How China Lends

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Last month a group of researchers at Adidata published a report in which they bring to light the good, the bad and the ugly about China’s lending practices. They analyse 100 contracts between Chinese state-owned entities and government borrowers (with commitment amounts totalling $36.6 billion) in 24 developing countries across the globe. Estimates by Horn et al. 2019, suggest total direct lending commitments of $560 billion between 2000 - 2017.

It is a long but insightful read, below i summarise the key findings:

• All of the post-2014 loan contracts commit the borrower to extreme confidentiality clauses. No terms of the contract or related information can be disclosed unless required by law. This includes the very existence of the loans itself

• A third of the contracts require borrower governments to maintain a special bank account offshore, which has to be approved by the lender. The terms allow the lender to withdraw from these banks accounts without prior approval from the authorities of the borrowing countries. However they limit the borrowing authorities from withdrawing funds without the permission of the lender… where is the justice pls?

• All or some of the revenues from the projects financed with the loan must also flow through the above bank accounts - this is effectively collateral in case of default, and limits the use of the funds to the borrower country

• ~75% of the contracts include “No Paris Club¹” clauses, which expressly commit the borrower to exclude the debt from restructuring² in the Paris Club of official bilateral creditors. This ensures Chinese state owned lending institutions formally remain exempt form restructuring initiatives, unless they decide to do so of course. Last year’s G20 DSSI program did see China providing some debt relieve to selected countries in Africa (notably Angola benefited). They however did not allow Zambia to disclose terms of debt owned to China, which was required by other G20 lenders in order to restructure Zambias debt after its default

• 100% of the contracts with China Eximbank and China Development Bank (CBD) include versions of a cross-default clause ( if a borrower with several loans fails to make a repayment on one loan, they default on all other loans as well, and can be required to make full repayment). This compares with ~11% in other multilateral³ debt contracts, and 63% in OCED⁴ bilateral⁵ debt contracts

• Some contracts also include the termination of diplomatic relations between China and the borrower country..a bit harsh i think

• Chinese lenders retain the right to cancel the loan and demand immediate repayment under a wide range of circumstances, including political and economic developments not directly connected to the lending relationship

Chinese state owned institutions like other sovereign lenders do everything in their power to ensure high likelihood if getting their money back. Unlike other lenders however, these institutions go a step further by adding terms usually only found commercial lending contracts into sovereign contracts.

Who are the main borrowers?

99% of the loans are made to central governments, and almost half of the lending has gone to African borrowers, followed by Latin American borrowers.

The borrowing countries are primarily low and lower middle income countries, countries which often have difficulties accessing capital markets for funding.

Regional distribution of Chinese loan contracts in dataset

Distribution of sample by borrower country income group

Sample composition by borrower type

Which sectors is do Chinese lenders focus on?

The authors do a comparison against a benchmark of non Chinese lenders. Notably the Chinese lenders lend significantly less to agriculture, health and educational sectors. There is a large focus more transport/storage and on communications sectors. Given the importance of these sectors, a more pessimistic person may see this as some evidence of the alleged “debt-trap diplomacy” conducted by China :/

The data though suggests that all else equal, the Chinese lenders prefer more liquid collateral like cash or cash like securities rather than actual real assets like the port of Hambantota (which was seized after default by Sri Lanka).

Sectoral distribution of loan contracts

To conclude

These lenders generally ask for less paperwork and make the whole process of borrowing much easier. Not to mention the interest rates on these loans are fairly low (in most cases). Cash strapped governments of developing nations find it hard to resists these types of offers. The results are highly indebted nations, with a COVID-19 induced economic shock on top of prevailing ailments in 2020

To quote from the paper

More generally, this study calls attention to the need for substantially greater transparency in sovereign lending, including but not confined to government-to-government loans. Transparency problems abound in the world of sovereign debt and they are not limited to China. Almost no official OECD and non-OECD lenders publicly release the text of their loan contracts. Nor do debtor governments.

More on the study:

How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments

Gelpern, A., Horn, S., Morris, S., Parks, B., & Trebesch, C. (2021). How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments. Peterson Institute for International Economics, Kiel Institute for the World Economy, Center for Global Development, and AidData at William & Mary

1. The Paris Club (French: Club de Paris) is a group of officials from major creditor countries whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor countries. As debtor countries undertake reforms to stabilize and restore their macroeconomic and financial situation, Paris Club creditors provide an appropriate debt treatment.

2. Debt restructuring is a process that allows a private or public company or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can continue its operations.

3. Contracts agreed upon or participated in by three or more parties, especially the governments of different countries

4. Organisation for Economic Co-operation and Development

5. The distinguishing feature of a bilateral loan is that it is a loan from a single source