By Scott Morris
WASHINGTON DC, Apr 9 2021 (IPS)

Is Chinese financing good for developing countries? This has become a provocative question, freighted with ideology, geopolitics, and commercial rivalries. That doesn’t mean it isn’t worth trying to answer factually and empirically.

Yet, taking stock of China’s lending activities has long been hindered by the lack of publicly available data on dimensions like loan volumes and interest rates, let alone more esoteric features like loan collateral or default contingencies.

The past year brought new worries about debt vulnerabilities exacerbated by the COVID crisis. This renewed attention in forums like the G20 and G7 has also brought some progress when it comes to publicly available information on basic lending data, with significant new data releases covering China and other major creditors by the World Bank.

This new reporting makes clear why we should care about China’s lending, as the top bilateral lender to over 50 developing countries. But much of China’s relationship with its borrowers remains outside the public view.

Scott Morris

This three-year project examines the content of 100 Chinese debt contracts to understand the financing relationship between Chinese lenders like China Exim Bank and China Development Bank and their government borrowers in developing countries.

As a starting point, the public release of this number of contracts in a single database itself represents a step forward. In fact, a key feature of the contracts themselves is enforced secrecy—from other creditors, from the IMF, and from the citizens and taxpayers in debtor and creditor countries alike, who ultimately bear the risks of these lending relationships.

Some other striking findings from the study: prohibitions on borrowers’ honoring the terms of “comparable treatment” in cases of a Paris Club debt treatment; extensive use of escrow accounts and other forms of non-asset collateral; as well as considerable flexing of political and economic muscle with broadly written cancellation and default clauses.

Clearly, there’s a lot to learn from this sort of intensive scrutiny of public debt contracts. Which raises the question, why aren’t more of these contracts made public? And not just Chinese contracts.

The uncomfortable truth is that citizens in virtually any creditor or debtor country would have a very hard time tracking down their government’s debt contracts. This study, focused on one of the least transparent of these governments, only reinforces the universal case that public debt should be public.

All eyes these days are on the growing list of conflicts between the United States and China, and no doubt the findings of this study lend themselves to criticism of China.

But both countries could usefully commit to a new agenda aimed at contract transparency, such that US Exim Bank’s contracts could be examined alongside those of China Exim Bank. Why should that be so controversial?

Read the paper.
RELATED TOPICS:
Chinese Development Policy, Sustainable Development Finance

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By Scott Morris and Gailyn Portelance
WASHINGTON DC, Jan 10 2019 (IPS)

China continues to borrow an average of $2 billion a year from the World Bank, making it one of the Bank’s top borrowers—despite being the world’s second-largest economy and itself a major global lender, according to our study released today.

By doing a project-level analysis of recent World Bank loans to China, we found that the World Bank’s International Bank for Reconstruction and Development (IBRD)—which offers loans to middle-income and credit-worthy lower-income countries—has loaned more than $7.8 billion to China since the country surpassed the bank’s “graduation” income threshold for lending in 2016. The World Bank’s current threshold to trigger IBRD country graduation discussions is $6,895 in gross national income (GNI) per capita.

Lending to countries above this threshold has been controversial, with the United States particularly critical of ongoing lending to China. Critics have pushed for strict graduation standards that would make wealthier borrowers ineligible for bank loans (i.e., “graduation”). Under the 2018 agreement, World Bank shareholders agreed to limit loans to countries above the threshold to only projects that focus on:

• global public goods (projects that benefit the world at large); and,
• capacity-building (projects that help the countries “graduate” away from World Bank lending).

As shown in the figure above, less than half of China’s lending has gone to either of the approved categories, by strict definitions of these categories, since China crossed the income threshold in 2016. Capacity-building projects contribute to only 5 percent of its portfolio, and global public goods make up 38 percent of China’s borrowing portfolio.

However, a broader conception of capacity-building, which focuses on the allocation of resources to the poorest provinces within China improves that picture. Fifty-eight percent of lending to China has been directed to provinces with per capita incomes below the graduation income threshold.

And with a third of the portfolio supporting the reduction of carbon emissions in the country, the bank is meeting a clear global public good mandate. As the world’s largest polluter, China will need to make sizeable investments in climate-friendly finance if we are to make meaningful progress on this critical agenda.

The world has a lot to gain from a sustainable and productive China-World Bank relationship. To lower political heat from the United States and other critics, the Bank should request more from China in terms of interest charges on loans and ensure that all project lending adheres to the 2018 standards.

You can read the full study here.

Excerpt:

By Scott Morris
WASHINGTON DC, Mar 14 2018 (IPS)

Chinese officials have been adept at ascribing a vision for the “Belt and Road” initiative (BRI) that garners support from a wide array of countries, as well as international institutions like the World Bank and International Monetary Fund (IMF).

The panel during the G77 event on debt restructuring. Credit: G77/IPS

High on the list is China’s go-it-alone approach to managing debt problems, evident in high-profile cases like Venezuela and in lesser-known situations like Sri Lanka and Tajikistan. The World Bank and other international institutions, which seek to lend their names to the BRI, have an obligation on behalf of their member countries to press the Chinese on a legacy of opaque and ad hoc debt workout arrangements.

These arrangements often prove to be a bad deal for distressed borrowers and are misaligned with global development objectives, which are pinned on principles of transparency and sustainability. For the Chinese themselves, unilateralism on debt is increasingly problematic.

Not only does it contribute to a political backlash in debtor countries, it makes Chinese financial interests increasingly vulnerable in the absence of the kinds of protections afforded to Paris Club creditors. In fact, this club of rich-country lenders was formed not to look out for the interests of debtors but to use collective action to ensure repayment from recalcitrant borrowers.

In practice, the disciplines, transparency, and predictability of the Paris Club’s approach, working in concert with the IMF and multilateral development banks, has proved to be beneficial for creditors and borrowers alike.

In new research, we identify eight BRI countries that could be pushed into debt distress due to lending under the initiative. That’s a relatively small share of the 68 countries associated with the BRI. But for these eight, which include Pakistan, Djibouti and Laos, China’s past behavior as a creditor ought to be a source of concern.

Unlike the world’s other leading government creditors, China has not signed on to a binding set of rules of the road when it comes to avoiding unsustainable lending and addressing debt problems when they arise. China’s rapid emergence from poor country to the world’s creditor has meant that sound policy frameworks around debt management, such as the approach of the Paris Club, have not caught up to China’s role as lender today.

Given China’s dominant role as an official creditor, it may be asking too much of Chinese officials to simply sign on to the set of rules and disciplines of a G-7-dominated forum like the Paris Club. Whether it is the club itself, or some new arrangement that holds closely to key principles of transparency and collective action, China would do well to step up on the debt front as the BRI gets underway.

Firmer commitments on responsible lending go beyond lending transparency and include clearer disciplines around lending terms and loan volumes, as well as project standards that help to ensure positive economic returns such as open and competitive procurement.

China can claim success when it comes to a vision for the BRI that has gained widespread support. The way forward demands a clear policy framework aligned with global standards, something that has been absent from China’s lending practices to date.

Whether Chinese officials have the will to pursue this approach will be critical in determining the ultimate success or failure of the BRI.

Excerpt: