Conditions for mass lending in China

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China Trade News

China is the world’s largest creditor to governments. And this is not only because of the huge supply of US Treasury bonds.

For much of the past decade, Beijing has sought to fill huge infrastructure financing gaps on several continents with its Belt and Road Initiative. The main goal, in addition to increasing global influence, is to modernize transport links along the old routes of the Silk Road, which allowed trade between the Far East and what lay to the west of it. While Beijing recently harnessed expensesThe China Development Bank and the Export-Import Bank of China provided $ 462 billion in loans between 2008 and 2019. For context, according to Boston University, that’s just under the $ 467 billion provided by the World Bank over the same period.

However, the terms of these loans to sovereign borrowers were kept secret. Still.

The Peterson Institute for International Finance, a Washington-based think tank, has fascinating paper this week, which compiles results based on 100 contracts with sovereign creditors, mainly in Africa and South America. The lenders are the China Development Bank and the Export-Import Bank of China, as well as several commercial banks and the Chinese government itself. The study was conducted with other think tanks and the William and Mary College AidData team, which has a dataset here for those who want to dig deeper.

While the researchers note that the sample size of 100 is only 5 percent of the contracts that Chinese lenders have awarded foreign governments since the early 2000s, in terms of standardization it is still enough to draw some conclusions about the nature of lending practices. and concluded that China is a “powerful and commercially savvy creditor.”

We recommend that you read the entire article. For those running out of time, here are a few highlights.

First, contracts are not very different from contracts offered by other sovereign creditors. Especially when these lenders – as is often the case here – lend to lower-income countries. However, the contracts are unique in that they reflect that China does not participate in collective restructuring agreements such as the Paris Club due to the loss of sovereign debt.

This creates a discrepancy with what you might expect to see in a contract with an export-import bank or development bank located elsewhere. For example, researchers believe that contracts represent a somewhat odd hybrid of private and public sector lending standards. This could give the Chinese authorities much more power if the situation worsens. Take, for example, the inclusion of clauses that mean that sovereign changes in policy and legislation can be seen as grounds for cancellation and immediate repayment of a loan. The document notes that while such clauses would be “unremarkable in a commercial debt agreement” entered into by a private sector player, they could take on “a different meaning and new potential in government-to-government lending arrangements.” It seems that this does indeed give Beijing enormous domestic decision-making power in the case of countries that owe a significant amount of money.

The extent to which Beijing has deviated from international debt relief protocols seems to us incredibly important – especially at times like now, when the pandemic has left many countries. developing countries China is considered a difficult borrower.

There is also the problem of coercion. Contracts (other than those agreed with the China Development Bank, which are mostly written in English) are subject to Chinese law. They also insist that the dispute resolution takes place in China. While researchers shy away from judging the merits of Chinese law or China’s commercial dispute resolution regime, we will not be hurt by our chances of defending our case in such a legal system.

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