New report led by AidData, a US-based development finance research lab, reveals how Chinese lenders are using contracts to gain an advantage over other developing country creditors, limiting borrowers’ options for crisis management and complicating debt renegotiation.
Researchers reviewed 100 contracts issued between 2000 and 2020 between Chinese lenders and 24 developing countries, including 11 African, valued at $ 36.6 billion. Lenders included the China Development Bank, the Export-Import Bank of China and state-owned commercial banks. They found that contracts frequently contained provisions that positioned Chinese state-owned banks as âpreferred creditors,â whose loans should be repaid first.
One of the report’s most controversial findings is that nearly three-quarters of contracts contained âno Paris Clubâ clauses. These have effectively “urged borrowing countries to exclude the debt of the Paris Club restructuring of bilateral creditors and any comparable debt”. China is not a member of the Paris Club, an informal group of 22 creditor countries responsible for coordinating payment terms. But last year he sign a G20 debt suspension initiative forcing governments to coordinate debt relief terms for countries who uses Paris Club Conventions. The study contracts predate this news.
âIt was really a big step forward to see China step up and make that commitment,â study co-author Scott Morris, senior researcher at the Center for Global Development, told Quartz. âNow the problem is that what we see in these debt contracts is very clear and explicit language that prevents borrowing countries from seeking this kind of cooperation from creditors.â
Another major finding is that Chinese contracts contain broad confidentiality clauses that prevent borrowers from sharing details about the contracts, or sometimes even the fact that they exist. And with a confidentiality clause in every dataset contract since 2014, the contracts have become more secret over time. Most clauses commit borrowing countries not to disclose any of the terms of the contract or related information, except as required by law.
Disclosure restrictions create real problems for the G20 framework to function effectively, as it critically depends on the ability of borrowing countries to give the World Bank and IMF a clear picture of their overall credit exposure. external, Morris said.
AidData is based at William & Mary, a research university in Virginia, 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. For 36 months, the group collected contracts by examining the debt information management systems, official registers and parliamentary websites of 200 borrowing countries.
China, the the largest creditor in the world and Africa’s largest economic partner, has often been accused of debt trap diplomacy in Africa because of the scale of its loans to African countries and the secretive nature of its loan contracts. Some accuse China of using these arrangements to burden developing countries with huge debts, leaving them vulnerable to exploitation in the event of default.
The researchers also found that Chinese lenders require that income from loan-funded projects and / or non-project cash be kept in escrow or special accounts with the “acceptable” lending institution or bank. for the lender â. Although the contracts state that the accounts are part of the debt repayment process, they serve as collateral.
“When combined with confidentiality clauses, revenue accounts pose significant challenges for policy making and multilateral surveillance,” say the authors. âIf a substantial share of a country’s income is under the effective control of a single creditor, conventional debt sustainability measures are likely to overestimate the country’s actual debt-servicing capacity and underestimate its debt service capacity. risk of over-indebtedness. “
“General borrower confidentiality covenants make it difficult for all stakeholders, including other creditors, to determine the true financial position of the sovereign borrower, detect preferential payments, and design response policies to crises, âwrite the authors. “Most importantly, the citizens of lending and borrowing countries cannot hold their governments accountable for the debts secret.”
The contracts also include âcancellation, acceleration and stabilization clausesâ which give lenders a great deal of leeway to cancel loans or speed up repayment if they do not agree with the borrower’s policies. This potentially allows Chinese lenders to influence the domestic and foreign policies of borrowing countries, the researchers said.
âAll contracts with China Eximbank and CDB include versions of the cross-default clause, standard in commercial debt, which allows the lender to terminate and demand immediate full repayment (acceleration) when the borrower defaults on his others. lenders, âthe authors write. âSome contracts in our sampleâ¦ also default on any action contrary to China’s investment interests in the borrowing country.â
The report confirms that Chinese lenders intend to be repaid, says Deborah BrÃ¤utigam, director of the SAIS China-Africa Research Initiative at Johns Hopkins University, and that they should not be viewed primarily as âDonorsâ, but as commercial creditors.
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