A train runs on the Addis Ababa-Djibouti Railway. Photo: Xinhua
In March 2021, Georgetown Law, the Peterson Institute for International Economics, AidData, Center for Global Development and Kiel Institute for the World Economy of Germany jointly issued a report titled "How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments". Through a comparison of 100 sovereign debt contracts signed by Export-Import Bank of China (China Eximbank), China Development Bank (CDB), Chinese state-owned commercial banks and Chinese government departments and 142 sovereign debt contracts signed between Cameroon and bilateral, multilateral and commercial creditors, the report points to the differences in the lending rules between China and mainstream Western institutions such as the Paris Club in the four aspects:First, Chinese contracts contain unusual confidentiality clauses, which were introduced around the time of the inception of the Belt and Road Initiative (BRI). According to the report, confidentiality clauses would give rise to the problem of "secret debts" to countries across the Global South, and make it difficult for the West to calculate those countries' debt sustainability.
Second, contracts offered by Chinese official creditors expressly commit borrowers to exclude the debt from restructuring in the Paris Club or any other multilateral restructuring, which hinders the implementation of the core principles of the Paris Club.
Third, Chinese contracts contain cross-default and cross-cancellation clauses, which tend to give China relational power over countries of the South and stronger influence over their domestic and foreign policies.
Fourth, Chinese loans to foreign countries require the maintenance of special accounts for the purpose of risk management, taking up the foreign exchange reserves of countries of the South and affecting the precision of Western analysis of those countries' debt servicing ability.
Actually, the argumentation method and process of the report lack scientific basis, and its conclusions are untenable.
Problematic contract samples
The samples used in the report are seriously flawed. For example, the source of the contract samples is unclear, and the choices of samples and comparison methodology are subjective and biased. Therefore, the conclusions are hardly convincing.
The samples represent base evidence for the research and conclusion of the report, and the legality, authenticity and relevance of the source of evidence directly determine the neutrality, credibility and scientificity of the conclusions. While claiming all the contracts were obtained from open sources, the report accuses China of keeping sovereign loan contracts confidential and not transparent. The report does not explain a contradiction: How the researchers obtained their information if the contracts were confidential.
The report examined 100 sovereign debt contracts signed between 24 developing nations and China from 2000 to 2020, and compared them with 142 sovereign debt contracts signed by Cameroon between 1999 and 2017. The problem with this approach is the mismatch and lack of heterogeneity of the country chosen for comparison: Cameroon is only one country, and its financing needs and development structure are not sufficiently diverse and heterogeneous. Comparing a benchmark country with little variety and a group of 24 countries with great variety reduces the validity of the research conclusion.
Another problem of the report involves comparing 100 bilateral sovereign debt contracts of China with 142 multilateral and bilateral debt contracts of Cameroon. Of all the Chinese contracts, the 76 contracts signed by China Eximbank include preferential government loans, preferential buyer's credit and buyer's credit; the eight CDB contracts are in the category of development financial loans, which are basically commercial bank loans. In comparison, Cameroon's contracts are mainly signed with multilateral development banks, with more favorable terms than the ones offered by China Eximbank.
Within the international development financing market, multilateral development banks, bilateral government aid agencies, development financial institutions and commercial banks are fundamentally different in their function, which is why government preferential loans, development loans and commercial loans constitute different types of loans, with different earning levels and means of risk prevention and control. The method used in the report, which is like comparing apples and oranges, makes the intent questionable.
A scientific and neutral research report would choose to compare the preferential loan contracts of China EximBank with similar contracts of government-backed institutions of preferential loans such as Agence française de développement (AFD), Japan International Cooperation Agency and KfW of Germany.
The failure of the report to provide equal numbers of similar bilateral sovereign loan contracts offered by Western countries reveals two things: First, the research method of the report is flawed, and the correlation between evidence and conclusion is insufficient. Second, the report seeks to make China the target for all while avoiding an assessment and judgement of bilateral lending institutions in the West.
On confidentiality clauses
According to the report, Chinese contracts contain "unusual" confidentiality clauses, which prohibit borrowers from disclosing clauses or the existence of debts. However, the principle of confidentiality is widely applied in international loan contracts, and the practice of not disclosing detailed information about the terms of loans is also quite common.
With few exceptions, creditors and sovereign debtors normally do not publish their contract texts in full. There is no uniform public disclosure standard or practice for bilateral official lenders. Even the authors of the report themselves admit "almost all OECD official creditors and non-OECD creditors have not publicly released their loan contracts." Similar confidentiality clauses can be found in the official bilateral debt contracts of the AFD. The Arab Bank for Economic Development in Africa (BADEA), the Islamic Development Bank, the OPEC Fund for International Development and the Kuwait Fund for Arab Economic Development all require the borrower to keep the documents and letters of the lender confidential. Even the Asian Development Bank has confidentiality clauses in its loan agreements. Debtor governments usually would not publish the text of their loan contracts either.
The above-mentioned examples show that setting confidentiality clauses is a common practice for lenders, yet the report singles out China, which is either due to a lack of understanding of common commercial practices or out of ulterior motives. Besides, China is not an OECD member, nor a party to the OECD creditor reporting system, the OECD Export Credit Group (ECG) or the Paris Club. Thus, it has no obligation to disclose its loan information.
On 'No Paris Club' clauses
According to the report, close to three-quarters of the debt contracts in the Chinese samples contain the so-called "No Paris Club" clauses, which expressly commit the borrower to exclude the debt from restructuring in the Paris Club of official bilateral creditors and from any comparable debt treatment. The report maintains that such clauses are inconsistent with China's position and attitude on signing the G20 Common Framework for Debt Treatments. Such a one-sided conclusion picks only opinions in their favor. Without proper framing of the argument, it takes the Western model of sovereign debt treatment as the best option for the international community, and attempts to obstruct the efforts of emerging creditor countries to build a new scheme for sovereign debt treatment.
By underscoring the issue of Paris Club clauses, the Western countries are actually attempting to bring China into their framework of debt rules, while taking a step back lowering lending limits, and, at the same time, "softly absorb" the potential influence of China's foreign lending with their framework of rules, and share in the reputational benefits of China's sovereign lending.
The principles of the Paris Club reflect merely the interests of Western creditor countries and are not recognized by other emerging creditor countries. Arrogantly asking others to observe the rules shows a lack of "basic courtesy". Commercial and official bilateral creditors that are not party to the Paris Club have no obligation to abide by these principles.
Over recent years, the international development financing market has gone through big changes, and the size of lending of Paris Club countries has dropped. That said, the current global debt governance system is still dominated by the "Paris Club - IMF - World Bank" structure of the West. But, with its expanded scale of China's sovereign loans and the lending practice with Chinese characteristics, a new order that is more friendly to developing countries is in the making.
By calling into question the "No Paris Club" clauses in Chinese contracts, the Western countries are interfering in the free choice and internal affairs of debtor countries, casting a hegemonic shadow on the cause of international development financing.
The signing of loan contracts containing "No Paris Club" clauses between debtor countries and China is entirely based on the principle of equality and mutual benefit. It is a choice made by the debtor countries for the best of their national interest. All countries should respect the right of other countries to make their own choice, instead of taking the rules of the Paris Club as universal norms that must be observed by all.
