The author is a senior researcher at Harvard Kennedy School

The leaders of the Group of Seven in Cornwall last weekend announced a proposed loan facility to compete with China’s “One Belt, One Road” initiative, sending a clear message: they are worried about China’s growing geo-economic impact in the world force.Largest official creditor. There is reason to worry.

The world of sovereign debt loans is the Wild West. The enforceability of sovereign debt contracts is very small (confiscation of a country’s assets is not easy), the contract terms between creditors are very different, and countries have no bankruptcy procedures. The worry about China as a lender is not that it violates international standards, because there are not many such standards. The worrying thing is that Chinese loans will make the situation of borrowers worse-and subject to political pressure from China.

A kind Learn World Bank chief economist Carmen Reinhart and others found that as of 2019, the 50 countries with the most debt to China accounted for nearly 40% of their total reported foreign debt. China would argue that it is filling the gap in the market and taking risky loans so that poorer countries can fund their development, just as it did.It will also emphasize that it has voluntarily signed the G20 Debt Service Suspension Initiative (DSSI) and General framework 2020 debt.

This DSSI Allow the world’s 73 poorest countries to suspend debt repayments before the end of this year. The common framework applies to the same countries and allows debtors to request debt restructuring in the IMF loan program and obtain the same restructuring conditions from all creditors. This is to avoid the problem of collective action. Some creditors insisted because they were worried that debtors would use their loan savings to repay other creditors.

Critics believe that China’s participation is political reality. When China was an emerging lender in the 2000s, it could free-rider in debt restructuring and hoped to avoid significant write-downs. As the largest official lending institution, China hopes that the treatment will be comparable in order to share the losses as much as possible.

The characteristics of China’s bilateral loans also show that participation in DSSI and the Common Framework has not changed it.two State-owned Development Bank Supervise most of the “Belt and Road” loans. They are public entities, more like multilateral organizations, which are ultimately responsible to Beijing’s State Council and cannot accept losses over a period of time.Based on a study 100 bilateral loans For Chinese entities, all contracts since 2015 have included confidentiality clauses, making it impossible for other creditors, investors, banks or taxpayers to determine the country’s financial status.

Nearly one-third of bilateral Chinese state-owned loan contracts also require the debtor to maintain an escrow account as a guarantee for debt repayment. Funding for these accounts comes from government revenue or funds generated from projects funded by loans. This means that foreign lenders can control large revenue streams.

More than 90% of China’s bilateral contracts contain clauses that allow state-owned entities to terminate the contract and demand repayment when the debtor country implements major legal or policy changes. All contracts with Chinese policy banks contain cross-default clauses that allow creditors to demand immediate repayment when the borrower defaults on other lenders. These provisions allow creditors to influence the foreign or domestic policies of the borrower and are helpless in the event of a debt crisis.

So far, we have little data to guide us on how to treat China as a creditor when borrowers are in trouble.Only Chad Creditor committee Several meetings were held under the common framework to obtain assurances from official creditors that they would restructure their debts. Since Chinese policy banks are accountable to the State Council, they will be extra careful to add points to all t and i before making such guarantees. Slow negotiations may not be malicious, but the longer the debtor waits for help, the more help it needs.

Overall, with the growth of Chinese loans, there have been no more debt distresses in the past 20 years. But this also coincides with a period of extremely loose monetary policy and abundant liquidity. There is also not much evidence that China has exerted political pressure on loans. But in the new world where China is seen as a strategic competitor, as long as its lending behavior is opaque and borrowers may be influenced by Beijing’s politics, G7 leaders have reason to worry.