US researchers say Chinese lenders require borrowers to prioritize repayments to Chinese banks ahead of others.

The terms of China’s loan deals with developing countries are unusually secretive and require borrowers to prioritize repayment of Chinese state-owned banks ahead of other creditors, a study of a cache of such contracts showed.

The dataset – compiled over three years by AidData, a United States-based research laboratory at the College of William & Mary – comprises 100 Chinese loan contracts with 24 low and middle-income countries, a number of which are struggling under mounting debt burdens amid the economic fallout from the COVID-19 pandemic.

Researchers and economists have turned their attention to the role of China, which is the world’s biggest creditor, accounting for 65 percent of official bilateral debt worth hundreds of billions of dollars across Africa, Eastern Europe, Latin America, and Asia.

“China is the world’s largest official creditor, but we lack basic facts about the terms and conditions of its lending,” the authors, including Anna Gelpern, a law professor at Georgetown University in the US, wrote in their paper.

The researchers at AidData, the Washington-based Center for Global Development (CGD), Germany’s Kiel Institute, and the Peterson Institute for International Economics compared Chinese loan contracts with those of other large lenders to produce the first systematic evaluation of the legal terms of China’s foreign lending, according to CGD.

Their analysis uncovered several unusual features to the agreements that expanded standard contract tools to boost the chances of repayment, they said in the 77-page report.

No Paris Club

These include confidentiality clauses that prevent borrowers from revealing the terms of the loans, informal collateral arrangements that benefit Chinese lenders over other creditors, and promises to keep the debt out of collective restructurings – dubbed by the authors as “no Paris Club” clauses, the report said.

The Paris Club is a group of 22 mostly developed nations that have agreed to act as one in dealing with debtor countries. China is not a member. One of its principles is that members share information with each other on the situation of debtor countries and that borrowers are treated on a comparable basis.

China’s insistence that borrowers adhere to confidentiality agreements differs from contracts made with state-backed lenders from other countries, which tend to impose confidentiality primarily on the lender. Such clauses mean that “citizens in lending and borrowing countries alike cannot hold their governments accountable,” according to the report.

However, the lack of transparency in sovereign debt deals is not limited to China, the report said, with almost no state-backed lenders publicly releasing the text of their loan contracts.

“Disclosing all debt contracts, however difficult politically, should become the norm rather than the exception,” it said. “Public debt should be public”.

AidData’s report also says China’s contracts with debtors give substantial leeway for China to cancel loans or accelerate repayment.

A very striking prohibition

The framework calls for comparable treatment of all creditors, including private lenders, but he said most of the contracts examined banned countries from restructuring those loans on equal terms and in coordination with other creditors.

“That’s a very striking prohibition, and it seems to run counter to the commitments the Chinese are making at the G20,” Morris told the Reuters news agency, though he added that it was possible China would simply not enforce those clauses in its loan contracts.

The Chinese foreign ministry did not immediately reply to a request by Reuters for comment.

China has said in the past that its financial institutions, and not just the country’s official creditors, were working to help ease the debt woes of African nations.

It also said in November that it had extended debt relief to developing countries worth a combined $2.1bn under the G20 program, the highest among the group’s members in terms of the amount deferred.

Even before the pandemic upended economies across the world, China had turned more cautious about lending to Africa. Chinese financing to Africa fell below $9bn for the first time in nearly 10 years in 2019, according to a separate study from Johns Hopkins University released this week.

The material examined by researchers for the study includes 23 contracts struck with Cameroon, 10 with Serbia and Argentina as well as eight with Ecuador.

In January, the World Bank warned that several countries were in urgent need of debt relief due to the severity of the global recession caused by the COVID-19 pandemic.