“China’s secret loan contracts reveal its hold over low-income nations.” This was the Financial Times headline on a new report issued last month: “How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments.”
The publication, which analyzed a database of 100 Chinese loan agreements to 24 countries – 47 percent of which are to 10 African nations – had both academics and the media going into overdrive. Most media outlets, from the FT to Reuters to Al Jazeera and Quartz, focused on “secrecy” as the key issue that jumped out from the data.
But while we understand why the “secrecy narrative” might be appealing to headline writers and journalists, on reflection it is a distraction and ultimately unhelpful to both borrowers and people really trying to understand the relationship between China’s financial institutions and other countries.
Why? Two key reasons.
First, the report’s authors claim that a key aspect of China’s contracts is that they contain “unusually far-reaching” confidentiality clauses. Our view is that this is a somewhat misdirected message for borrowers and citizens in borrowing countries.
The Chinese contracts in the database clearly state that confidentiality clauses are subordinate to national laws, and indeed the very existence of the database confirms the subordination. The authors themselves make it clear that all the contracts obtained are from public sources. This would suggest a level of transparency and chimes with our own work that Chinese agreements with other countries in a whole host of areas are subordinate to national laws. In development language this is known as respecting “country ownership.”
Cameroon is a case in point of how national laws can enshrine transparency in loan agreements, irrespective of what the lender might want. The country is not just the source of almost 25 percent of the contracts in this database, it is – as our colleagues explained in a 2019 report – also ahead of many other countries in assessing the quality and effectiveness of Chinese versus other countries’ loans and grants. The country also scores mid-range in a debt transparency index designed by our firm in 2021 covering 20 African economies.
This would suggest that, rather than focusing on China for transparency, borrower countries might actually want to look to each other, including Cameroon, to see what they can learn.
Another point to be cautious of is the report’s assertion that “No Paris Club” clauses exclude Chinese debt contracts from multilateral debt restructuring arrangements. Like the authors of the report, we fully agree that the ability for countries to negotiate debt restructuring is vital. However, we do not draw the same conclusion from this clause. The clause talks of the borrower not seeking from the lender “comparable terms and conditions which are stated or might be stated in agreements with other creditors.” In essence, this is not an exclusion, but an illustration of different conditions in which the clause may apply. And there is evidence of this. Rhodium Group have previously compiled multiple examples of restructuring of Chinese loans, both before and after other creditor restructurings.
Our second, and perhaps most important concern about the “secrecy” narrative is that it distracts from the real value of the database. If used correctly, this database could be incredibly helpful for arming borrowers with more information to demand more from everyone in their future contracts – China and other lenders.
The issues we know borrowers to be concerned with go far beyond secrecy.
For instance, borrowers – and their citizens – are interested in achieving lower interest rates, longer grace periods and maturities from debt. Various possibilities are helpfully compiled in the report, although they were not picked up in media reports. What would also be helpful to compile, however, given the context for African countries in particular, who need to provide 15 million new jobs every year to meet U.N. Sustainable Development Goals, are metrics on a number of other areas. For instance, negotiating governments need to be able to argue for the maximum use of local labor and content in the contracts, and the strongest environmental conditions in order to ensure the greenest future for young citizens. It would be useful for future researchers to explore the contract details in these areas. One of the Ghanaian contracts, for instance, contains a clause for 30 percent of the value of the contract to be spent on local goods, and 30 percent of local labor to be used.
Another example of such a shortcoming from a borrowers’ perspective is when it comes to the interpretation of special “escrow” accounts. These use finance from commodities to pay directly for infrastructure – a sort of “sovereign wealth fund” or “hypothecated” fund in financial terms. These are often proposed by borrowing countries that face restrictions on debt ceilings, are under sanctions, or can’t access private sector bonds because they are seen as too “risky.” Such borrowers have to work creatively to get the finance they need to develop. However, the report interprets escrow accounts fairly uniformly in a negative light. Yet, we are aware that these types of contracts can differ widely. Some actually provide buffers in the event of falling or volatile commodity prices, which would be very useful for other borrowers to know about and understand.
We strongly welcome this new loan contracts database. The authors should be praised for their efforts, and we sincerely hope the database grows.
But the authors’ and media’s focus to date on “secrecy” is a significant missed opportunity. Certainly, other lenders – the Paris Club, World Bank, and IMF – are curious about the terms of loans from China, and have concerns about being outside of the room when contracts with China and other lenders are negotiated. Yet if the authors are to have positive “implications on debt contracting and sovereign debt policy” as is their stated ambition, the worries of other lenders must not be their primary focus. The new database has rich data that can be used to educate and inform, providing agency to borrowing governments negotiating for much needed loans for infrastructure and other public goods that can have huge benefits and impacts on citizens’ lives. The new database needs repurposing, and to be analyzed for the issues that really matter to borrowers, and their citizens.