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HFSC Belt and Road Hearing

House Financial Services Subcommittee on National Security, International Development, and Monetary Policy 

Examining Belt and Road: The Lending Practices of the People’s Republic of China and Impact on the International Debt Architecture

Tuesday, May 18, 2021

Witnesses 

Opening Statements
Chairman Jim Himes (D-Conn.)
In his opening statement, Himes said even before the pandemic there were worrying signs of sovereign debt distress and noted that most of it is owed to the People’s Republic of China. He said China has become the single largest lender but that they do not publicly disclose their foreign lending, so little is known about the scope of debt owed to them. Himes applauded the groundbreaking work of the panelists in providing insight on how China lends through strict non-disclosure agreements and “no-Paris Club clauses.” He said China uses acceleration and cross-default clauses to expand its sphere of influence on borrower nations by cancelling unrelated loans when borrowers make policy decisions China opposes. He said the lack of clarity and transparency on how much is owed to Chinese entities makes future debt restructuring efforts much more difficult. Himes said the Common Framework is a positive development to bring China closer to Paris Club style coordination. In conclusion, he said it is more important than ever that the U.S. establishes durable global norms for official bilateral lending.

Ranking Member French Hill (R-Ark.)
In his opening statement, Hill said this is a bipartisan concern and mentioned his Ensuring Chinese Debt Transparency Act which passed in the House last Congress. He highlighted multiple policy implications that result from China’s belt and road lending. First, he said the U.S. and allies need to be more serious about pushing for real concessions from Beijing. Hill questioned the U.S. Treasury’s recently announced plan to allocate $650 billion in special drawing rights (SDR) and stated that it could facilitate Belt and Road repayments, thereby making it more challenging to force China to the negotiating table. He said Treasury should use its leverage to obtain a meaningful agreement on debt before signing off at the International Monetary Fund (IMF) meeting this summer to entail specific long term concessions on transparency and appropriate coverage of all China’s official creditors. Hill said we need to find an alternative to developing countries’ acceptance of Chinese lending. Finally, he said Beijing’s resistance to international lending rules highlights that it does not deserve more of a voice as it relates to international financial institutions (IFIs) because shareholding is about the commitments and contributions to multilateral cooperation, not just the size and scope of a country.

Testimony
Professor Anna Gelpern, Anne Fleming Research Professor at Georgetown Law and nonresident senior fellow at the Peter G. Peterson Institute for International Economics
In her testimony, Gelpern opened by saying the COVID-19 shock to the international financial system is both an alarm bell and an opening for meaningful institutional reform as it relates to the international debt architecture. She highlighted three takeaways for the committee to inform their policy thinking: 1) the Common Framework is a worthwhile policy investment and needs a lot of work to live up to its architectural potential; 2) the Common Framework will quickly fall apart if it fails to establish threshold legitimacy with sovereign debt stakeholders; and 3) participants in the Common Framework, the Paris Club, and the IMF should use their existing policies on comparability of treatment, financing assurances, and lending into arrears, among others, to ensure that debt restructurings are comprehensive and equitable. She emphasized that dozens of countries are suffering from debt distress, more now than a year ago, and desperately need resources to manage the pandemic and the resulting economic fallout. Gelpern said she believes debt relief is rarely the best way to deliver financing for humanitarian and development goals, and debt relief by itself does not achieve these goals. She said to rely solely on debt relief would be especially problematic and that in working to fix the debt architecture, she emphasized the importance of understanding that it is part of a broader financial architecture where there is still more work to be done.

Scott Morris, Senior Fellow, Center for Global Development
In his testimony, Morris said the pandemic has exacerbated the risk of debt distress for nearly all low-income heavily indebted poor countries (HIPC). He said the U.S. is one of the smallest creditors to low-income countries, while China is by far the largest in the world, and that their dominant position in terms of lending volumes as well as the conditions Chinese leaders attach to their loans must be considered when thinking of policy to address the debt crisis. He focused the majority of his remarks on findings of a new report that he co-authored in which they assessed the provisions of 100 Chinese debt contracts. Morris said their findings include: 1) Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt; 2) Chinese lenders seek advantage over other creditors through collateral arrangements such as lender-controlled revenue accounts; 3) Chinese lenders also seek advantage over other creditors through requirements to keep the debt out of collective restructuring efforts by the Paris Club of creditors or any other multilateral arrangements; and 4) cancellation, acceleration, and stabilization clauses in Chinese contracts have broad scope and imply significant policy leverage over the borrowing country. He urged Congress to make the interests of developing countries and their citizens a priority and to work with partners to mobilize as much aid and concessional financing as possible. He concluded in saying as the U.S. seeks to compete with China in offering development finance, our government should be vigilant about avoiding China’s mistakes in lending imprudently into vulnerable environments.

