    [House Hearing, 117 Congress]
    [From the U.S. Government Publishing Office]

                      EXAMINING BELT AND ROAD: THE LENDING

                     PRACTICES OF THE PEOPLE'S REPUBLIC OF

                     CHINA AND IMPACT ON THE INTERNATIONAL

                               DEBT ARCHITECTURE

    =======================================================================

                                VIRTUAL HEARING

                                   BEFORE THE

                       SUBCOMMITTEE ON NATIONAL SECURITY,

                           INTERNATIONAL DEVELOPMENT

                              AND MONETARY POLICY

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED SEVENTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  MAY 18, 2021

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 117-24

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                ______

                   U.S. GOVERNMENT PUBLISHING OFFICE
     45-076 PDF             WASHINGTON : 2021

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     MAXINE WATERS, California, Chairwoman

    CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina,
    NYDIA M. VELAZQUEZ, New York             Ranking Member
    BRAD SHERMAN, California             FRANK D. LUCAS, Oklahoma
    GREGORY W. MEEKS, New York           BILL POSEY, Florida
    DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
    AL GREEN, Texas                      BILL HUIZENGA, Michigan
    EMANUEL CLEAVER, Missouri            STEVE STIVERS, Ohio
    ED PERLMUTTER, Colorado              ANN WAGNER, Missouri
    JIM A. HIMES, Connecticut            ANDY BARR, Kentucky
    BILL FOSTER, Illinois                ROGER WILLIAMS, Texas
    JOYCE BEATTY, Ohio                   FRENCH HILL, Arkansas
    JUAN VARGAS, California              TOM EMMER, Minnesota
    JOSH GOTTHEIMER, New Jersey          LEE M. ZELDIN, New York
    VICENTE GONZALEZ, Texas              BARRY LOUDERMILK, Georgia
    AL LAWSON, Florida                   ALEXANDER X. MOONEY, West Virginia
    MICHAEL SAN NICOLAS, Guam            WARREN DAVIDSON, Ohio
    CINDY AXNE, Iowa                     TED BUDD, North Carolina
    SEAN CASTEN, Illinois                DAVID KUSTOFF, Tennessee
    AYANNA PRESSLEY, Massachusetts       TREY HOLLINGSWORTH, Indiana
    RITCHIE TORRES, New York             ANTHONY GONZALEZ, Ohio
    STEPHEN F. LYNCH, Massachusetts      JOHN ROSE, Tennessee
    ALMA ADAMS, North Carolina           BRYAN STEIL, Wisconsin
    RASHIDA TLAIB, Michigan              LANCE GOODEN, Texas
    MADELEINE DEAN, Pennsylvania         WILLIAM TIMMONS, South Carolina
    ALEXANDRIA OCASIO-CORTEZ, New York   VAN TAYLOR, Texas
    JESUS ``CHUY'' GARCIA, Illinois
    SYLVIA GARCIA, Texas
    NIKEMA WILLIAMS, Georgia
    JAKE AUCHINCLOSS, Massachusetts

                       Charla Ouertatani, Staff Director
               Subcommittee on National Security, International
                        Development and Monetary Policy

                      JIM A. HIMES, Connecticut, Chairman

    JOSH GOTTHEIMER, New Jersey          FRENCH HILL, Arkansas, Ranking
    MICHAEL SAN NICOLAS, Guam                Member
    RITCHIE TORRES, New York             LEE M. ZELDIN, New York
    STEPHEN F. LYNCH, Massachusetts      ROGER WILLIAMS, Texas
    MADELEINE DEAN, Pennsylvania         TOM EMMER, Minnesota
    ALEXANDRIA OCASIO-CORTEZ, New York   WARREN DAVIDSON, Ohio
    JESUS ``CHUY'' GARCIA, Illinois      ANTHONY GONZALEZ, Ohio
    JAKE AUCHINCLOSS, Massachusetts      VAN TAYLOR, Texas, Vice Ranking
                                             Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        May 18, 2021.................................................     1
    Appendix:
        May 18, 2021.................................................    33

                                   WITNESSES
                             Tuesday, May 18, 2021

    Atienza, Jaime, Debt Policy Lead, Oxfam..........................     8
    Gelpern, Anna, Anne Fleming Research Professor at Georgetown Law,
      and Nonresident Senior Fellow at the Peterson Institute for
      International Economics........................................    10
    Horn, Sebastian, Economist, Kiel Institute for the World Economy.    11
    Lienau, Odette, Professor of Law and Associate Dean for Faculty
      Research, Cornell University Law School........................     7
    Morris, Scott A., Senior Fellow, Center for Global Development...     5

                                    APPENDIX

    Prepared statements:
        Atienza, Jaime...............................................    34
        Gelpern, Anna................................................    41
        Horn, Sebastian..............................................    45
        Lienau, Odette...............................................    48
        Morris, Scott A..............................................    65

