A loan shark puts poor borrowers back on their feet

Chennai:

The study analyzes 100 Chinese loan agreements with 24 countries, the first systematic analysis of the legal terms of China’s foreign loans, the report’s authors write. Produced with the support of several American research institutes, it compares the agreements concluded with Chinese public banks to 142 publicly accessible contracts from other major creditor countries.

The contracts in question “use a creative design to manage credit risk and overcome obstacles to enforcement,” the report’s authors conclude, revealing that China is a “strong and commercially savvy lender to developing countries.” Much of the lending has been made under the China Belt and Road Initiative, an ambitious global infrastructure investment strategy involving more than 60 countries. In the agreements, China’s state-owned finance banks establish new loan terms or adapt standard terms in such a way as to “go beyond maximizing business advantage,” the researchers found. “Such conditions can amplify the influence of the lender on the economic and foreign policies of the debtor,” the report says. He goes on to list several examples.

Over 90% of Chinese contracts reviewed include a clause that allows the creditor to terminate the contract and demand repayment in the event of a significant change in law or policy in the borrowing country. While policy change clauses are standard in commercial contracts, researchers argue that it takes on a different dimension when the lender is a state entity and not a private company subject to standard financial regulation. The contracts also contain “confidentiality clauses of unusual scope,” the researchers found. “Many contracts contain or refer to promises by borrowers not to disclose their terms – or, in some cases, even the fact of the existence of the contract,” write the authors, who have not been granted access to these. documents only through multi-year data. collection initiative led by AidData, a research laboratory at the College of William and Mary in Virginia, United States.

This secrecy prevents other lenders from reliably assessing a country’s creditworthiness. “More importantly,” the authors write, “citizens of lending and borrowing countries cannot hold their governments accountable for debts secret”.

The contracts also give China’s state-owned banks priority over other creditors. At the same time, many agreements give China “a lot of leeway to cancel loans or speed up repayment if it does not agree with a borrower’s policies.” The severing of diplomatic relations with China is also classified as default and breach of contract. Policy changes in the recipient country can also trigger a breach of contract, forcing the debtor government to immediately repay the full loan amount.

In a normal case, the lender would choose to expedite principal and interest repayments, rather than requiring that the loan be repaid in full.

“Default triggers of the type we have identified in Chinese debt contracts potentially amplify China’s economic and political influence over a sovereign borrower,” the report says. The researchers also found that 30% of contracts require countries receiving loans to deposit collateral in special escrow accounts, often held by a Chinese state-owned bank. Borrowing countries may also be required to deposit income from projects financed by these banks into these accounts. In the event of bankruptcy, the Chinese bank could then seize these assets.

This article has been supplied by Deutsche Welle

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