China is the world’s biggest lender to governments. And that’s not just because of its gigantic stockpile of US Treasuries.
For much of the past decade Beijing has sought to plug massive infrastructure funding gaps across multiple continents through its Belt and Road Initiative. The overarching aim, other than to bolster global influence, is to upgrade transport links on the old silk road routes which enabled trade between the Far East and what lay to the west of it. While Beijing has recently reined in spending, between 2008 and 2019 the China Development Bank and the Export-Import Bank of China lent $462bn. For context, that’s just short of the $467bn loaned by the World Bank over the same timeframe, according to the Boston University data.
Yet the terms of these loans to sovereign borrowers have been shrouded in secrecy. Until now.
The Peterson Institute for International Finance, a DC-based think-tank, has a fascinating paper out this week which pulls together findings based on 100 contracts made to sovereign creditors mainly in Africa and South America. The lenders are the China Development Bank and the Export-Import Bank of China, along with a handful of commercial banks and the Chinese government itself. The research was carried out with other think tanks and the College of William & Mary’s AidData team, which has a data set here for those that want to delve deeper.
While the researchers point out that this sample size of 100 represents just 5 per cent of the contracts the Chinese lenders have extended to foreign governments since the early 2000s, there’s still enough in terms of standardisation to draw some findings about the nature of the lending practices and come to the conclusion that China “is a muscular and commercially-savvy lender”.
We’d recommend reading the paper in full. For those who haven’t got the time, here are a few highlights.
First, the contracts don’t appear vastly different from those offered by other sovereign creditors. Especially when those creditors — as is often the case here — are lending to lower income countries. However, the contracts are unique in that they reflect China does not participate in collective restructuring agreements, such as the Paris Club, for sovereign debt gone bad.
This creates divergence with what you might expect to see listed in a contract with an export-import, or development, bank located elsewhere. For instance, the contracts are judged by the researchers to be a somewhat odd hybrid of private and public-sector lending standards. This has the potential to hand much more power to the Chinese authorities in the event of things turning sour. Take, for instance, the inclusion of clauses that mean policy and legal changes by the sovereign could count as grounds for cancellation and immediate repayment of the loan. The paper notes that while such clauses would be “unremarkable in a commercial debt contract” made by a private sector player, they could acquire “a different meaning and new potency in government-to-government lending arrangements”. It does indeed appear to grant Beijing an awful lot of sway in domestic decision-making in the case of nations that owe a significant amount of cash.
The degree to which Beijing will stray from international protocols in granting debt relief strikes us as incredibly important — especially at times such as the present when the pandemic has left many of the developing economies China counts as borrowers in dire straits.
There is also the issue of enforcement. The contracts (other than those agreed with the China Development Bank which, for the most part written, are in English law) follow Chinese law. They insist too that dispute resolution occurs in China. While the researchers shy away from making a judgment on the substance of Chinese law or China’s commercial dispute resolution regime, we would not fancy our chances arguing our case under such a legal framework.