Professor Odette Lienau, Professor of Law, Associate Dean for Faculty Research and Intellectual Life, Cornell University Law School
In her testimony, Lienau began by saying the U.S. today faces a turning point in the international framework for dealing with sovereign debt problems. She argued that government debt distress from the pandemic is likely to last for years and that the global balance of economic power is likely to shift. She said the U.S. must now ensure its values are reflected in lending as well as restructuring norms and practices going forward. She outlined her support for an explicitly multi-pronged approach to improving the global debt framework and continued with three ways Chinese lending practices fit into the story. Lienau said the problematic elements of Chinese lending practices tend to reflect and amplify more general and endemic issues in the international debt arena, including a lack of transparency in loan amounts and terms, insufficient concern for whether debt actually benefits a country’s underlying population, and a lack of comprehensive creditor participation. Second, Lienau said there are concerns about China’s increasing role in international capital flows, and as such, the U.S. needs to take steps now to cement American interests and values in international debt efforts including transparency and accountability. Her third and final point focused on corruption and the mismatched financial incentives that are present in a number of borrowing countries. She said greater tolerance of corruption appears to be a problem in some Chinese lending contracts, and the decisions made by borrowing country representatives may not always reflect the interests of their citizens.

Jaime Atienza, Debt Policy Lead, Oxfam
In his testimony, Atienza said the timing of this discussion is critical as the debt situation, especially of the poorest countries, has worsened significantly, and cited the IMF in saying more than half of low-income countries in Africa are either in debt distress or at high risk of being so. Atienza said the human impact of a debt crisis is often overlooked and that higher spending on debt means lower spending on public services like teachers, health workers, and hospital beds for hundreds of millions of citizens in need. He said the pandemic has also had an extensive negative impact and that low-income countries experienced losses over 20 percent in revenue collection as poorer countries are unable to redeploy their resources to the most urgent needs, or are forced to cut their own public spending. He emphasized the need to view the crisis from the perspective of developing countries as they require solutions that bring both China and the private creditors and bond holders on board. He suggested that new financing in grant or concessional terms, alongside debt relief, including explicit haircuts and debt cancellation are needed to find a real solution. Some of his recommendations included scaling up collaborative efforts under the G20 “common framework” umbrella, including China and the U.S., private bond holders and banks, as well as moving from modest debt relief in the Debt Service Suspension Initiative (DSSI) to a next level to allow for debt cancellation options under the Common Framework for all DSSI countries and middle-income countries facing severe vulnerabilities.

Sebastian Horn, Economist, Kiel Institute for the World Economy
In his testimony, Horn said the Chinese government and its banks have lent at least $500 billion USD to developing countries and this boom has turned them into the world’s largest official creditor. He said China’s overseas lending has filled a void left by traditional development donors and has contributed to meeting the enormous funding gap for infrastructure and reliable energy sources in the developing world, noting it is a positive step for growth. However, he said the opacity surrounding Chinese lending practices has made it difficult to assess the exact debt burdens of recipient countries and that unreported lending from China has grown to more than $200 billion USD as of 2016. He said hidden debt problems are wide-spread and not exclusively linked to China. As a result of the opacity, Horn said the private sector will misprice debt contracts and lead to a lengthy and costly debt restructuring process. Horn outlined his support for exposing public debt to public scrutiny as, in his view, this would reduce the risks of unsustainable debt build-ups and mitigate the severity of recurring cycles of debt and financial crises. He concluded that greater debt transparency alone cannot overcome all issues, and the best way for advanced countries to address the crisis is to lead by example.

Question & Answer
Disclosure Issues
Himes focused on how the U.S. can set a good example, citing that China is resistant to abiding by generally accepted international norms, and asked what leverage exists to bring China into a more multilateral framework for this sort of lending. Horn said the most powerful way is to work through the debtor countries and implement robust debt disclosure laws that require them to publish lending contracts as part of the disclosure process. Morris said it is about working within the multilateral setting in place and that the G20 framework is a step forward but can be built upon. He added there is no guarantee China will get on board quickly.

