China flagged for using contract clauses to prevent debt renegotiation with countries

May 11, 2021 News

The China EXIM Bank. (Photo: Imaginechina)

Kaieteur News – China, one of the world’s largest creditors, has been flagged for using contract clauses that prevent countries they saddle with debt from seeking renegotiation and more specifically outside intervention. This damning revelation was made in a report titled, “How China Lends; A Rare Look into 100 Debt Contracts with Foreign Governments,” compiled by the Center for Global Development (CGD) in collaboration with other key organisations.The report noted that it is the first systematic analysis of the legal terms of China’s foreign lending. This is because very few contracts between Chinese lenders and their government borrowers have ever been published or studied. It said that 100 contracts between China’s state-owned entities and government borrowers in 24 developing countries within Africa, Asia, Eastern Europe, Latin America and Oceania were analysed, and then compared to other contracts those countries inked with other bilateral, multilateral and commercial creditors.
Further to that, it said that as these contracts were analysed three main insights emerged.
It first pointed out that Chinese lenders seek an advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and “no Paris Club” clauses which inherently prevent collective debt restructuring through the Paris Club Agreement. The Paris Club, which was founded in 1956, comprises a group of officials from major creditor countries and, with the agreement, it seeks to find coordinated and sustainable solutions to repayment difficulties being faced by debtor countries. Interestingly, out of the 100 contracts that were carefully assessed, three-quarter of them contained these no Paris Club clauses. In addition, it was also keen to note that such a clause also prevents countries from even comparing their debt.
The CGD report went on to highlight that the contracts also contain unusual confidentiality clauses, barring borrowing nations from revealing the terms or even the existence of the debt. “All of the post-2014 contracts with Chinese state-owned entities in our sample contain or reference far-reaching confidentiality clauses. Most of these commit the debtor not to disclose any of the contract terms or related information unless required by law,” it outlined, adding that such a clause prevents the citizens in lending and borrowing nations from holding their governments accountable for secret debts. More specifically, it highlighted that whereas only one of 37 China’s Export-Import (Exim) bank contracts prior to 2014 contains a confidentiality clause, all of the China Exim bank’s contracts after 2014 include confidentiality clauses. This shows that while confidentiality clauses were always implemented, China has become more rampant in its usage over the years.
Thirdly, the report magnified the use of cancellation, acceleration and stabilisation clauses in Chinese contracts, which potentially allows the lender to influence the debtors’ domestic and foreign policies. “Even if these terms were unenforceable in court, the mix of confidentiality, seniority and policy influence could limit the sovereign debtor’s crisis management options and complicate debt renegotiation,” it affirmed.
According to the analysis, Chinese contracts are creatively designed to manage credit risks and overcome enforcement hurdles from sovereign nations making China a muscular and commercially savvy lender to the developing world.