A new study and a new data set released Wednesday revealed previously unknown details about China’s secret lending practices in developing countries, including 11 in sub-Saharan Africa. China is currently the world’s largest official creditor.

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The study is based on 100 Chinese loan contracts in 24 countries, including 11 African countries: Benin, Botswana, Cape Verde, Cameroon, DRC, Republic of Congo, Ghana, Malawi, Rwanda, Sierra Leone and Uganda.

The How China lends A study, conducted by researchers at AidData at William & Mary, the Center for Global Development, the Kiel Institute for the World Economy, and the Peterson Institute for International Economics, looked at 100 Chinese loan deals to 24 countries, many of which are involved. to the Belt and Road Initiative.

The analysis is the first systematic assessment of the legal terms of China’s foreign loans, and the recently released contract dataset, assembled by AidData, is the largest source of debt contracts between Chinese government lenders and borrowers from developing countries.

These documents were difficult to access, but over a 36-month period, AidData pulled together the contracts by performing an in-depth review of the debt information management systems, official records and parliamentary websites of 200 borrowing countries. .

How China lends have found that Chinese state-owned banks are strong, commercially savvy lenders who use contracts to position themselves as “preferred creditors,” seeking repayment ahead of other commercial and official lenders. They often do this by asking borrowers for an informal source of collateral – bank accounts with minimum cash balance requirements that lenders can enter in the event of default – and prohibiting borrowers from restructuring their Chinese debts in coordination with other creditors.

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“All the arguments made about China’s foreign loans have been played out in a factual vacuum,” said Anna Gelpern, a Georgetown law professor, a non-resident senior researcher at the Peterson Institute for International Economics (PIIE), “with virtually no debt contracts from China – and very few bilateral contracts from other countries, never published or studied.

The researchers compared Chinese contracts to 142 publicly available contracts with other major lenders and found several unusual features in Chinese contracts:

• Chinese contracts contain unusually wide confidentiality clauses, which prevent borrowers from revealing the terms or sometimes even the existence of the loans. The researchers also found that China’s contracts have become more secret over time, with a confidentiality clause in every contract in the dataset since 2014. These confidentiality restrictions hide loans from people who are required to repay them through taxes.

• The contracts also contain provisions that position Chinese state-owned banks as preferred creditors whose loans must be repaid as a priority. Almost a third of contracts required borrowing countries to maintain large cash balances in bank or escrow accounts. These informal collateral agreements put Chinese lenders at the forefront of the repayment line, as banks can simply dip into their borrowers’ accounts to collect unpaid debts.
• China’s contracts also give it great leeway to cancel loans or speed up repayment if it disagrees with a borrower’s policies. For example, the Development Bank of China (CDB) regards the severing of diplomatic relations with China as an “event of default”. The extensive cross-default and cross-cancellation provisions also give Chinese lenders more leverage over borrowers and other creditors than previously thought.

Another key finding of the study, according to Sebastian Horn, an economist at the Kiel Institute for the World Economy, is that “most Chinese loan contracts contain ‘No Paris Club’ clauses, which prohibit countries to restructure Chinese loans on an equal footing and in coordination with other creditors. This approach to foreign lending effectively gives Beijing the discretion to decide if, when and how it will provide debt relief. Christoph Trebesch, also of the Kiel Institute, adds that “China’s practices complicate debt relief efforts in countries that are in financial difficulty due to the COVID-19 pandemic or other factors “.

According to Scott Morris, Senior Fellow at the Center for Global Development, “China has adopted a cooperative tone on debt issues at the G20, but some of the provisions of these contracts are clearly at odds with the objectives of the Common Debt Framework. that G20 ministers agreed to six months ago.

The authors of How China lends warn that restrictions on debt transparency make it difficult for citizens of borrowing and creditor countries to hold their governments to account, and call for public debt to be made public.

Brad Parks, executive director of AidData and co-author of the report, says that “By protecting their contractual agreements from public scrutiny, China’s state-owned banks have made it difficult for other lenders to know if they are positioning themselves. at the front of the redemption line. Hidden debts to China have also placed developing countries, whose foreign currencies are insufficient to repay all their overdue obligations to foreign creditors, in an equally difficult position. According to Parks, “non-Chinese creditors are increasingly reluctant to renegotiate repayment terms until they know more about China’s claims.”

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