The Unusual Case of China’s Overseas Lending Practices, East Asia News & Top Stories
SINGAPORE – When a new Argentine government came to power in 2016, it tried to cancel two dam projects on environmental grounds.
The China Development Bank (CDB), one of three Chinese banks funding the projects, threatened to cancel a rail project that would bring Argentina’s agricultural products to Chile’s Pacific ports if the dam projects were to be abandoned.
Eventually Argentina decided to go ahead with the construction of the dams.
The CBD had invoked a loan clause that allowed it to stop lending in one project if the borrower were to default or cancel another – in Argentina’s case, the attempt to cancel two dam projects.
This cross-cancellation clause is one of the many unconventional ways Chinese lenders use to manage the risk of their overseas loans, said a new study on China’s international lending program.
The practice of suspending or canceling multiple projects with one debtor is used by multilateral institutions to protect lender finances and ensure that public funds do not continue to support failed projects or poor policy results.
However, the CBD used a similar practice as a safety net for its loans and as a way to protect China’s other interests in the borrowing country, the study noted.
This practice and others, such as Chinese lenders prohibiting borrowing countries from restructuring Chinese loans on an equal basis and in coordination with other creditors, complicate debt relief efforts in troubled countries. financial, according to the researchers.
In addition, the restrictions that Chinese lenders place on debt transparency through broad confidentiality clauses make it difficult for citizens and other creditors to hold borrowing governments accountable, they add.
The study titled “How China Lends,” published Wednesday, March 31, examines 100 Chinese loan contracts with foreign governments in 24 countries and compares them to 142 contracts the countries have with other major lenders.
It involves researchers from AidData, a research lab at the College of William and Mary, the Peterson Institute for International Economics, the Center for Global Development, and the Kiel Institute for the World Economy.
It comes at a time when China has emerged as the world’s largest official creditor, with direct loans and trade credits to more than 150 countries totaling US $ 1.5 trillion (S $ 2 trillion), by some estimates.
Chinese loans abroad have exploded from 2010 and particularly from 2014, with the take-off of the Chinese Belt and Road Initiative (BRI) for building infrastructure in developing countries , launched in 2013.
Dr Bradley Parks, executive director of AidData, explained that with China suffering from domestic overproduction of industrial inputs such as cement and steel, it must find buyers for the surplus. It therefore offered relatively cheap credit for overseas infrastructure projects that relied heavily on these Chinese products.
One of the unusual features of Chinese contracts is that they contain provisions that position Chinese state-owned banks as senior creditors whose loans must be repaid first.
Almost a third of contracts required borrowing countries to maintain large cash balances in bank or escrow accounts. These informal collateral agreements put Chinese lenders at the forefront of the repayment line, as lenders can simply tap into these accounts to collect unpaid debts.
China’s contracts also give it a lot of leeway to cancel loans or speed up repayment if it disagrees with a borrower’s policies. For example, the CBD regards the end of diplomatic relations with China as “an event of default”.
The extensive cross-default and cross-write-off provisions give Chinese lenders greater leverage over borrowers and other creditors than previously thought, according to the study.
While some of these contractual conditions are difficult for borrowers, some states are willing to borrow from China.
Indeed, the development projects that these loans support can generate significant economic benefits, noted Dr Parks.
An assessment of 4,300 Chinese government-funded development projects in 138 countries by Dr Parks and colleagues showed that these projects generate substantial economic growth dividends for host countries. For an average country, receiving such an additional project increased economic growth by 0.41 percentage point two years after the financial commitment, he noted.
In some cases, countries with bad credit scores borrow from China because they cannot access large loans elsewhere, he added.
With the Covid-19 pandemic causing financial strains for many developing countries, the Group of 20 proposed last year a common framework for debt restructuring.
China, a member of the G-20, has repeatedly opposed parts of the debt relief plans, but officials at its finance ministry recently signaled their willingness to cooperate on this. frame.
However, the “How China Lends” report suggests that there is a disconnect between recent announcements and the actual debt contracts that are issued by Chinese banks, Dr Parks said.
“Only time will tell if Beijing’s rhetoric will eventually align with its lending behavior,” he said.