                      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

                 U.S. House of Representatives,
                     Subcommittee on National Security,
                              International Development
                                   and Monetary Policy,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10 a.m., via
    Webex, Hon. Jim A. Himes [chairman of the subcommittee]
    presiding.
        Members present: Representatives Himes, Torres, Lynch,
    Dean, Garcia of Illinois, Auchincloss; Hill, Zeldin, Williams
    of Texas, Davidson, Gonzalez of Ohio, and Taylor.
        Ex officio present: Representative Waters.
        Also present: Representative Sherman.
        Chairman Himes. The Subcommittee on National Security,
    International Development and Monetary Policy will come to
    order. Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time. Also, without
    objection, members of the full Financial Services Committee who
    are not members of this subcommittee are authorized to
    participate in today's hearing.
        As a reminder, I ask all Members to keep themselves muted
    when they are not being recognized by the Chair. The staff has
    been instructed not to mute Members, except where a Member is
    not being recognized by the Chair and there is inadvertent
    background noise. Members are also reminded that they may only
    participate in one remote proceeding at a time. If you are
    participating today, please keep your camera on, and if you
    choose to attend a different remote proceeding, please turn
    your camera off.
        A quick note of personal privilege, I want to announce to
    the subcommittee that Chairwoman Waters has appointed the
    gentleman from New Jersey, Josh Gottheimer, to be Vice Chair of
    this subcommittee. I have known Josh for a long time, and I am
    excited to have him on board on the subcommittee. You know
    Josh; he is always willing to hear from lots of different
    perspectives, so I invite you to give Mr. Gottheimer your ideas
    on what else the subcommittee could do in this Congress.
        Today's hearing is entitled, ``Examining Belt and Road: The
    Lending Practices of the People's Republic of China and Impact
    on the International Debt Architecture.''
        I now recognize myself for 4 minutes to give an opening
    statement.
        Even before the Coronavirus besieged the world, there were
    worrying signs of sovereign debt distress in developing
    countries, and much of that debt is owed to the People's
    Republic of China. In the last 20 years, China has become the
    single-largest official lender to developing countries,
    dwarfing other multilateral institutions like the World Bank,
    the International Monetary Fund (IMF), and the countries that
    make up the Paris Club. Exactly how large of a lender China is,
    however, remains unknown because the country does not publicly
    disclose its foreign lending. In addition, very little about
    the specific terms of the debt contracts have previously been
    made public.
        The groundbreaking work of three of our panelists today--
    Professor Gelpern, Dr. Horn, and Mr. Morris--provides the most
    complete look at the terms of Chinese lending to date. Their
    report, ``How China Lends: A Rare Look into 100 Debt Contracts
    with Foreign Governments,'' is a first-of-its-kind study
    examining sovereign debt contracts between Chinese entities and
    sovereign governments in their entirety. The paper lays out, in
    detail, how China has developed standardized contracts
    containing extreme provisions squarely aimed at the dual goals
    of protecting its investment and exercising its sovereign
    power.
        China seeks to climb the seniority ladder through strict
    nondisclosure agreements and so-called, ``No Paris Club
    clauses,'' tying borrowing countries' hands in restructuring
    debts, or even acknowledging that debts exist. The contracts
    contain provisions requiring collateral accounts that are held
    offshore and off the government's books. And China seeks to
    expand its sphere of influence by using acceleration and cross-
    default clauses to impose their policy preferences on borrower
    nations, going as far as cancelling unrelated loans when
    borrowing nations make policy decisions that China opposes.
        Given that lack of clarity around exactly how much is owed
    to Chinese entities and the terms of those agreements, other
    lenders face uncertainty about their level of seniority and the
    full extent of the borrowing country's debt servicing costs.
    This lack of transparency makes future debt restructuring
    efforts, many of which we are seeing get underway right now,
    that much more difficult.
        The Debt Service Suspension Initiative (DSSI) and the
    Common Framework are both positive developments in ensuring
    international cooperation in addressing sovereign debt issues.
    Most notably, the Common Framework brings China closer to
    agreeing to Paris Club-style coordination. However, there
    remain significant hurdles to putting developing countries on a
    sustainable debt path.
        As China continues to expand its lending throughout the
    world, it is more important than ever that the United States
    and our global partners lead in setting durable global norms
    for official bilateral lending. With that, I would like to
    thank our panel of witnesses whose expertise in this field is
    unparalleled. I sincerely appreciate your assistance in
    tackling these difficult issues, and I look forward to your
    testimony.
        I now recognize the ranking member of the subcommittee, Mr.
    Hill, for 4 minutes for an opening statement.
        Mr. Hill. Chairman Himes, thank you.
        Chairwoman Waters, it is good to have you in our discussion
    today. We appreciate your leadership on the bipartisan agenda
    as it relates to reviewing China's engagement as the world's
    largest creditor. It is a bipartisan concern, and our committee
    has made that clear through enacting legislation like the
    Export-Import Bank's most recent reauthorization, as well as my
    Ensuring Chinese Debt Transparency Act that was passed last
    Congress.
        Multilateralism means bringing Beijing into compliance with
