How China Lends: A Rare Survey of 100 Debt Contracts with Foreign Governments
A new survey shows that long-held international fears of Chinese “debt trap diplomacy” are not untrue, and that China’s debt contracts use secrecy and preference clauses to extend leverage, some of which are set to potentially affect the sovereignty and independence of borrowing countries.
The “Trap” of 100 Debt Contracts
AidData, a research institute affiliated with the College of William and Mary, the Center for Global Development, the Kiel Institute for the World Economy and the Peterson Institute for International Economics, a Washington, D.C. think tank, released a report on March 31 titled “How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments” (How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments). into 100 Debt Contracts with Foreign Governments), collected and analyzed 100 contracts between governments and Chinese state-owned entities in 24 developing countries in Africa, Asia, Eastern Europe, Latin America, and Oceania from 1999 to 2020, and compared them to other bilateral, multilateral, and commercial creditor contracts were compared. The report draws three conclusions.
Chinese contracts contain very extensive confidentiality clauses that prevent the borrowing country from revealing the terms and, in some cases, the existence of the loan.
The lack of transparency and full knowledge of the debt means that it will be difficult for other creditors or multilateral institutions to provide assistance to the borrowing country. A notable example occurred in November 2020 when the Zambian government’s Eurobond holders rejected the government’s request for a moratorium on debt repayment because, among other things, the size and terms of the loans the country owed to China were not transparent.
Suppose a country has to default and it negotiates with its creditors whether it can delay repayment or reduce the amount it owes, the first thing the creditors have to ask is: What is the situation with other creditors? The country says: I can’t tell you. But the fact is, whether it’s a unilateral, multilateral or commercial creditor, they need to know what your overall debt situation is.” Gilburn further noted that these developing countries may become increasingly dependent on China due to difficulties in obtaining loans and aid from other countries.
According to Eyck Freymann, a China scholar at Oxford University, the secrecy clauses also open the door to corruption, saying, “It looks sneaky and it’s likely to be full of corruption. When you’re going to sign some very controversial contracts that you don’t want the opposing party, the media or the public to know about, then that’s the clause you would choose.”
Chinese contracts typically designate Chinese state-owned banks as senior creditors, requiring borrowing countries to repay their loans first, while placing other bilateral, multilateral and commercial claims second.
To achieve senior creditor status, nearly 75 percent of Chinese contracts have “non-Paris Club” clauses, which exclude China’s debt from collective restructuring and allow China to determine the details of debt relief on its own, giving it more leverage and advantage over other creditors.
In addition, the 30% contract requires the borrowing country to set up a special account with a minimum deposit limit, allowing China to use the country’s revenues to repay the debt in case of default. Some of these fiscal revenues come from projects financed by Chinese loans, while others are unrelated to China. By contrast, of the 142 contracts with countries other than China included in the report’s comparison group, only three made similar claims.
According to Gilburn, such special accounts could easily strain already financially troubled developing countries and limit their future development to recovery. When this is combined with confidentiality agreements, it can lead to a situation where borrowing countries are isolated and have no choice but to rely on China.
Moreover, these same accounts can also lead to corruption. She said, “The problem is that we don’t know what the revenues of these countries are. For example, you would think that if this country sold a certain amount of goods, there would be a certain amount of foreign exchange revenue, and it turns out that there is none at all, and this money is remitted directly to the offshore accounts.”
If China disagrees with some of the borrowing country’s policies, it can use some of the contract’s provisions to cancel the loan and accelerate repayment, which could affect the borrowing country’s internal and foreign policies.
According to the report, 50 percent of the contracts from China Development Bank include clauses such as “actions harmful to the interests of entities in the People’s Republic of China may trigger joint and several defaults.
In addition, all CDB contracts provide that a default by the borrowing country could result in the termination of China’s diplomatic relations with that country, which increases China’s leverage to demand immediate repayment.
Finally, 90 percent of all Chinese contracts collected for the report provide that China can terminate the contract or demand immediate repayment if there is a significant change in law or policy in China or the borrowing country. While such clauses are common in commercial contracts, in the context of government-to-government lending, China can use these clauses to put economic pressure on the borrowing country by threatening to terminate the loan or make early repayments should political differences arise with the borrowing country.
According to Gilburn, “This appears to be a case of using a huge loan from the China Development Bank to defend China’s broader interests in those borrowing countries. It can’t be described as crazy or unheard of, but it borders on the abnormal.”
Gilburn further noted that what China wants most is not repayment, but to put pressure on the borrowing countries. She said, “My hypothesis is that China will not really demand that the borrowing country pay back everything it owes, but will use the leverage it has, using leverage that can destroy an entire country, in exchange for concessions in other areas.” In 2011, China received more than 1,000 square kilometers of land in Tajikistan in exchange for debt relief.
