The Chinese government and its state-owned banks have lent record amounts to governments in low- and middle-income countries since the early 2000s, making China the world’s largest official creditor. Although several recent studies examine the economics of Chinese lending, we still lack basic facts about how China and its state-owned entities lend—in particular, how the loan contracts are written and what terms and conditions they contain. Neither Chinese creditors nor their sovereign debtors normally disclose the text of their loan agreements. But the legal and financial details in these agreements have gained relevance in the wake of the Covid-19 shock and the growing risks of financial distress in countries heavily indebted to Chinese lenders. As of January 2021, according to the IMF, about half of all low-income countries were in debt distress or faced a high risk of entering distress. In light of the high stakes, the terms and conditions of China’s debt contracts have become a matter of global public interest.
We present the first systematic analysis of China’s foreign lending terms by examining 100 debt contracts between Chinese state-owned entities and government borrowers in 24 countries around the world, with commitment amounts totalling $36.6 billion. All of these contracts were signed between 2000 and 2020. In 84 cases, the lender is the Export-Import Bank of China (China Eximbank) or China Development Bank (CDB). Many of the contracts contain or refer to borrowers’ promises not to disclose their terms—or, in some cases, even the fact of the contract’s existence. We were able to obtain these documents thanks to a multi-year data collection initiative undertaken by AidData, a research lab at William and Mary. AidData’s team of faculty, staff, and research assistants identified and collected electronic copies of 100 Chinese loan contracts (not summaries or excerpts) by conducting a systematic review of public sources, including debt information management systems, official registers and gazettes, and parliamentary websites. In partnership with AidData, we have digitised and published each of these contracts in a searchable online repository.
Each Chinese entity in our sample uses its own contract form across all of its foreign borrowers. Three main forms, or contract types, occur most often in our sample: the CDB loan contract, the China Eximbank concessional loan contract, and the China Eximbank non-concessional loan contract. We find substantial overlap in how these entities write debt contracts with foreign governments, which suggests that our sample is informative of the larger universe of other CDB and China Eximbank contracts.
We evaluated China’s contracts in a broader international sovereign debt contracting context. For this purpose, alongside the 100 contracts with Chinese lenders, we code a benchmark set of foreign debt contracts that consists of 142 loans from 28 commercial, bilateral, and multilateral creditors. With few exceptions, neither sovereign debtors nor their creditors normally publish their contract texts in full. Our benchmark contracts are from Cameroon, the only developing country that, at the time of our study, had published all of its project-related loan contracts with foreign creditors of all types, entered into between 1999 and 2017. We compare the Chinese contract terms with those in the benchmark sample, as well as the model commercial loan contract published by the London-based Loan Market Association (the ‘LMA template’).
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Results of our analysis
First, China’s state-owned entities blend standard commercial and official lending terms, and introduce novel ones, to maximise commercial leverage over the sovereign borrower and to secure repayment priority over other creditors. For example:
- 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. Only 2 of the 142 contracts in the benchmark sample contain potentially comparable confidentiality clauses. Commercial debt contracts, including the LMA template, impose confidentiality obligations primarily on the lenders. Broad borrower confidentiality undertakings make it hard for all stakeholders, including other creditors, to ascertain the true financial position of the sovereign borrower, to detect preferential payments, and to design crisis response policies. Most importantly, citizens in lending and borrowing countries alike cannot hold their governments accountable for secret debts.
- 30 percent of Chinese contracts in our sample (representing 55 percent of loan commitment amounts) require the sovereign borrower to maintain a special bank account—usually with a bank “acceptable to the lender”—that effectively serves as security for debt repayment. Banks typically have the legal and practical ability to offset account holders’ debts against account balances. These set-off rights can function as cash collateral without the transparency of a formal pledge. Contracts in our sample require borrowers to fund special accounts with revenues from projects financed by the Chinese lender, or with cash flows that are entirely unrelated to such projects. In practice, this means that government revenues remain outside the borrowing country and beyond the sovereign borrower’s control. In our benchmark sample, we find only three analogous arrangements: one each with a multilateral, a bilateral, and a commercial lender.
- Close to three-quarters of the debt contracts in the Chinese sample contain what we term “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. These provisions predate and stand in tension with commitments China’s government has made under the G20 Common Framework for Debt Treatments beyond the DSSI (the “Common Framework”), announced in November 2020.
