Chinese Contracts Could Complicate Sovereign Debt Restructuring

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Developing countries’ ability to renegotiate their overseas borrowing could be complicated by contracts with Chinese state-lenders which include confidentiality clauses and exemptions from restructuring, according to a new report.

China has emerged in the last decade as the world’s largest non-commercial international creditor, with its state-owned policy banks lending more to developing countries than the International Monetary Fund and World Bank. That lending has been subject to international scrutiny which has intensified as the pandemic caused dozens of countries to suspend debt repayments.

The question of confidentiality of Chinese debt became an issue during talks to provide those nations with relief as there was concern that not all lending by Chinese banks was public and they could get a better deal in any restructuring. Without full transparency about all the debts a nation has, there’s suspicion that any relief granted by one country or lender could be used to repay other parties instead of benefiting the recipient nation.

Ahead of the 2019 IMF bailout of Pakistan, then head of the Fund Christine Lagarde said “we need to have a complete understanding and absolute transparency about the nature, size, terms of the debt that is bearing on a particular country.”

Loan Confidentiality

The new research from academics in the U.S. and Europe analyzed publicly available contracts signed by Chinese state-owned lenders including China Development Bank and the Export-Import Bank of China. Of more than 2,000 loan agreements that these lenders have signed with developing countries since the early 2000s, 100 have been made public, according to AidData, a research lab at The College of William and Mary in the U.S.

More than three quarters of those were for loans made by the Export-Import Bank, with most signed during the last decade. AidData found that many contracts included confidentiality requirements on the borrowers.

This differed from contracts made with state-backed lenders from other countries, which tend to impose confidentiality primarily on the lender. Such clauses mean that “citizens in lending and borrowing countries alike cannot hold their governments accountable,” according to the report.

However, the lack of transparency in sovereign debt deals is not limited to China, the report said, with almost no state-backed lenders publicly releasing the text of their loan contracts.

“Disclosing all debt contracts, however difficult politically, should become the norm rather than the exception,” it said. “Public debt should be public”.

The researchers compared Chinese contracts with those drawn up by other countries which had been published by Cameroon, the only developing country that had released all of its project-related loan contracts with foreign creditors. The research was partly funded by the U.S. and British governments but does not necessarily reflect their views, the report said.

Paris Club

Close to three-quarters of the Chinese contracts reviewed commit the borrower to exclude the debt from restructuring involving the Paris Club of official bilateral creditors, the report said, although it said it was unclear if such clauses could actually be enforced. However, “even if these terms were unenforceable in court, the mix of confidentiality, seniority, and policy influence could limit the sovereign debtor’s crisis management options and complicate debt renegotiation,” it said.

China and the Paris Club, an informal grouping of 22 mostly rich western government creditors, agreed in November to principles for restructuring the debt of poor countries hit by the pandemic to avert defaults. Through mid-November, Chinese lenders had suspended $2.1 billion in debt repayments from nearly two dozen nations due to the pandemic.

Even before the pandemic upended economies across the world, China had turned more cautious about lending to Africa. Chinese financing to Africa fell below $9 billion for the first time in nearly a decade in 2019, according to a separate study from Johns Hopkins University released this week.

Contract Analysis

More than 90% of the contracts reviewed identify policy changes in the debtor or creditor country as an event of default, giving Beijing an option to demand immediate debt repayment. These clauses are wider than those in contracts by other state-lenders which have been made public, the researchers wrote.

China’s Ministry of Foreign Affairs did not immediately reply to a request for comment on Beijing’s lending policies for developing countries.

Eight of the contracts reviewed by AidData were from the China Development Bank. Beijing argues that CDB is a commercial lender, but according to the report, the contracts show that CDB’s lending practices belie this claim.

“The CDB contracts in our sample are enmeshed in the broader Chinese government investment program, drafted so that CDB lending can protect a broad spectrum of Chinese interests in the borrowing countries,” the authors wrote.

©2021 Bloomberg L.P.

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