China’s strategy of debt traps with confidentiality clauses

Till 2019, China Development Bank and China Import-Export bank granted loans worth almost $120 billion to the developing countries of Asia-Pacific regions. But the question arises: what is the intention behind providing these loans?

How are such intentions fulfilled with the use of confidentiality clauses in the agreement, and why do countries seek monetary support from China?

As a tool for gaining considerable power all over the world, China uses financial debt. It is often noticed that for the purpose of infrastructure projects in developing countries, China offers cheap loans which attract them. Almost every time these countries are unable to repay these loans which provides Beijing with a chance to gain control over them.

An evident example is the Hambantota Port in Sri Lanka which has been handed to China on a 99-year lease; a similar instance can be seen in Pakistan and Malaysia as well. There is a pending debt of around USD 60 billion in Pakistan on account of the China-Pakistan Economic Corridor project.

Also, there is no cap on the amount of loan provided by China. As China is not a member of the Paris Club, loan agreements signed by it are not in compliance with the sustainable debt relief clauses. It doesn’t even disclose the clauses of loan agreements to any of the agencies. This also indicates risks and tensions towards the commitment of China under G20 Common Framework for Debt Treatments beyond the DSSI, as announced in 2020.

Recently, a joint research has been conducted by the Peterson Institute for International Economics, Keil Institute for the World Economy and the Centre for Development and Aid Data reported by International Forum for Rights and Security(IFFRAS), This research says China used legal contracts to gain hidden advantage over borrowers. Most of the clauses of the agreement are strict in nature and don’t provide any rights to the borrowers.

This report analysed over 100 contracts signed between Chinese lenders and developing countries including Argentina, Venezuela and some of the countries of Sub-Saharan Africa. In this analysis, it has been revealed that most of the contracts contained confidentiality clauses, meaning no information can be disclosed by the countries to any other creditors. This makes it impossible for other creditors to ascertain the position of the borrowers. Nor can they disclose the terms of the agreement to their citizens, who have the legitimate right to know about these agreements. As they never get to know about these, they cannot hold their government liable for the secret debts.

Besides, almost all the contracts examined have clauses, saying that in case of any law or policy change or even at their will the lenders can terminate the agreement and demand immediate repayment, thus providing no rights to the borrowers and giving Chinese lenders an upper hand.

Countries entering into these loan agreements require to maintain a separate special bank account acceptable to the lender, meaning that the revenues of the government will remain out of the borrower’s control. This makes a collateral arrangement for getting control over the revenue accounts for the purpose of debt repayments. This also includes termination of diplomatic relations in an event of default. These agreements also contain a clause of stabilisation that shields the lenders from any of the political risks or any legislative or regulatory change happening in the borrower’s country.

With the help of such legal agreements, Chinese lenders limit the borrowers’ crisis management options. Overcoming enforcement and repayment hurdles becomes almost impossible, which ultimately leads to debt traps and gives the lenders much more advantages than assumed.