China’s secret loan deals reveal its grip on low-income countries

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Chinese lenders have used legal contracts to give them a hidden advantage over other creditors when lending to low-income countries, in a trend that threatens to undermine global debt relief efforts, research shows .

Many contractual clauses were exceptionally strict and gave priority to repaying Chinese loans while prohibiting borrowers from restructuring their Chinese debts in coordination with other creditors, The report released Wednesday said.

It was written by analysts at the AidData research lab at the College of William & Mary in the United States, in collaboration with the Center for Global Development, the Kiel Institute for the World Economy, and the Peterson Institute for International Economics.

They analyzed 100 contracts between lenders such as the China Export-Import Bank and the China Development Bank and 24 developing countries including Argentina, Ecuador and Venezuela, all of which have defaulted in recent years, and several countries. from sub-Saharan Africa.

All contracts signed since 2014 – 38 out of 100 – contained far-reaching confidentiality clauses that prevent other creditors from knowing the true financial position of the borrower. This means that “citizens of lending and borrowing countries cannot hold their governments accountable for secret debts,” the researchers warned.

Several contracts have influenced the domestic and foreign policies of borrowing countries. These included cross-default clauses triggered by any action deemed to be contrary to the interests of a “People’s Republic of China entity”, and others which gave the lender the right to immediate repayment if diplomatic relations d a debtor country with China came to an end.

The research comes at a critical time for indebted emerging economies, as the IMF and other leading multilateral institutions like the UN warn of the looming threat of a debt crisis.

China has been criticized for its role in recent sovereign restructurings like Zambia, where some bondholders have resisted cutting their interest payments because they suspected the savings would be used to repay China’s debts. country.

“As creditors compete for their position with each other, the damage is concentrated in a country already in distress and in the weakest position to address it,” said Anna Gelpern, lead author of the report, professor of law at the Georgetown University. and senior fellow at PIIE.

Of the 100 contracts analyzed, which covered loan commitments totaling $ 36.6 billion between 2000 and 2020, 30% required the sovereign borrower to maintain a special bank account as collateral for debt repayment, usually with a bank account. bank “acceptable to the lender”.

“In the case of non-recourse project funding, this might be a normal thing to do. . . but in a sovereign development loan at full recourse, this is not normal. It’s a questionable proposition, ”Gelpern said.

Almost three-quarters of contracts contain what the report calls “no Paris Club” clauses, which expressly commit the borrower to exclude debt from Paris Club restructuring of official bilateral creditors.

China is not a member of the Paris Club. However, last year he signed two initiatives of the G20 group of the world’s largest economies to deal with the growing indebtedness of developing countries. The initiatives are managed jointly by the Paris Club, the IMF and the World Bank, using Paris Club conventions, including equal treatment for all creditors.

Scott Morris, senior researcher at the Center for Global Development, said the report’s findings were “clearly at odds” with China’s commitments under the G20 agreements. However, John Lipsky, former IMF first deputy managing director and CGD board member, said China’s commitment will be tested in practice in the coming months.

“The proof will be in the execution,” he said.

The research is the result of a multi-year effort by AidData researchers to obtain electronic copies of loan contracts from debt management systems, government registers and journals, and parliamentary websites.



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