Hambatota Port, Sri Lanka. on Dec. 9, 2017, the Sri Lankan government officially leased the port of Hambatota to China. (Photo by Juno, Voice of America, Jan. 3, 2016)
A new study released by a U.S. research firm reveals that China’s loan agreements with developing countries contain unusual confidentiality clauses that require those developing countries to prioritize repayment of China’s debts before repaying other creditors, which could affect their debt negotiations with other creditors.
The report, released Wednesday (March 31), is titled “How China Lends: A Rare Look into100 Debt Contracts with Foreign Governments. It is a joint effort by AidData, a research institute affiliated with the prestigious University 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.
The researchers examined 100 loan contracts between Chinese state-owned entities and the governments of 24 low- and middle-income countries, including Cameroon, Ghana and Ecuador, and found that Chinese state-owned entities combine standard commercial and official loan terms and introduce new terms to “maximize commercial leverage to sovereign borrowers ” to ensure repayment priority relative to other creditors.
For years, China’s debt problems with developing countries have been criticized by the international community. China has built infrastructure for these countries, leaving them with huge debts beyond their ability to pay. China has used these debts to gain control of the resources of these countries or to lease their important ports for long periods of Time.
The report also mentions that China’s contracts contain “unusual” confidentiality clauses that prohibit borrowers from disclosing the terms or even the existence of the debt.
The report added: “Extensive borrower confidentiality commitments make it difficult for all stakeholders, including other creditors, to determine the true financial position of sovereign borrowers, to discover priority payments, and to design crisis response policies.”
If a country’s debt is not transparent, it raises questions about whether any relief granted by its lenders is being used to repay other countries.
According to the Associated Press, Bradley C. Parks, one of the report’s authors and executive director of AidData, said the new crown Epidemic “has weakened the ability of many borrowers to repay,” but that other creditors, without knowing what the borrowers owe to Beijing, ” reluctant to renegotiate”.
Sebastian Horn, who studies international finance and macroeconomics at the Kiel Institute for the World Economy, previously told Voice of America, “If creditors are concerned that their debt relief is being used to repay other creditors (China as well as some private creditors) rather than for additional spending on health care and crisis management, they will obviously be more willing to take action when they commit to generous relief measures will clearly be more hesitant to do so.”
One of the report’s authors, Scott Morris, a senior fellow at the Center for Global Development, told VOA that the secrecy clause also inhibits accountability within borrowing countries, making it difficult for a country’s citizens to fully understand The secrecy clause also inhibits accountability within the borrowing country, making it difficult for citizens to fully understand the government’s obligations to external creditors.
He said, “This level of secrecy obscures a country’s overall fiscal position and obscures critical details of major infrastructure projects that citizens and taxpayers are entitled to know.”
Morris also said the secrecy provisions also create problems for borrowing countries in meeting their obligations to multilateral lending institutions such as the International Monetary Fund and the World Bank, as well as Paris Club creditors, all of which require full reporting of debt as the basis for their assistance.
In addition, Horn says another finding of the study is that “most Chinese loan contracts contain ‘non-Paris Club’ clauses that prohibit countries from restructuring Chinese loans on equal terms and in cooperation with other creditors. This treatment of foreign loans effectively allows the Chinese government to decide for itself if, when and how to reduce its debt.”
Morrison told Reuters that the findings raise questions about China’s role in the G20, which previously agreed on a “common framework” to help poorer countries cope with the fiscal pressures of the new epidemic by restructuring their debt burdens. The framework calls for equal treatment of all creditors, including private creditors.
The report also found that China’s contracts provide significant leeway to cancel loans or accelerate repayments if the country does not agree with some of the borrower’s policies.
Requests to renegotiate debt have become increasingly frequent as a result of the New Crown epidemic, according to a study released last October by New York-based consultancy Rhodium Group titled “Seeking Relief: China’s Foreign Debt in the Wake of the New Crown Epidemic. The report said that Chinese banks are unlikely to forgive large amounts of debt and that deferment remains their preferred solution, but that some of China’s debt negotiations to date have been neither standardized nor public.
Recent Comments