The French newspaper Le Monde recently published a report by its journalist Julien Bouissou, stating that a report published at the end of March revealed the borrowing conditions offered by the world’s largest creditors to low-income countries. Here is the content of the article.
Researchers in the United States and Germany have just discovered a treasure trove. They dug deep into online and public administration archives to find more than a hundred loan agreements totaling $36.6 billion (€31 billion) signed by China with 24 low-income countries between 2000 and 2020. These documents are worth their weight in gold because little is known about the terms of borrowing required by the world’s largest creditor country, which have been the subject of much research, or, admittedly, much speculation.
Some argue that China’s borrowing is a trap designed to gain geostrategic concessions from bankrupt countries, while others argue that by borrowing to poor countries abandoned by their creditors, China is offering them a respite. This is the result of a study just published and announced; the study was conducted by four research centers, including the Washington-based AidData Lab at the American College of William and Mary, the Center for Global Development and the Peterson Institute for International Economics, as well as the Kiel Institute for the World Economy in Germany, in a joint effort that the report hopes will stimulate discussions among the G-20 countries. The G-20 met this week to discuss the debt of poor countries, which has increased dangerously sharply since the start of the economic crisis triggered by the new crown epidemic.
According to the study “How China Borrowed,” published in late March, China’s creditors drafted confidentiality clauses that go far beyond what creditors or development banks usually demand. Not only are the terms of borrowing confidential, but so are the amounts of the payments. This secrecy poses a serious problem for transparency, as the borrowing governments must conceal from their taxpayers the amounts that will have to be repaid sooner or later. This lack of transparency also complicates the process of restructuring collective debt. If the creditors of a country on the verge of default lack certain information, how do they assess the borrowing country’s ability to pay or repay?
Unusual requirements
Beyond the sight of other creditors, Beijing has made other unusual demands. Four-thirds of the contracts include clauses not to participate in the debt restructuring mandated by the Paris Club. Over the years, this club of the world’s major creditors has patiently developed a set of rules for coordinating debt restructuring or cancellation, one of which is not to favor one creditor over another. China has ruined this principle of fairness by allowing the debtor to be asked to pay first should a problem arise.
Did China change its position in November 2020 when it joined the common framework for debt restructuring for poor countries established by the G-20? Researchers doubt the sincerity of this move. According to them, many Chinese creditors could escape this common framework on the grounds that they are only private commercial institutions and not “official creditors” dependent on the state.
Finally, China uses debt as an instrument of influence. Half of the lending agreements signed by the State Development Bank stipulate that any act by the debtor state regarding any disadvantage to the “PRC entity” may result in early repayment of the lending amount. There is also a provision that states that a breach of diplomatic relations is tantamount to a breach of contract. And 90 percent of the agreements studied in the report allow Chinese creditors to demand repayment in the event of a major political or legal change in the debtor country.” The phenomenon of the “debt trap” is undoubtedly exaggerated, but China’s debt diplomacy is a reality.
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