    international rules of the road, including those of the Paris
    Club. Recent research, including some by our witnesses today,
    has filled many important details in on the scope, opacity, and
    conditionality of Chinese lending, which clearly runs counter
    to the mission of the International Monetary Fund, the World
    Bank, and other multilateral lenders. This is unacceptable.
        Let me highlight three policy implications I believe result
    from China's Belt and Road lending. First, the U.S. and our
    allies need to be much more serious about pushing for real
    concessions from Beijing. Many know that I have raised
    questions about the Treasury's recent plan to allocate $650
    billion in special drawing rights (SDRs), which could
    facilitate directly or indirectly, Belt and Road repayments.
    This could also make it more challenging to force China to the
    negotiating table.
        Even if you support an SDR allocation, we should all be
    able to agree that the Treasury should use its leverage to
    obtain meaningful agreement on debt before signing off at the
    IMF meeting this summer, and not afterwards, when China could
    end up leading us into endless talks with zero results. Thirty
    years of failure to protect intellectual property and the
    recent suspension of 8 years of fruitless discussions by
    Treasury and our allies on the transparency of China's export
    credit market should remind us just how typical and real that
    danger is.
        A meaningful agreement on debt would entail specific long-
    term concessions on transparency and appropriate coverage of
    all of China's official creditors, not just the ones they claim
    are arms of the government. We also must consider whether or
    not the G20's Common Framework for debt treatment should expand
    to cover additional borrowers. The time for the U.S. and its
    allies to nail down these formal commitments is right now, not
    after an allocation, when the urgency of the COVID-19 economic
    downturn begins to fade.
        Second, we need to find an alternative to developing
    countries' acceptance of Chinese lending. Much of the Chinese
    credit to low-income countries is at relatively high rates with
    short maturities, and in some cases requires onerous collateral
    requirements and cross-default provisions. Loans may be also
    linked to a country's diplomatic treatment of Taiwan or some
    other policy at odds with U.S. interests, and the IFI's
    Treasury needs flexibility to weigh these kinds of
    considerations strategically and use the mandates it has to
    make the IFIs as nimble and effective as possible.
        Finally, Beijing's resistance to international lending
    rules, not to mention the abuse of basic human values in
    Shenzhen and Hong Kong, once again highlights that it does not
    deserve more of a voice in the international financial
    institutions. Shareholding is not just about a country's size
    of economy. It is about the commitments and contributions to
    multilateral cooperation. We can't wish this away by believing
    that the IMF quota for China or the status of the RMB in the
    SDR basket are things that can entice Beijing into better
    behavior. It simply hasn't worked, and we must adopt by
    focusing more countries on the interests that align with ours.
        I look forward to our panel today, and I yield back to you,
    Mr. Chairman.
        Chairman Himes. I thank my friend, the ranking member, and
    I now recognize the Chair of the full Financial Services
    Committee, the gentlewoman from California, Chairwoman Waters,
    for one minute.
        Chairwoman Waters. Thank you so very much, Chair Himes. I
    am so pleased about your leadership on this issue and your
    bipartisan efforts. Today, we will discuss how we can prevent a
    pandemic-induced series of sovereign debt crises, and how we
    can bring international norms and principles to China and its
    investments around the world.
        Last Congress, I had the benefit of learning about China's
    Belt and Road Initiative directly from our military leadership
    in the United States Africa Command, when I traveled to
    Germany. The conclusion I drew was that addressing these
    challenges can only be accomplished with United States
    leadership through coordinated and thoughtful multilateral
    action. I am pleased we finally have that leadership in the
    White House with President Joe Biden, and I hope this hearing
    is informative to not just the public, but to his
    Administration as well. Thank you so very much, and I yield
    back the balance of my time.
        Chairman Himes. Thank you very much, Madam Chairwoman.
        I am told that the ranking member of the Full Committee,
    Mr. McHenry, is not present, and doesn't claim his minute. Let
    me give him a second to object or forever hold his peace. Okay.
    It sounds like Mr. McHenry is not there.
        Today, we welcome the testimony of our distinguished
    witnesses: Scott Morris, a senior fellow at the Center for
    Global Development; Odette Lienau, the associate dean for
    faculty research and intellectual life at Cornell University
    Law School; Jaime Atienza, the debt policy lead at Oxfam; Anna
    Gelpern, the Anne Fleming Research Professor at Georgetown Law
    and non-resident senior fellow at the Peter G. Peterson
    Institute for International Economics; and Sebastian Horn, an
    economist at the Kiel Institute for the World Economy.
        Witnesses are reminded that their oral testimony will be
    limited to 5 minutes. You should be able to see a timer on your
    screen that will indicate how much time you have left, and a
    chime will go off at the end of your time. I would ask that you
    be mindful of the timer and quickly wrap up your testimony if
    you hear the chime, so that we can be respectful of both the
    witnesses' and the committee members' time. And without
    objection, the witnesses' written statements will be made a
    part of the record.
        Just as a reminder, it is the practice of the subcommittee
    to allow witnesses to finish their answers, but we do not
    permit Members to go much beyond their 5 minutes to finish a
    question or to elicit a response.
        Mr. Morris, you are now recognized for 5 minutes to give an
    oral presentation of your testimony.

