The French newspaper Le Monde recently published an article by the newspaper’s journalist Julien Bouissou, which states that: a report published at the end of March reveals the borrowing conditions offered by the world’s largest creditors to low-income countries.
The article says that researchers in the United States and Germany have just discovered a treasure trove. They dug deeper into online and public administration archives to find more than a hundred loan agreements signed by China with 24 low-income countries between 2000 and 2020, totaling $36.6 billion (31 billion euros). These documents are of great value 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, rather, much speculation.
One recent study argues that China’s borrowing is a trap designed to gain geostrategic concessions from the bankrupt country. Others argue that China’s borrowing to poor countries abandoned by their creditors is offering them a respite. The report, conducted by four research centers – the AidData Lab at the College of William & Mary, the Center for Global Development and the Peterson Institute for International Economics, and the Kiel Institute for the World Economy in Germany – hopes to stimulate discussion among the G-20 countries. The G20 met this week to discuss the debt of poor countries, which has risen dangerously sharply since the start of the economic crisis triggered by the new crown epidemic.
According to a study published at the end of March, Chinese creditors drafted confidentiality clauses that go far beyond what creditors or development banks usually demand. Not only are the terms of borrowing and lending 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 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?
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. The Chinese Communist Party has destroyed this principle of fairness and can demand that debtors 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. The lending agreement signed by China’s State Development Bank includes a provision that any action by the debtor country regarding any disadvantage to the “PRC entity” may result in early repayment of the lending amount. There is also a provision that a breach of diplomatic relations is tantamount to a breach of contract. And in 90% of the agreements, Chinese creditors are allowed to demand repayment in the event of significant political or legal changes in the debtor country. China’s debt diplomacy is a reality.
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