Shantanu Roy Chaudhury, a researcher at the Center for Air Power Studies, a think tank based in New Delhi, India, told the Voice of America. “If a country of strategic importance to China begins to feel the pressure of mounting debt, then these terms can be used as a means to an end rather than an end in themselves.”
“Debt Trap Diplomacy”
Sam Parker, a scholar at Georgetown University Law School, told Voice of America that the report confirms long-standing fears about Chinese loans. He said, “The lack of transparency in Chinese loans, tied to collateral, generally makes it very difficult for borrowing countries to renegotiate, or manage their debt crisis. China is accumulating huge amounts of debt that appear unlikely to be repaid.”
He added that there have been a number of cases and reports in recent years suggesting that China is trying to trade debt relief for strategically important collateral. Parker is one of the authors of a 2018 report from the Belfer Center for Science and International Affairs Studies at Harvard Kennedy School, “Debtbook Diplomacy.
The term “Debt Trap Diplomacy” (DTD) was coined by Indian scholar Brahma Chellaney in 2017.
Chellaney argues that China, through its Belt and Road Initiative, has provided huge loans to the governments of developing countries, leaving them vulnerable to Chinese influence when they are unable to repay the loans and have to hand over control of their strategic assets to China. Examples of possible Chinese “debt trap diplomacy” in recent years include.
- a 2018 report by the Center for Global Development (CGD), a U.S. think tank, showed that Tajikistan ceded more than 1,000 square kilometers of disputed land to China in 2011 in exchange for a portion of the country’s debt forgiveness.
- In 2014, China loaned the Republic of Montenegro nearly $1.6 billion to build the 163-kilometer Bar-Boljare Highway (Bar-Boljare Highway). The Financial Times said the contract specified that China could obtain the country’s coal mines, ports and even land as collateral if Montenegro defaulted.
- in December 2017, Sri Lanka leased the port of Hambantota (Hambantota) to China for ninety-nine years because it could not pay its debts.
In September 2020, Reuters reported that, due to the risk of possible default, Electricite du Laos and China Southern Power Grid signed a shareholding agreement in which China acquired a controlling stake. 2021, Laos and China signed a 25-year In 2021, Laos signed a 25-year concession agreement with China, which will allow China to take full control of Laos’ national grid system.
5/ In March 2021, the Kenyan newspaper The Star reported that the country’s auditor general had submitted a report to parliament showing that a Chinese loan for the Mombasa-Nairobi Standard Gauge Railway (SGR) project was secured by the assets of Kenya Ports Authority (KPA) and Kenya Railways Corporation (KRC). Corporation) assets as collateral, and the collateral is not protected by Kenya’s national sovereign immunity.
In addition, the Center for Global Development’s 2018 report lists eight high-risk countries that could fall into China’s debt trap, including Djibouti, Maldives, Laos, Montenegro, Mongolia, Tajikistan, Kyrgyzstan and Pakistan. The 2018 report by the Belfer Center for Science and International Affairs at Harvard Kennedy School lists 16 countries that are likely targets of a Chinese debt trap.
The “debt trap” is not a fiction
In recent years, some Western scholars have questioned the argument of “debt trap diplomacy,” such as the Royal Institute of International Affairs’ August 2020 report Debunking the Myth of “Debt Trap Diplomacy”: How Borrowing Countries Shape China’s Belt and Road Initiative ( Debunking the Myth of “Debt-Trap Diplomacy”: How Recipient Countries Shape China’s Belt and Road Initiative), and the Atlantic Monthly’s February 2021 article The Chinese “Debt Trap” is a Myth. However, the publication of the report “How China Lends” once again highlights the impact that Chinese lending activities may have on the sovereignty of borrowing countries.
Another author of the report, Sebastian Horn, an economist at the Kiel Institute for the World Economy, also notes that China is likely to hold national security considerations and interests in some of the projects it funds.
In addition, Chowdhury recently wrote in the Indian media Telegraph, even if the main purpose of China’s “Belt and Road” project is not to seize the tangible assets of the borrowing country, but in considering the borrowing object, China has shown a clear strategic intent, as well as the borrowing country can repay the loan of careful consideration.
He added that China may be relatively soft on African countries at the moment, but it has clearly acquired some tangible assets in geostrategically important regions such as Southeast Asia, South Asia and Central Asia, such as Sri Lanka’s Hambantota port and Laos’ power grid. China will become more opportunistic and will try to take possession of those assets of international strategic importance as the repayment deadlines of the various borrowing countries approach.
Parker also told VOA, “I don’t think China intends to put some countries in debt, but nonetheless it has built up a lot of leverage that it can use to acquire important assets and geopolitical interests. Debt trap diplomacy is a long-term process, but it is not fictional.”
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