OPINION | A new report has shone a light on Chinese loans in Africa: Here is what we can learn

(pic: Xinhua)

Zimbabwe, like many African economies, has looked to China for lending to fund critical infrastructure. But are the terms of the loans fair? Lawyer Bernard Mukwaira looks into a new report that examines the legal terms of Chinese credit

In July last year, newZWire reported that Zimbabwe owed China US$2.03 billion, mostly used for infrastructure. It is no surprise that Zimbabwe has turned to China for loans. From 2018 onwards, China has become the largest lender in the world. Chinese direct loans and trade credit exceed US$1.5 trillion and amount to more than 5% of global GDP.

Chinese lending surpasses the combined lending of the World Bank, International Monetary Fund and OECD governments, even though China is also the second largest recipient of World Bank funding. There has been intense scholarly debate about Chinese lending. Some argue that it is detrimental to the borrowers and designed to induce financial distress. Others observe that lending from China can be transformative and its rapid rise can benefit borrowers and the world. What drives the debate is the lack of data and facts about Chinese lending. That it is until now.

In a first, Anna Gelpern et al last year published an analysis of the legal terms of China’s foreign lending. The paper analysed 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America and Oceania, and compared them with those of other bilateral, multilateral and commercial creditors. Three things emerge from the analysis: (a) Chinese contracts contain unusual confidentiality clauses, (b) Chinese lenders seek advantage over other creditors and (c) there are clauses in Chinese contracts that potentially allow the lenders to influence debtors’ domestic and foreign policies. Even though these terms are not enforceable in court, they limit what debtor nations like Zimbabwe can do in debt crisis management and complicate debt renegotiation.

Why do developing countries like Zimbabwe borrow from China?

Before looking at the specific terms of Chinese contracts, it’s useful to consider why Chinese financing is so attractive to developing countries. One reason is that the financial terms of Chinese loans contain a significant subsidy compared to market financing. For instance, for China’s state-owned lenders, the average commitment-weighted interest rate is 3.2%, which is lower than the average rates on private external bank loans (3.7%) and on international bonds (5.6%). However, Chinese lending carries higher average rates compared with the concessional loans provided by multilateral (e.g. World Bank, IMF) (2%) and other bilateral creditors (2.1% for Paris Club creditors and 2.3% for non-Paris Club bilateral creditors). 

This begs the question why developing countries are not borrowing from multilateral, Paris Club creditors and non-Paris Club bilateral creditors? There is a limited availability of concessional loans from Paris Club creditors, especially in high-risk countries and for infrastructure. Multilateral and Paris Club loans come with policy conditions such as transparency and institutional reforms. Conditions are irksome especially if a country struggles with corruption and capacity. Transparency and institutional reforms will prove unpopular with public officials. Chinese infrastructure financing on the other hand comes as a take-it-or- leave-it bundle, with loans, construction and project management handled by a consortium of cooperating Chinese entities. The projects are developed and implemented quickly, giving politicians in borrowing countries an opportunity to demonstrate highly visible, short-term wins.

Chinese loans to Africa, 2022 (Global Policy Development Centre)


Unusual confidentiality clauses

It is the norm for commercial debt contracts, including the London-based Loan Market Association

(LMA) template, to impose confidentiality obligations primarily on the lenders. Chinese state-owned entities on the other hand impose far reaching confidentiality clauses on the borrower. These commit the debtor not to disclose any of the contract terms or related information unless required by law. This has two broad consequences. First, broad borrower confidentiality undertakings make it hard for all stakeholders, including other creditors, to work out the true financial position of the sovereign borrower, to detect preferential payments and to design crisis response policies when a default occurs. Second and more importantly, citizens in lending (China) and borrowing (say Zimbabwe) countries alike cannot hold their governments accountable for secret debts.

Seeking advantage over other creditors

Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts. A significant amount of Chinese contracts 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. Borrowers are required 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. This would help to explain why a government would have an insatiable demand for revenues through a myriad of taxes. Overall, revenue accounts combined with confidentiality clauses make policymaking and multilateral surveillance difficult. If a substantial share of a country’s revenues is under the effective control of a single creditor, conventional measures of debt sustainability are likely to overestimate the country’s debt servicing capacity and underestimate its risk of debt distress. This is precisely the situation in which Zambia found itself and explains why Zambia’s debt restructuring has been challenging. 

Close to 75% of Chinese debt contracts also contain what can be termed ‘No Paris Club’ clauses. These clauses expressly commit the borrower to exclude the debt from restructuring in the Paris Club of official bilateral creditors, and from any comparable debt treatment relative to Paris Club or any other creditors.

Influencing  debtors’ domestic and foreign policies

Contracts with Chinese lenders supervene maximising commercial advantage and in effect entrench the lender’s ability to influence the debtor’s economic and foreign policies.   Half of China Development Bank (CDB) contracts 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 People’s Republic of China (PRC) entity’. All the more interesting as China characterises CDB as a commercial lender. 

More contentiously, over 90% of Chinese contracts, including all CBD 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% 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 labour policies. To be fair, change-of-policy clauses are standard in commercial contracts, including the LMA template, but they take on a different colour 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. 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.

Unsurprisingly, the majority of the 100 Chinese contracts are governed by Chinese law. Chinese lenders express a preference for their own law or, failing that, ironically for English law.

Some conclusions and policy implications

It is paramount that public debt is made public. Citizens in lending and borrowing countries should be able to hold their governments accountable for contracts signed in their name. In Zimbabwe’s case, we need to know formal and informal collateral arrangements for debt. Are there any ‘hidden revenues’ which tie up Zimbabwean resources that are hidden from public view? Greater transparency around public debt encourages better risk management. There are many talented and well respected Zimbabwean trade and contract lawyers who could provide technical assistance to the government and ensure that the country does not tie itself in contracts which imperil sovereignty and national security. Poor debt management is not only an economic risk but a security risk as well.

The President rightly asked Zimbabwean diplomats to make Zimbabwe’s arrears clearance plan a priority. However, this could prove challenging if the government has committed itself to ‘No Paris Club’ clauses with Chinese lenders. More so Zimbabwe owes Paris Club creditors and other multilateral institutions more than it owes China and No Paris Club clauses would complicate debt restructuring and/or debt cancellation as we have seen with Zambia. Zambia’s bondholders were refusing to proceed with debt renegotiation citing insufficient information about China’s claims on the country.

There are some further unsettling questions for the government. Has the government committed itself to contracts with Chinese lenders which make it difficult for Parliament to amend labour and environmental laws? Or if the government were to enforce labour and environmental laws, would that permit a Chinese lender to accelerate loan repayment as a response to potential political disagreements with the government? Crucially, is the environment and labour rights being put at risk due to contracts the government signed with Chinese lenders? We know from Argentina’s example that the CBD invoked a cross suspension clause and threatened to cancel a railway project when a new government in Argentina sought to cancel dam construction on environmental grounds. In other words Chinese lenders are influencing policy in debtor countries and making it harder for governments to walk away from unrelated projects.

Some clauses in Chinese lenders contracts effectively create carve-outs within the rule of law, which limit the borrower’s self-governance and potentially block environmental, public health, labour and other potentially vital and popular regulations. Is this acceptable for a sovereign state? 


About the writer: Bernard read International Economic Law at the University of Edinburgh. The views expressed in this article are solely that of the author and do not reflect the views of the author’s employer, company, institution or other associated parties.