Hill referenced a contract between Argentina and China with terms that prohibit reporting to the Paris Club for restructuring, and asked if that sounds like a country truly ready to participate in the Paris Club. Morris said that provision is clearly at odds with what the Chinese government has committed to under the Common Framework. He said the U.S. needs to get an explicit disavowal from China on those kinds of provisions and a commitment to not use such terms going forward.

Rep. Brad Sherman (D-Calif.) asked if countries or companies really agree to not disclose their debts owed to China to their own citizens or other lenders. Gelpern said yes, but the only qualification to all of this is we have the agreements either because of the legal requirements or they were leaked and there needs to be an international data set. Sherman said the American response should be if a borrowing country is required to not disclose their debt, we need to encourage them to not repay and support them. Gelpern said the U.S. does not have the leverage to tell countries to default. She said if the U.S. could replace all of the liquidity, then they could consider it, but noted that Paris Club creditors are five percent of these countries’ debt and said the question then is who is our audience.

Impacts for Borrowers
Himes asked how widespread of a role Chinese lending plays in creating technical default. Gelpern said the clauses are very widespread but their formulation varies tremendously. She added that the carve-outs are so broad it is not entirely clear how much of this lending triggers technical default and the trouble is that these bank accounts are behind the vail of confidentiality so people do not know much.

Rep. Maxine Waters (D-Calif.) said these developing countries are desperate which forces them to sign these agreements and asked what can be said about the success of debt restructuring. Gelpern said the success of restructuring cannot be measured by their speed but the impact to their citizens’ wellbeing. She reiterated her colleagues’ sentiments that building better capacity and agency in the borrowing countries that need tremendous infrastructure investment should be a priority. She said if countries have these domestic laws it will force lenders into less abusive terms.

Waters asked what can be done to incentivize borrowing countries to seek help in dissecting the agreement and getting advice before signing off. Gelpern said they have done training sessions with developing country debt managers and the attendance is always high. She said there is genuine humanitarian need so we cannot just say stop borrowing. She added there needs to be affordable funding for basic human needs so countries are not driven into abusive terms.

Rep. Warren Davidson (R-Ohio) asked for an explanation as to why it is a bad idea for borrowing countries to selectively default on debt. Morris said China is a creditor and the challenge for borrowing countries is if they default on a single creditor it will make their life more difficult generally as a borrower by violating the terms of their contract.

China’s Lending Intentions
Rep. Ritchie Torres (D-N.Y.) asked if China’s “end game” is seeking repayment or leveraging debt financing to secure control of countries’ strategic assets. Morris said they view these features as aggressive measures to get repaid and that lending in the high-risk debt environments are features the lender is using to protect itself.

Rep. Roger Williams (R-Texas) said the pandemic has been devastating for less developed nations, and opened up an opportunity for China to offer assistance. He said China realizes they can assert influence over the borrowing countries and asked how they are exploiting the pandemic to expand their influence across the world. Horn said foreign assistance comes with some foreign influence and a key issue is with the inclusion of fraud, acceleration, and cancellation clauses that give a lot of bargaining power to the creditor and allow it to impose influence on certain domestic and political issues.

Rep. Jake Auchincloss (D-Mass.) asked witnesses to explain how China has been using cancellation, acceleration, and stabilization contracts to influence the foreign policy of countries in the South China Sea and what the U.S. might do to push back on these aggressive actions. Morris said to remember that entirely separate from these loan contracts, the volume of financing inherently creates significant leverage. He said when looking at china lending globally, there is no question of the concentration particularly in Southeast Asia and it is inexplicably linked with a broader range of objectives by the Chinese government. He said he is stricken when looking at the debt contracts and seeing Chinese lenders taking steps of writing aggressive behaviors into the contracts.

Multilateral Approach
Hill asked Horn for enforcement suggestions to encourage Chinese behavioral changes and what the IMF can do specifically. Horn said with respect to confidentiality clauses, the most powerful way is to strengthen the debt management capacity in the debtor countries and make use of the carve-outs that these clauses have. He said the clauses are written in a broad way but usually include a carve-out that allows the country to publish the terms.

