Commentary: China’s foreign loans, recent study shows, are full of ‘Chinese characteristics’

SINGAPORE: In a recent study of China’s loans to foreign governments, American and German researchers discovered particular characteristics that are uniquely Chinese.

The study, titled How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments, covered 100 contracts between Chinese public entities and foreign borrowers in 24 countries from 2000 to 2020, for a total commitment of 36, 6 billion US dollars.

In other words, they found that China’s loan contracts were full of “Chinese characteristics”.

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SECRETIVE CONTRACTS

The study made some interesting observations. First, all of these Chinese contracts since 2014 have imposed strict confidentiality conditions on the borrower.

Under these contracts, the borrower will keep all terms, conditions and level of charges “hereunder or in connection with” such contracts “strictly confidential”.

This conclusion seems to contradict conventional wisdom regarding China’s foreign loans under Xi Jinping. Since Xi Jinping became the supreme leader in 2012, China has become much more visible and open as a foreign aid donor country.

At the China-Africa Cooperation Forum (FOCAC) in Beijing in September 2018, for example, President Xi pledged US $ 60 billion for new projects in Africa “unconditionally.”

Yet these authors are absolutely right. Very few details on this US $ 60 billion pledge have been released.

Now called the Sinamale Bridge, the China-Maldives Friendship Bridge was completed with Chinese loans. (Photo: AFP)

There’s a rough breakdown that includes US $ 20 billion in new lines of credit; $ 15 billion in foreign aid in the form of grants, interest-free loans or concessional loans; US $ 10 billion for a special fund for financing development; and US $ 5 billion for a special fund for imports from Africa.

But there were no further details on which entities lend how much to which borrowers and on what terms.

This lack of transparency has made it difficult for taxpayers in both creditor and borrower countries to monitor the performance of these loans and to hold their governments accountable.

There were steps in that direction, however, when the World Bank released new data last year showing the distribution of debt in 72 low-income countries, which did not detail the conditions at play.

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The dataset showed that these countries owed China US $ 104 billion in 2018, of which 62% went to Africa. China is the largest bilateral lender of 51 countries. Even so, China only accounted for 20% of the total external public debt contracted.

‘NO PARIS CLUB’

Second, most Chinese contracts contain “No Paris Club” clauses and require senior status over the debts of other creditors in the event of default.

The Paris Club, an informal group of creditor countries comprising most of the Western European and Scandinavian countries, the United States, the United Kingdom and Japan, aims to find viable solutions to the payment problems facing financial institutions. debtor countries.

It is understandable that China does not follow the rules of the Paris Club. He is not a member of the Paris Club.

China has the world's largest foreign exchange reserves

Chinese and American currency file photo. (Photo: AFP)

However, China would benefit from joining the Paris Club. Created in 1956 during the first negotiations between Argentina and its official creditors in Paris, the group brings together officials from the Ministry of Finance of the main creditor countries to resolve the difficulties encountered by debtors in meeting their repayment obligations.

As the world’s largest sovereign lender with US $ 5.6 trillion outstanding external debt in 2020, China must find a new approach to handling sovereign debt defaults.

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POLITICAL CLAUSES, PREVIOUS CHINESE LAWS

Third, Chinese contracts stipulate unusual political clauses that incorporate the interests of a “PRC entity” and the end of diplomatic relations.

All of the China Development Bank (CDB) contracts in the sample include termination of diplomatic relations between China and the borrowing country as an event of default.

Sri Lankan government forced to lease Hambantota port to Chinese company after failing

The Sri Lankan government was forced to lease the Port of Hambantota to a Chinese company after failing to repay the loan used to build it. (Photo: AFP / LAKRUWAN WANNIARACHCHI)

Almost half of the CDB contracts contained cross-default clauses that could be triggered by actions ranging from expropriation to actions broadly defined by the sovereign debtor as prejudicial to the interests of a “PRC entity”.

Fourth, most Chinese contracts use “Chinese law” as the applicable law in the case of dispute settlement. Out of 100 contracts, 76 were signed by the Export-Import Bank of China and foreign governments.

All of these contracts clearly state that any dispute over the contracts will ultimately be resolved by a Chinese court.

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A CHINA CLUB?

It is clear that these Chinese contracts have Chinese characteristics that are quite distinct from the benchmark contracts practiced by other banks in the world.

The larger question is this: with the rise of China as a major economic and financial power, a “China Club” through which China formulates its own rules and builds a China-centric international lending system. could it take precedence over a Paris Club?

While China has so far called on domestic financial institutions to comply with G20 guidelines, such as the Debt Service Suspension Initiative, which extends repayments for some of the poorest countries, China could will she one day set rules for loans outside of international standards?

Professor Bo Zhiyue is the founder and chairman of the Bo Zhiyue China Institute, a consultancy firm that provides services to government officials and CEOs of multinational corporations.

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