China, like all other rich countries, lends billions of dollars to needy governments. Unlike other rich countries, it does so in a particularly self-serving manner.
Driving the news: A major new study from Georgetown University's Anna Gelpern and others shows that China's debt contracts are more unfriendly to debtor nations than anybody else's.
Why it matters: China is using debt contracts to place it at a geopolitical advantage not only to its debtors, but also to all other rich nations.
How it works: Chinese debt contracts differ from standard boilerplate in three main ways.
- Confidentiality: Under the terms of most modern Chinese loans, borrowers are not allowed to reveal their terms or even their existence. That means China has much more information about debtor countries' real financial state of affairs than any other creditor nation, bank, or bondholder.
- Collateral: China often insists on ensuring that countries set up a special bank account — at a bank "acceptable to the lender" — which China can seize more or less at will in the event that the borrower enters any kind of distress. That money is therefore effectively off-limits when it comes to any other form of government spending, even if it's an official part of the country's asset base.
- Acceleration: China can declare the loan to be in default, with the full amount of the debt due and payable immediately, under an astonishingly broad range of events, including the debtor taking action adverse to almost any Chinese entity.
- The Chinese loans also include clauses that explicitly exclude the debts from being included as part of a broad international debt restructuring.
- The combination of aggressive acceleration clauses with equally aggressive cross-default clauses means that China has extreme control over actions in debtor countries. For instance: one proposal to cancel a dam project in Argentina was abandoned because it would not only mean an event of default on dam-related loans; it would also mean an event of default on all Chinese loans to the country.
The bottom line: Citizens cannot hold their governments accountable for debts they do not know about. And when those governments do get into trouble, the web of Chinese debt contracts makes any kind of restructuring vastly more difficult.
This paper is co-published by AidData at William & Mary, the Kiel Institute for the World Economy, and the Peterson Institute for International Economics.
China is the world’s largest official creditor, but we lack basic facts about the terms and conditions of its lending. Very few contracts between Chinese lenders and their government borrowers have ever been published or studied. This paper is the first systematic analysis of the legal terms of China’s foreign lending. We collect and analyze 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America, and Oceania, and compare them with those of other bilateral, multilateral, and commercial creditors. Three main insights emerge. First, the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. Second, Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (“no Paris Club” clauses). Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies. 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. Overall, the contracts use creative design to manage credit risks and overcome enforcement hurdles, presenting China as a muscular and commercially-savvy lender to the developing world.
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What they're saying: The collateral requirements mean in practice "that government revenues remain outside the borrowing country and beyond the sovereign borrower's control," write the authors of the paper.