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Will Chinese loan terms hamper post-virus debt talks in Africa, Asia?

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In a report published this week, a group of US and German researchers warns that the terms under which China has advanced loans to poor countries in Africa and Asia are damaging some governments’ ability to renegotiate debt in the wake of the coronavirus epidemic.

The report, called “How China Lends – A Rare Look into 100 Debt Contracts with Foreign Governments” echoes warnings about problems from Chinese lending, which vastly increased after Beijing launched its trillion dollar Belt and Road Initiative (BRI) in 2012 to built vast infrastructure projects on the Eurasian continent, in Africa and the Middle East.

China has become one of the biggest lenders, especially to developing countries, as the ruling Communist Party strives to expand its global influence to match the country’s status as the world’s second-biggest economy.

Unlike financial entities such as the World Bank, state-owned Chinese banks require foreign borrowers to keep terms and sometimes even the existence of loans secret, according to the researchers who hail from the College of William and Mary in Virginia, Germany’s Kiel Institute for the World Economy, the Peterson Institute for International Economics and the Center for Global Development in Washington. 

Reluctant to negotiate

Chinese banks insist on being repaid ahead of other creditors, which can disrupt debt talks with groups of lenders, their report said. It added that borrowers are required to put oil or other revenue into foreign accounts that can be seized in the event of default.

The pandemic “sapped the repayment capacity of many borrowers,” but creditors are “reluctant to renegotiate” without knowing what is owed to Beijing, said Bradley C. Parks, executive director of AidData, a laboratory at the College of William and Mary in Virginia.

Zambia in southern Africa is deadlocked in talks with bondholders who refuse to negotiate until they know its Chinese debts, according to the report.

“The stakes are quite high,” Parks said. “If China is not at the table when these countries are trying to renegotiate, it is very difficult for countries in repayment distress to get out of that situation.”

Too much debt

The researchers looked at 100 contracts between Chinese lenders and government borrowers in 24 countries worth a total of 36.6 billion dollars. The lender for 84 of those was the Export-Import Bank of China or the China Development Bank.

Leaders of poor countries welcome Beijing’s lending, but Belt and Road has led to complaints they are left with too much debt. Kenyan filling station operators went on strike in 2018 after a fuel tax was imposed to repay Chinese loans for a railway.

The researchers hope to encourage “soul-searching” by Beijing about whether secrecy and other restrictions are needed, Parks said. He said they hope borrowers “get smart on the need to do their homework before they sign these contracts.”

Chinese officials received a copy of the report before its release and responded with “detailed written comments” that emphasized their need to “mitigate risk” in lending to weak economies, Parks said.

Human rights standards

“There were no requests that we change anything,” he said. “They wanted to make sure their perspective was understood.”

China’s official secretiveness has fueled complaints its aid and lending might prop up corrupt regimes or undercut environmental and human rights standards Western donors are trying to enforce.

Officials in charge of Belt and Road say the initiative benefits all countries involved and lending is on commercial terms, not aid. 

Chinese leaders have forgiven interest owed by some Belt and Road borrowers and say they want to keep debt manageable. Wednesday’s report noted, however, that Ecuador was reminded by Chinese bankers about its secrecy terms and told future lending might be jeopardized following leaks of loan details.

Researchers led by AidData released their first report in 2013 focusing on Chinese financing to Africa.

In 2017, a report found China was close to matching the United States as a source of official grants and loans but said much of that served Beijing’s economic interests instead of those of the recipients. A 2018 report found Chinese-financed railways in Africa and Asia were helping to reduce economic inequality between regions within countries.

(With AP)

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