    STATEMENT OF SCOTT A. MORRIS, SENIOR FELLOW, CENTER FOR GLOBAL
                              DEVELOPMENT

        Mr. Morris. Chairman Himes, Ranking Member Hill, Chairwoman
    Waters, thank you for the opportunity to testify today. Twenty-
    five years ago, this committee was instrumental in putting
    forward the Heavily Indebted Poor Countries Initiative or HIPC
    to relieve the debt burdens of 37 low-income countries. At the
    time, the U.S. Government was one of the leading creditors to
    these countries, while China was a smaller creditor than Costa
    Rica. Today, nearly all of the HIPC countries are again at risk
    of debt distress with vulnerabilities that have been greatly
    exacerbated by the pandemic, but on the creditor side, the
    picture has changed dramatically.
        The U.S. Government today is one of the smallest creditors
    to these countries, while China, on the other hand, is a bigger
    creditor than all other government creditors combined. So when
    we consider how best to address a potential widescale debt
    crisis, we have to grapple with China's dominant position, not
    just how much China lends, but how China lends. I will focus
    the balance of my remarks on the findings of a new report on
    China's lending practices as evidenced by their debt contracts
    as well as U.S. responses to these practices. I co-authored
    this report, ``How China Lends: A Rare Look into 100 Debt
    Contracts with Foreign Governments'', with Anna Gelpern and
    Sebastian Horn, who are both also on the panel today, as well
    as Brad Parks and Christoph Trebesch.
        Four main insights emerge from our research. First, Chinese
    contracts contain unusual confidentiality clauses that bar
    borrowers from revealing the terms or even the existence of the
    debt. These restrictions are problematic. They impede budget
    transparency, they hide the borrower's true financial condition
    from its other creditors, and they can serve as an obstacle to
    timely and orderly debt restructurings.
        Second, Chinese lenders seek advantage over other creditors
    through collateral arrangements such as lender-controlled
    revenue accounts. Accounts of this sort encumber and scare
    foreign exchange and fiscal resources of developing country
    governments. And when the accounts are hidden through strict
    non-disclosure requirements, they can distort the overall
    economic picture for a country in the eyes of the IMF and other
    creditors. Again, such arrangements may serve as a barrier to
    timely and efficient debt restructurings.
        Third, Chinese lenders also seek advantage over other
    creditors through requirements to keep the debt out of
    collective restructuring efforts. Such clauses unambiguously
    seek to set Chinese creditors apart from and ahead of other
    creditors in restructuring situations.
        Fourth, cancellation and acceleration clauses in Chinese
    contracts have broad scope and imply significant policy
    leverage over the borrowing country. These provisions enable
    the Chinese lender to accelerate payments or cancel a loan due
    to a wide array of policy conditions in the borrowing country
    or in China.
        With these findings in mind, let me turn to the U.S.
    Government's policy agenda. In responding to China, I would
    urge you to keep the interests of developing countries in mind,
    particularly during the current crisis. These countries need an
    extraordinary amount of support right now, and the U.S.
    Government should work with partners to mobilize as much aid
    and concessional financing as possible. The U.S. is already
    stepping up with direct support for COVID relief and access to
    the vaccines for these countries, and the faster we can move on
    these measures, the better.
        We should continue to support institutions like the World
    Bank and the IMF in their efforts in these countries. Our
    financial contributions to these institutions are critical. The
    U.S. should have clear objectives when it comes to China's role
    in debt relief. As the largest of the government lenders to
    indebted countries, the Chinese government should bear the
    largest cost of any debt relief initiative, but that outcome
    will not be automatic. The U.S. should work with other
    countries on a more comprehensive definition of government
    creditors such that Chinese governmental lenders are not
    shielded from debt relief commitments.
        The U.S. should also insist that the Chinese government
    disavow contractual provisions that impede debt relief efforts.
    Our government should lead by example when it comes to
    government contract transparency. The degree of secrecy we
    observe in Chinese contracts is unusual, but the reality is
    that secrecy is the prevailing norm among government lenders.
    While the burden of transparency has fallen almost exclusively
    on borrowing countries to date, the U.S. could lead in
    expanding this agenda to creditor governments as well. That
    should start with a commitment to publish government-to-
    government debt contracts where the U.S. Government is a
    creditor.
        Finally, as the U.S. seeks to compete with China in
    offering development finance, our government should be vigilant
    about avoiding China's mistakes and lending imprudently into
    vulnerable environments. There is no doubt the U.S. Government
    could be doing more to support infrastructure projects in
    developing countries, but doing so in a manner that protects
    the U.S. taxpayer and benefits these countries will require
    focusing on measures of project quality and safeguards,
    financing terms that are appropriate to the country's
    circumstances, and strong alignment with the IMF and the World
    Bank and their financing frameworks. Thank you.
        [The prepared statement of Mr. Morris can be found on page
    65 of the appendix.]
        Chairman Himes. Thank you, Mr. Morris.
        Ms. Lienau, you are now recognized for 5 minutes to give an
    oral presentation of your testimony.

    STATEMENT OF ODETTE LIENAU, PROFESSOR OF LAW AND ASSOCIATE DEAN
          FOR FACULTY RESEARCH, CORNELL UNIVERSITY LAW SCHOOL

        Ms. Lienau. Chairman Himes, Ranking Member Hill, Chairwoman
    Waters, and members of the subcommittee, thank you for the
    opportunity to testify. The United States faces a turning point
    in the international debt architecture for two reasons.
        First, pandemic-related debt distress will be a multi-year
    issue. This means that the international community is currently
    paying closer attention to these problems. There may be a
    greater appetite to put in place necessary changes.
        Second, the global balance of economic power is likely to
    shift in the coming decades. The U.S. has been the central
    actor in international finance for 50 years. This will not
    necessarily be the case forever, so it should act today to
    cement its values, going forward.
        In the remainder of my remarks, I want to emphasize three
    ways that the problematic elements of Chinese lending practices
    fit into broader sovereign debt concerns.
        First, these lending practices do not exist in a vacuum.
    They reflect and amplify general and endemic issues. These
    include a lack of transparency of loan terms and conditions,
    insufficient concern for whether debt actually benefits a
    country's underlying population, and a lack of comprehensive
    creditor participation. The practices of certain Chinese
    creditors take these general defects to the extreme.
        Still, the best way to constrain troublesome practices by
    one country is to establish norms relevant to all countries.
    Otherwise, efforts to constrain problematic actors are unlikely
    to stick. This has been a key principle of the post-World War
    II global order, and it remains essential. Therefore, any
    efforts to improve Chinese lending practices must be part of
    broader progress in the debt architecture.
        Second, if the U.S. is concerned with China's increasing
    role in international capital flows, it should work now to
    solidify values of transparency, accountability, public
    benefit, and comprehensive participation. As with any path,
    this begins with an initial step. The U.S. should commit to
    supporting a swift, stable, and equitable public health and
    financial recovery from the pandemic. This will be essential to
    a full, global economic recovery and also help to forestall
    follow-on consequences such as political instability and
    disruptive migration patterns.
        In the medium term, the U.S. should implement widely
    accepted lending and restructuring principles across multiple
    tracks, including contract term improvements, domestic
    legislation, and international initiatives. This matters
    whether creditors are private investors or government actors,
    especially when these categories are starting to blur.
        For long-term progress, the U.S. should consider the
    establishment of an independent authority to facilitate these
    improvements. Especially given the potential changes in the
    global balance of power, an independent authority committed to
    broadly acknowledged principles could be helpful.
        My third and final point involves corruption and mismatched
    financial incentives in a number of borrowing countries.
    Greater tolerance of corruption may be a problem in some
    Chinese contracts, and again, this issue implicates broader and
    long-standing dynamics in international finance where the
    decisions of borrower elites may not always reflect the
    interests of their citizens.
        This means two key things. First, we should not punish
    countries' populations when dealing with a pandemic and the
    related debt crisis even if elites have made financial
    mistakes. It makes sense to promote transparency and
    responsible lending now, but the most vulnerable will suffer
    the most from inaction.
        Second, U.S. and other international actors must take the
    lead in implementing and modeling new norms and practices. We
    sometimes hear that debtor countries are primarily responsible
    for transparency and other reforms, and that is true, but
    ruling elites in these countries may prefer to drag their feet
    while their citizens often do not have the information or the
    power to take action. So, given the power imbalances and
    information asymmetries on the ground, more needs to be done at
    the external level. U.S. support for strong creditor-focused
    rules on transparency and lending could, over time, help
    undermine troublesome internal dynamics in sovereign borrowers.
        To conclude, I should note that meaningful reforms may not
    be fully embraced by all U.S. stakeholders. Some American
    affiliates have also benefited from deficiencies in the
    international framework. So, if the U.S. is serious about
    curbing problematic debt practices, it will have to make that
    commitment clear to domestic constituencies as well. This will
    not always be an easy choice. Thank you again for the
    opportunity to testify.
        [The prepared statement of Professor Lienau can be found on
    page 48 of the appendix.]
        Chairman Himes. Thank you, Ms. Lienau.
        Mr. Atienza, you are now recognized for 5 minutes to give
    an oral presentation of your testimony.

