Commentary: China’s foreign loans, as a recent study shows, is full of ‘Chinese characteristics’
China’s lending has been secretive, with clauses to protect political interests and subject disputes to Chinese law. These could create a “China Club” that rivals the Paris Club, says Professor Bo Zhiyue.
SINGAPORE: In a recent study of China’s lending to foreign governments, researchers from US and Germany have discovered some peculiar features that are distinctively Chinese.
The study, titled How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments, involved 100 contracts between Chinese state-owned entities and foreign borrowers in 24 countries from 2000 to 2020, with a total commitment of US$36.6 billion.
In other words, they have found that China’s loan contracts are full of “Chinese characteristics”.
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The study made some interesting observations. First, all of these Chinese contracts since 2014 have imposed strict confidentiality conditions on the borrower.
According to these contracts, the borrower shall keep all the terms, conditions and the standard of fees “hereunder or in connection with” these contracts “strictly confidential”.
This finding seems to contradict the conventional wisdom regarding China’s foreign lending under Xi Jinping. Since Xi Jinping took over as the paramount leader in 2012, China has become much more visible and open as a donor country of foreign aid.
At the Forum on China-Africa Cooperation (FOCAC) in Beijing in September 2018, for instance, President Xi pledged US$60 billion for new projects in Africa “with no strings attached”.
Yet these authors are perfectly right. Very few details about this US$60 billion pledge have been made available.
There is a rough breakdown that includes US$20 billion new credit lines; US$15 billion in foreign aid as grants, interest-free loans or concessional loans; US$10 billion for a special fund for development financing; and US$5 billion for a special fund for imports from Africa.
But there have been no further details on which entities are lending how much to which borrowers under what conditions.
This lack of transparency has made it difficult for taxpayers in both the creditor country and borrower countries to monitor the performance of these loans and to hold their governments accountable.
There are, notwithstanding, steps in this direction when the World Bank published new data last year showing the breakdown of debt in 72 low-income countries, which do not give details of the terms involved.
The data set showed these countries owed China US$104 billion as of 2018, of which 62 per cent was disbursed to Africa. China is the biggest bilateral lender for 51 countries. Even then, China made up only 20 per cent of total public external debt incurred.
‘NO PARIS CLUB’
Second, most Chinese contracts contain “No Paris Club” clauses and require senior status over debts of other creditors in the event of default.
The Paris Club, an informal group of creditor nations including most Western European and Scandinavian nations, the United States, the United Kingdom and Japan, aims to find workable solutions to payment problems faced by debtor nations.
It is understandable that China does not follow the rules of the Paris Club. It is not a member of the Paris Club.
However, China would benefit from joining the Paris Club. Established in 1956 with the first negotiation between Argentina and its official creditors in Paris, the group brings together finance ministry officials from major creditor countries to resolve difficulties faced by debtors in meeting their repayment obligations.
As the largest sovereign lender in the world with an outstanding foreign debt of US$5.6 trillion in 2020, China needs to find a new approach to the management of sovereign debt defaults.
POLITICAL CLAUSES, CHINESE LAWS TAKE PRECEDENCE
Third, the Chinese contracts stipulate unusual political clauses that incorporate interests of a “PRC entity” and the termination of diplomatic relations.
All China Development Bank (CDB) contracts in the sample include the termination of diplomatic relations between China and the borrowing country among the events of default.
Almost half of CDB contracts contained cross-default clauses that can be triggered by actions ranging from expropriation to actions broadly defined by the sovereign debtor as adverse to the interests of “a PRC entity”.
Fourth, most Chinese contracts use “Chinese law” as the governing law in the case of dispute resolutions. Out of 100 contracts, 76 were signed by Export-Import Bank of China and foreign governments.
All of these contracts have a clear stipulation that any dispute regarding the contracts would be eventually resolved in a Chinese court.
A CHINA CLUB?
Clearly, these Chinese contracts have clear Chinese characteristics distinguishable from the benchmark contracts practised by other banks in the world.
The larger question is this: With China’s rise as a major economic and financial power, could a “China Club” through which China formulates its own rules and build a China-centred system of international lending take primacy over a Paris Club?
While China so far has called on domestic financial institutions to abide by G20 guidelines, like the Debt Service Suspension Initiative, extending repayments for some of the poorest countries, could China one day set rules for lending outside of international norms?
Professor Bo Zhiyue is founder and president of the Bo Zhiyue China Institute, a consulting firm providing services to government leaders and CEOs of multinational corporations.