Rep. Anthony Gonzalez (R-Ohio) said he is skeptical the World Bank and IMF are equipped to get the transparency needed from China and asked if the U.S. should we be looking to create an alternative financing mechanism that can push back on China. Horn said his observation is there has been progress over the past few months. He said multilateral institutions will play a large role in making offers to countries that lessens their dependence on China, noting that the attractiveness in lending from China has mostly been the lack of alternatives. Gelpern said Chinese lending is going down and the question of what will replace that is where multilaterals can come into play. Lienau added that the U.S. needs to maintain its voice rather than withdraw from these institutions and consider support from an independent expert institution given the shift in balance of power over time.

Transparency Needs
Williams asked why people think this time will be different when pushing for transparency in China’s financial dealings. Horn said he shares similar skepticism that repeated commitments may not make a material difference this time. He said the most powerful way for transparency is to enable the debtors to put out contracts and terms into the public space.

Hill asked if the G7 countries should agree to come together to press china for transparency. Morris said he agrees with that completely and ultimately the aim is to have that happen in the G20, but that it will only help to have agreements first in the G7.

Rep. Madeleine Dean (D-Pa.) asked for more depth as to the opaqueness in Chinese lending and what steps Congress can take for greater transparency. Gelpern said the contracts have expansive confidentiality terms and more so in recent years, but that there are carve-outs for disclosures required by law. She said we should require disclosure by law and start with the borrowing countries because any legal statutory requirement of disclosure would take the wind out a lot of these contractual terms. She added that the French have similar confidentiality clauses, so going through the G7 is a good idea. Horn said he is fully in favor of having a global debt census which creates a global data base on sovereign debt that requires information sharing, perhaps hosted by the World Bank would help erase the pressure on creditors that refuse to disclose.

Common Framework and Alternative Solutions
Rep. Stephen Lynch (D-Mass.) asked if there is a way in the Common Framework to adopt a requirement that the U.S. discourage or deny the opportunity for Chinese governments to acquire major maritime ports. Atienza said to think about how to turn these around, for example, if there are capital needs why are the Chinese providing it and who else can provide, and which terms will help support the borrower. He said if China benefits from the lack of transparency and rules then we should set a rules-based system, noting that the Paris Club is an informal club and there needs to be an architecture strong enough to make everyone abide. Gelpern said all multilateral banks have negative pledge clauses and they need to be made more uniform, revisited, and taken more seriously. She said the multilaterals can be a lot more “muscular” in institutions and encourage collateral only when it is a revenue generating project that has returns in terms of human development.

Davidson asked what kinds of tools the U.S. could use more effectively and how developing countries could interact better with the U.S. Morris said to find ways to get money into these economies as they grapple with this crisis, which means financing terms that are appropriate for their circumstances, as well as giving full support to institutions like the IMF and World Bank. Atienza said the U.S. lost the chance of providing debt cancellation to countries already under strong debt distress. He added that countries need additional aid and concessional financing to cope with repaying with a grace period and low interest rates.

Rep. Chuy Garcia (D-Ill.) asked what Congress can do to support a fair restructuring mechanism for sovereign debt. Lienau said there are important processes underway to try to include debt restructuring. She said the current discussion of the Common Framework to include more countries and creditors is important, but in addition take broader steps on transparency and the fair restructuring side and think about including both private and public creditors.

Corruption Concerns
Dean asked for greater detail on the concern regarding corruption in Chinese lending practices and if there are criminal aspects Congress should be considering. Lienau said Dean is highlighting that corruption is an issue and can distort the way lending is done. She said it is not just Chinese entities, but a larger issue in the international financial architecture. She said there needs to be a multipronged approach that includes constraining the capacity of officials to hide funds to limit the incentives for the type of corruption being discussed like bribery, the use of side accounts and middle men; strengthening efforts to target tax havens; and putting laws into place in borrower countries so bad faith creditors cannot recover on debt. She added that creditor side transparency in lending is important when there are debtor side corruption concerns.

Recovering Post-Pandemic
Garcia said he worries it will be impossible to recover from the pandemic and asked if larger economies like Mexico are likely to run into debt issues and jeopardize debt recovery for all. Atienza said there are middle income countries, not likely Mexico, with widespread debt problems. He said there is a need for new mechanisms to protect countries from the worst, adding that debt cancellation was a lost opportunity where nothing was done under DSSI.

For more information on this hearing, please click here.