          STATEMENT OF JAIME ATIENZA, DEBT POLICY LEAD, OXFAM

        Mr. Atienza. Chairman Himes, Ranking Member Hill,
    Chairwoman Waters, and members of the subcommittee, good
    morning, and thank you for the opportunity to testify today. My
    name is Jaime Atienza, and I come to this committee as the
    global debt policy lead of the Oxfam Confederation. The timing
    of this session is critical as we have seen the debt situation,
    especially of the poorest countries, worsen significantly in
    recent years, and even more after COVID hit.
        In February 2020, before the pandemic was declared, the IMF
    stated that over half of low-income countries in Africa were
    either in debt distress or at high risk of being so, and things
    have only worsened since. Debts, both with China and with
    private creditors, represent the largest threat to their
    economic options for recovery, so both need to be tackled to
    bring in effective solutions.
        The human impact of a debt crisis is often overlooked.
    Higher spending on debt means lower spending on public
    services, which means fewer teachers, health care workers, and
    hospital beds for hundreds of millions of citizens in need. It
    also means further entrenching the cycle of poverty for many,
    the impacts of which fall particularly hard on women, as unpaid
    care work must often fill the gaps.
        The impact of COVID-19 in Africa has been profound, with a
    10-year setback in poverty, a steep rise in hunger, and
    desperation leading to more migration. Small island states,
    among them, some in the Caribbean, have lost an average 13
    percent of their GDP, a wartime loss that is boosting poverty.
    In large part because of their debt burdens, poor countries are
    unable to redeploy their resources to the most urgent needs. In
    advanced economies such as the United States, the use of
    expansive monetary policies or large debt purchasing programs
    allow a wide range of policy actions to cope with the crisis,
    protect those worse off, and prepare for the future stage of
    recovery.
        On the contrary, in the poorest countries, the situation is
    dire and options are scarce. In April 2021, one month after the
    pandemic was declared by the WHO, a global initiative called
    the DSSI was launched by the G20. It allowed for up to 23
    countries to receive, upon request, a temporary suspension of
    their bilateral debt repayments from China to the United
    States. But this initiative left voluntary mechanisms any debt
    relief from private creditors, which has not materialized at
    all, and simply invited IFIs to find ways to contribute more.
        The IMF did mobilize resources to cover debt repayments
    that 29 low-income countries owed to the fund, something the
    World Bank has yet to accomplish. However, Oxfam research shows
    that 84 percent of COVID-era loans by the fund encourage or
    require austerity measures, which strike at the very physical
    space needed for recovery. Overall design flaws with DSSI have
    meant that only 46 of the 73 eligible countries requested any
    debt suspension, and at the end of 2020, only $5.7 billion of
    debt repayments were suspended, with almost 90 percent of those
    repayments still flowing out of poor indebted nations. The
    moratorium has failed to give enough fiscal space for the
    poorest nations in response to COVID and essentially has
    postponed the crisis.
        The Common Framework holds more promise, but it has yet to
    be tested, and the kind of debt relief it will deliver is
    unclear. It excludes middle-income countries, and the prospects
    for the comparability of treatment clause to deliver debt
    relief by private creditors remains uncertain at best.
        The situation for developing countries, and specifically
    for low- and low-middle-income African economies on small
    island states, in particular those in the Caribbean, is very
    urgent, and at a minimum, we need to take the following
    actions: ensuring debt cancellation options under the Common
    Framework for DSSI countries as well as middle-income countries
    in deep trouble; ensuring legal protection to debtor countries
    from the potential risks of debt holdouts after debt
    restructuring; accelerating new grant and concessional
    financing to countries that are unable to use their own
    resources or use new debt as advanced economies can; bring
    forward truly collaborative efforts under the G20 umbrella of
    the Common Framework between major creditors including China
    and the U.S., IFIs, and private bondholders and banks; upgrade
    transparency and disclosure of all debt contracts in
    collaboration with the Organisation for Economic Co-operation
    and Development (OECD), including civil society and public
    oversight; and finally, agreeing to sustainable borrowing and
    lending standards to be applied to new operations and include
    catastrophic clauses in needed contracts to avoid situations as
    the current.
        Again, thanks very much for this opportunity.
        [The prepared statement of Mr. Atienza can be found on page
    34 of the appendix.]
        Chairman Himes. Thank you, Mr. Atienza.
        Ms. Gelpern, you are now recognized for 5 minutes to give
    an oral presentation of your testimony.