- All contracts with China Eximbank and CDB include versions of the cross-default clause, standard in commercial debt, which entitles the lender to terminate and demand immediate full repayment (acceleration) when the borrower defaults on its other lenders. Some contracts in our sample also cross-default to any action adverse to China’s investment interests in the borrowing country. Every commercial contract in our benchmark sample includes a cross-default clause, as does the LMA template. Only around half of all bilateral official debt contracts, and just 10 percent of multilateral debt contracts in the benchmark sample contain cross-default clauses. Instead, multilateral debt contracts usually let the lender suspend or cancel the contract if the debtor fails to perform its obligations under different contracts with the same lender, or in connection with the same project. Both cross- default and cross-suspension clauses put pressure on the debtor to perform or renegotiate, but they serve somewhat different purposes. A commercial cross-default clause helps protect creditors from falling behind in the payment queue; a cross-suspension clause lets a policy lender pause disbursements when the debtor’s policy or project effort—or its relationship with the lending institution—deteriorates. Some Chinese contracts combine elements of both, further constraining the sovereign borrower.
- Second, several contracts with Chinese lenders contain novel terms, and many adapt standard commercial terms in ways that can go beyond maximising commercial advantage. Such terms can amplify the lender’s influence over the debtor’s economic and foreign policies. For instance,
- 50 percent of CDB contracts in our sample include cross-default clauses that can be triggered by actions ranging from expropriation to actions broadly defined by the sovereign debtor as adverse to the interests of “a PRC entity.” These terms seem designed to protect a wide swath of Chinese direct investment and other dealings inside the borrowing country, with no apparent connection to the underlying CDB credits. They are especially counterintuitive in light of China’s characterization of CDB as a “commercial” lender. No contract in our benchmark sample contains similar terms.
- All CDB contracts in our sample include the termination of diplomatic relations between China and the borrowing country among the events of default, which entitle the lender to demand immediate repayment.
- More than 90 percent of the Chinese contracts we examined, including all CDB contracts, have clauses that allow the creditor to terminate the contract and demand immediate repayment in case of significant law or policy changes in the debtor or creditor country. 30 percent of Chinese contracts also contain stabilisation clauses, common to non-recourse project finance, whereby the sovereign debtor assumes all the costs of change in its environmental and labor policies. Change-of-policy clauses are standard in commercial contracts, including the LMA template, but they take on a different meaning when the lender is a state entity that may have a voice in the policy change, rather than a private firm on the receiving end of new financial regulations or UN sanctions. At the extreme, policy change clauses could allow the state lender to accelerate loan repayment and set off a cascade of defaults in response to political disagreements with the borrowing government.
Overall, the contracts in our sample suggest that China is a muscular and commercially-savvy lender to developing countries. Chinese contracts contain more elaborate repayment safeguards than their peers in the official credit market, alongside elements that give Chinese lenders an advantage over other creditors.
Lending to sovereign governments occurs in an environment of limited and indirect enforcement, with incomplete and uneven contract standardisation and no statutory or treaty bankruptcy to supply generally accepted default outcomes. As a result, even when we find troubling terms in debt contracts between sovereign borrowers and China’s state-owned entities, we cannot conclude that they violate international standards: with few exceptions, such standards do not exist. On the other hand, we suspect that the contracts we have examined are both more common than had been understood and a sign of things to come. New and hybrid lenders that mix official and commercial institutional features are growing in importance for sovereign financing. These are not limited to China. We expect such lenders to adapt and innovate contract features to maximise their commercial and political advantage in an increasingly crowded field.
Disclosing all debt contracts, however difficult politically, should become the norm rather than the exception. This would give citizens the ability to hold their governments accountable for the debt contracts signed in their name. Public debt should be public.
Anna Gelpern, Georgetown Law and Peterson Institute for International Economics.
Sebastian Horn, Kiel Institute for the World Economy.
Scott Morris, Center for Global Development.
Brad Parks, AidData, William and Mary, and Center for Global Development.
Christoph Trebesch, Kiel University, and Centre for Economic Policy Research (CEPR).
This is an edited excerpt from the authors’ paper How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments, first published by the Center for Global Development and co-published by AidData at William & Mary, the Kiel Institute for the World Economy, and the Peterson Institute for International Economics. Read the full paper here.