preferred creditors,” whose loans should be repaid on a priority basis.
One of the most contentious findings of the report is that almost three quarters of the contracts contained “no Paris Club” clauses. These effectively “committed the borrowing countries to exclude the debt from restructuring in the Paris Club of bilateral creditors and from any comparable debt.” China is not a member of the Paris Club, an informal group of 22 creditors nations to coordinate payment terms. But last year it signed up to a G20 debt suspension initiative requiring governments to coordinate debt relief terms for countries that use Paris Club conventions. The contracts in the study predate this news.
“It really was a major step forward to see China step up and make this commitment,” study co-author Scott Morris, a senior fellow at the Center for Global Development, tells Quartz. “Now the problem is, what we observe in these debt contracts is very clear and explicit language constraining the borrowing countries from seeking that kind of co-operation from the creditors.”
Another major finding is that Chinese contracts contain broad confidentiality clauses that stop borrowers from sharing details about the contracts, or sometimes even the fact that they exist. And with a confidentiality clause in every contract in the dataset since 2014, the contracts had become more secretive over time. Most of the clauses commit the borrowing countries not to disclose any of the contract terms or related information, unless required by law.
The disclosure restrictions create real problems for making the G20 framework work effectively, because it critically depends on the borrowing countries being able to give the World Bank and IMF a clear picture of their entire external credit exposure, Morris says.
AidData is based at William & Mary, a Virginia research university, and the report was written in collaboration with the Center for Global Development, the Kiel Institute for the World Economy, and the Peterson Institute for International Economics. Over 36 months, the group collected the contracts by reviewing debt information management systems, official registers, and parliamentary websites of 200 borrower countries.
China, the world’s single largest creditor and Africa’s largest economic partner, has often been accused of debt-trap diplomacy in Africa because of the scale of its lending to African countries, and the secretive nature of its loan contracts. Some accuse China of using these arrangements to saddle developing countries with huge debts, making them vulnerable to being exploited if they default.
The researchers also found that the Chinese lenders require revenue from projects funded by the loans and or cash unrelated to the projects to be kept in escrow or special bank accounts at the lending institution or at a bank “acceptable to the lender.” While the contracts say the accounts are part of the debt repayment process, they act as security.
“When combined with confidentiality clauses, revenue accounts pose significant challenges for policymaking and multilateral surveillance,” the authors say. “If a substantial share of a country’s revenues is under the effective control of a single creditor, conventional measures of debt sustainability are likely to overestimate the country’s true debt servicing capacity and underestimate its risk of debt distress.”
“Broad borrower confidentiality undertakings make it hard for all stakeholders, including other creditors, to ascertain the true financial position of the sovereign borrower, to detect preferential payments, and to design crisis response policies,” the authors write. “Most importantly, citizens in lending and borrowing countries alike cannot hold their governments accountable for secret debts.”
The contracts also have “cancellation, acceleration, and stabilization clauses” that give lenders broad latitude to cancel loans or accelerate repayment if they disagree with a borrower’s policies. This potentially allows the Chinese lenders to influence the borrowing countries’ domestic and foreign policies, the researchers say.
“All contracts with China Eximbank and CDB include versions of the cross-default clause, standard in commercial debt, which entitles the lender to terminate and demand immediate full repayment (acceleration) when the borrower defaults on its other lenders,” the authors write. “Some contracts in our sample…also cross-default to any action adverse to China’s investment interests in the borrowing country.”
The report confirms that Chinese lenders intend to be repaid, says Deborah Bräutigam, director of the SAIS China-Africa Research Initiative at Johns Hopkins University, and that they should not be viewed primarily as “donors,” but as commercially oriented creditors.
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