     STATEMENT OF ANNA GELPERN, ANNE FLEMING RESEARCH PROFESSOR AT
     GEORGETOWN LAW, AND NONRESIDENT SENIOR FELLOW AT THE PETERSON
                 INSTITUTE FOR INTERNATIONAL ECONOMICS

        Ms. Gelpern. Thank you very much, Chairman Himes, Ranking
    Member Hill, Chairwoman Waters, and members of the
    subcommittee. It is a privilege to be here and talk about both
    the next steps for financial architecture reform as well as the
    role of China, and I am happy to answer questions, along with
    my co-authors, about the China Lending Paper.
        COVID-19 is both an alarm bell and an opening for
    meaningful reform of international financial architecture and
    debt architecture in particular. And this is one of those few
    times where the word, ``architecture'' actually means
    ``architecture'' and not sort of frittering around with
    interior decoration and changing the doorknobs. Today's crises
    are quite different from the crises we saw 2 decades ago, when
    there was another flurry of architecture conversations. This is
    not the last pandemic. We are going to see climate disasters,
    and public health, and financial shocks that are going to call
    for very different kinds of responses than what we have seen so
    far.
        The actors are very different today. Many of them have no
    experience and at best provisional commitment to multilateral
    crisis resolution. And here, I think, Chad, for one random
    example--it is the first Common Framework country. Its biggest
    creditor, almost half of the debt, is Glencore, a mining
    company. Its biggest official creditor is China, followed by,
    of all countries, Libya, France, Angola, India, and Saudi
    Arabia. This is not the old bonds versus banks, hedge funds
    versus city conversation. Debt stocks are much bigger, more
    fragile, and much more complex. There is more collateralized
    debt, and it is inexcusably untransparent.
        Against this background, the Common Framework is real
    progress. It is a real architectural move. It is a new room. It
    is a turret perhaps. It does need support. It is worth
    investing in. It also needs oversight to live up to its
    potential.
        Now, China found it in its interest to participate, as did
    India, as did other big creditors, and I think that, above all,
    is a really hopeful sign. I am, on balance, optimistic. I am
    testifying here purely in my personal capacity, but I did want
    to highlight for the members some takeaways from a Group of 30
    report on sovereign debt and financing for post-COVID recovery,
    which does focus on next steps in debt architecture reform.
        In particular, I think many of us are on the same page. The
    Common Framework should be open to any country in debt
    distress, not just the poorest. It is a problem to have just
    the poorest countries be eligible, both because it
    marginalizes, kind of, the Common Framework as a mechanism, but
    also because it creates a stigma that I think would be very
    undesirable going forward in the architecture project. The
    Common Framework has to establish a record of transparency,
    equity, and consistency from the very start. This means that
    creditors have to renounce the debt terms that conflict with
    their Common Framework commitments.
        Now, you can always waive the contract terms if you're a
    creditor, right? There is nothing magical about the G20
    standing up and saying, we are not going to enforce these terms
    that my colleagues and I have found, particularly the non-Paris
    Club term and certainly confidentiality provisions.
        Comparability, which Mr. Atienza mentioned, is essential
    and that, by the way, should make this whole distraction of a
    conversation about who is an official and who is a private
    creditor--it should make it go away. I don't care if you're
    official, I don't care if you are private. Everyone has to
    contribute to comparable debt relief and that, I think, is
    essential. Going forward, we are going to see a lot more hybrid
    creditors and we don't want to waste time on this sort of
    thing.
        There should be public disclosure and there has to be
    something like a standing consultative coordinating body to
    ensure that this ad hoc restructuring is not seen as
    illegitimate, and is not conducted behind closed doors.
        My colleagues already mentioned, and I agree
    wholeheartedly, that the U.S. and other G20 have to lead by
    example and disclose our bilateral contracts. And my very last
    point is that my big fear from the China Lending Paper is that
    we are going to see an arms race where every creditor is going
    to want some collateral, and everyone is going to want
    priority. We have to nip this in the bud. We have to start with
    a multilateral agreement that we are not going to dismember
    distressed countries and engage in an asset grab race. That is
    not a way to build an architecture. Thank you very much.
        [The prepared statement of Dr. Gelpern can be found on page
    41 of the appendix.]
        Chairman Himes. Thank you, Ms. Gelpern.
        Dr. Horn, you are now recognized for 5 minutes to give an
    oral presentation of your testimony.

    STATEMENT OF SEBASTIAN HORN, ECONOMIST, KIEL INSTITUTE FOR THE
                             WORLD ECONOMY

        Mr. Horn. Chairman Himes, Ranking Member Hill, Chairwoman
    Waters, and members of the subcommittee, thank you for the
    opportunity to testify today. I would like to use my time to
    highlight findings from a recent research project with Carmen
    Reinhart and Christoph Trebesch. I would also like to share my
    personal views on why I believe that greater debt transparency
    needs to be a cornerstone in all efforts to reform the
    international debt architecture.
        Over the course of the past 15 years, the Chinese
    government and its state-owned enterprises and banks have lent
    at least 500 billion U.S. dollars to developing and emerging
    market countries. This lending boom has turned the Chinese
    government into the world's largest official creditor, with
    outstanding claims surpassing those of the IMF, those of the
    World Bank, or those of all Paris Club members combined.
    Chinese 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. This has potentially large positive
    effects on economic growth and development
        At the same time, outstanding debt to Chinese creditors has
    risen fast and has contributed to debt servicing difficulties
    in multiple developing and emerging countries. For the 50 most-
    indebted developing countries to China, we estimate that
    outstanding debt stocks have risen from almost zero in 2005 to
    an average of more than 15 percent of GDP in 2017. In more than
    two dozen developing countries, outstanding debt stocks to
    China now exceed 10 percent of recipient country GDP. The large
    majority of loans have been extended at commercial terms,
    meaning with interest rates that are close to those in private
    capital markets and with comparatively short grace periods and
    maturities. As a result, Chinese creditors are going to play a
    dominant role in debt service payments of many low- and middle-
    income countries for years to come.
        Furthermore, the opacity surrounding Chinese lending
    practices has made it difficult to assess the exact debt
    burdens of recipient countries. Our analysis reveals that
    around 50 percent of Chinese lending to developing country
    public sector recipients has gone unreported, meaning that
    these debt stocks do not appear in the most widely used data
    sources provided by the World Bank and other international
    organizations. The unreported lending from China has grown to
    more than 200 billion U.S. dollars as of 2016. Most of these
    liabilities are held on the books of state-owned enterprises
    and special purpose vehicles and are, therefore, outside the
    often narrowly drawn perimeter of public debt statistics.
        Hidden debt problems are widespread and not exclusively
    linked to Chinese lending, however, the opacity of the Chinese
    lending process has fueled the build-up of the problem, which
    Chinese authorities so far have done little to address. The
    issue is that the Chinese government does not publish detailed
    statistics on its outstanding claims and lending activities and
    does not share information with the OECD Creditor Reporting
    System or the Paris Club. Furthermore, Chinese state-owned
    banks often exclude expansive confidentiality undertakings in
    their loan contracts, and thus, prevent adapters from revealing
    the terms or even the existence of the loans.
        Failing to account for unreported debts distorts the views
    of the official and private sectors in significant ways.
    Uncertainty about the amount in terms of outstanding claims
    undermines that sustainability analysis and asset pricing and
    leads to longer and ultimately more costly debt restructuring
    processes. These problems are aggravated by the fact that a
    substantial share of Chinese loans relies on formal and
    informal means of collateralization so that Chinese creditors
    may be treated preferentially in case of repayment problems.
        Maybe most importantly, the lack of transparency prevents
    citizens in both the borrower and lender countries from holding
    their governments accountable for their borrowing and lending
    decisions. Exposing public debt to public scrutiny can help to
    reduce the risks of unsustainable debt buildups and helps to
    mitigate the severity of recurring cycles of debt and crisis.
        The COVID-19 crisis has exposed those vulnerabilities in
    developing countries along with the deficiencies of the
    international debt architecture. Broad action on that is needed
    to ensure that developing countries can mobilize the resources
    they require to address the ongoing health crisis. While
    greater debt transparency alone cannot overcome on issues, it
    is a prerequisite to broader attempts to reform the
    international debt architecture. The best way for advanced
    countries to support such efforts is to lead by example. Thank
    you, and I am looking forward to answering your questions.
        [The prepared statement of Dr. Horn can be found on page 45
    of the appendix.]
        Chairman Himes. Thank you, Dr. Horn. I now recognize myself
    for 5 minutes for questions.
        Ms. Gelpern, let me start with you. My experience is that
    underwriting docents and contracts usually includes
    representations and warranties that forbid a borrower from
    assuming additional debt that is senior to that debt and
    creates a technical default if that occurs. My understanding is
    that at a minimum, a lender will expect to be asked for consent
    for a borrower to take on debt that is senior to that debt.
        So my questions are: first, do you have any sense for how
    widespread Chinese lending that may actually be creating
    technical defaults is; and second, how do both the Chinese and
    the borrowers who are presumably knowingly getting into a
    technical default think about undertaking that kind of
    activity?
        Ms. Gelpern. What a fantastic question. Sorry, I am a
    contracts ethics professor, so I am loving this. The clauses
    you are talking about, pari-passu and negative pledge clauses,
    are very widespread, but their formulation varies tremendously.
    So while I think it is a healthy assumption that a lot of this
    debt violates traditional negative pledge clauses, there the
    carveouts are so broad, and the variation is so wide, that it
    is not entirely clear how much of this lending triggers
    technical default.
        Also, what we found, and my colleagues can elaborate, is
    not so much formal collateralization as just a contractual
    promise to route funds in a certain way. You may recall we did
    this when we did an emergency loan for Mexico in the United
    States in the mid-1990s, and it is just a contractual
    commitment. Now, ours was in the open and politically very
    controversial in both countries. The trouble here is that these
    bank accounts are--many of them are behind the veil of
    confidentiality, so people don't know. The answer is probably
    the--
        Chairman Himes. Thank you, Ms. Gelpern. Not to be rude
    here, but I want to get one or two more questions in before I
    run out of time.
        Dr. Horn, you intrigued me with the last thing you said,
    which is that one thing we could do is actually set a good
    example. The Chinese are famously resistant to moral suasion or
    to abiding by otherwise generally accepted international norms.
    I would love to get a more broad answer. What leverage does the
    rest of the world really have? I am not talking again about
    just moral suasion, I am talking about what leverage do we
    really have to bring the Chinese into a more multilateral
    framework for this sort of lending?
        Mr. Horn. None. In addition to leading by example, I think
    the most powerful way in this regard would be to work to the
    debtor countries and require them to have robust debt
    disclosure laws in their domestic laws that requires them to
    publish lending contracts if they themselves take them up as
    part of the of the debt disclosure process. I think that would
    be beneficial for the borrowers and would have this effect of
    creating a standard that the debt needs to be public in order
    to enter into effect.
        Chairman Himes. Any other thoughts on leverage that the
    rest of the world may have to achieve that end?
        Mr. Morris. Mr. Chairman, I think I share, to some degree,
    your skepticism. I do think it is about using the multilateral
    settings that we have, as Ms. Gelpern noted, the G20 Common
    Framework is a step forward. So it is a matter of, how do we
    build on that? And this agenda, which I think all of us have
    pointed to around transparency, really is a critical piece of
    the next steps.
        And, no, I agree there's no guarantee that China is going
    to get on board quickly, but I do think part of the process is
    that we demonstrate a willingness ourselves to take this on,
    and then we push very aggressively, certainly in the G20 but
    also in the IMF, and the World Bank. These are institutions
    where China is the third largest shareholder, and I think we
    can rightly point to the obligations of the leading
    shareholders to do the right thing here.
        Chairman Himes. Thank you. Mr. Atienza, very quickly, the
    equilibrium clauses that Professor Gelpern, and Mr. Morris, and
    Dr. Horn wrote about, would appear to have perhaps a chilling
    effect on the implementation of new environmental and labor
    laws in countries that borrow from China. Do you share that
    concern?
        Mr. Atienza. I think I really believe that what my
    colleagues state is a true concern that needs to be factored
    in, and I just want to say that it is important to try and find
    frameworks where China will join others, but leading by example
    is not enough. I made the point that we need the privates to be
    part of the mix. And Dr. Gelpern mentioned, too, if we want
    them to be part of efforts that are broader, it is not only
    about bilateral. They, for their size, compete with others that
    are in this mix and it is not just governments. So I think
    that's a direction to take, ensure that everybody is sitting
    around the table, and then there will be a better option of
    pushing China forward as well.
        Chairman Himes. Thank you. Thank you, Mr. Atienza.
        I now recognize the distinguished ranking member of the
    subcommittee, Mr. Hill, for 5 minutes of questions.
        Mr. Hill. Thank you, Chairman Himes, and again, thank you
    for this very constructive panel.
        And I thank all of the witnesses for their excellent
    commentary. I have shared my concerns time and time again
    about, is China really going to come forward and be a
    constructive partner in the debt relief efforts? In speaking
    with the Treasury Secretary and others, people, including
    today, have celebrated that China has said well, we will
    participate in the Common Framework, and I am not saying that
    is not encouraging. That is certainly a good, small step. But
    as with so many things with China, trust but verify is
    important.
        In the very good study that our witnesses have drafted
    today, there is a reference to a contract with Argentina,
    between Argentina and the China Development Bank. And it says,
    ``The borrower shall under no circumstances bring or agree to
    submit the obligations under the finance documents to the Paris
    Club for restructuring or into any debt reduction plan of the
    IMF, World Bank, or any other multilateral international
    financial institution to which the state, Argentina, is a part
    of or the government of the PRC without prior written consent
    of the lender.''
        Mr. Morris, does that sound like somebody who is ready to
    participate in the Paris Club?
        Mr. Morris. Congressman, that provision in particular is
    clearly at odds with what the Chinese government has committed
    to under the Common Framework, which is why I think, for the
    U.S. Government, it ought to be a priority to get a very
    explicit disavowal of those kinds of provisions both in the
    existing contracts, but also a commitment not to use those
    kinds of provisions going forward. But you are absolutely
    right. This creates a clear conflict and particularly a burden
    for the borrowing country here where they are making a
    contractual commitment to a Chinese lender that is at odds with
    their own obligations to other creditors and to the
    multilateral institutions.
        Mr. Hill. Right. And it is not in their long-term interest.
    The Chinese loans might be expedient by rate or shortness of
    terms, but they come with these unprecedented non-disclose
    features that we have seen turn into an utter disaster in
    Zambia, in Ecuador, in the Maldives, in Sri Lanka, and the list
    goes on and on, which everyone here certainly knows.
        Would you say that the G7 countries, our finance ministers,
    and our leaders, including President Biden, should have that as
    a part of the G7 meeting where they say that they will together
    press China for this kind of transparency?
        Mr. Morris. I agree with that completely. While ultimately,
    we aim for progress in the G20 because China would make
    commitments there, I think to get there, we need very
    coordinated and cohesive efforts by the G7 countries, which are
    going to be much more like-minded on these issues.
        Mr. Hill. Yes, I agree. I just don't see how, within the
    IMF framework, there is any real enforcement capability here. I
    see transparency, and I like the idea of a register on the
    SDR's transfer, for example. But we have to educate our friends
    in the developing world on what is a good loan versus a bad
    loan.
        Dr. Horn, in your paper, you show this non-disclosure
    chart, which I found very interesting. And the red bars are, of
    course, after 2013, and 2013 is a seminal year as the Chinese
    communist leader Xi Jinping began Belt and Road in 2013, and
    suddenly, we have all these non-disclosure arrangements in
    every aspect of your 100-loan sample. Dr. Horn, what are your
    suggestions for enforcement and how we can encourage Chinese
    behavioral change? What can the IMF do specifically?
        Mr. Horn. I am going to repeat myself in a sense, but I
    think with respect to the confidentiality clauses, again, the
    most powerful way would be to strengthen the debt management
    capacity, the statistical capacity in the debtor countries and
    make use of the carveouts that these clauses have. These
    confidentiality clauses are written in a very broad way, but
    they usually include a carveout that allows the debtor
    countries to publish the contracts and the terms in case there
    is a domestic law in place that requires them to do so. I think
    giving them the capacity to put these laws in place would be
    the most powerful instrument to create transparency.
        Mr. Hill. Thank you, Mr. Chairman, and I yield back.
        Chairman Himes. The gentleman yields back.
        The Chair of the Full Committee, the gentlewoman from
    California, Chairwoman Waters, is recognized for 5 minutes for
    questions.
        Chairwoman Waters. Thank you so very much, and I am
    appreciating this discussion. And I am very thankful that our
    witnesses are here today.
        Professor Gelpern, some people have referred to recent
    sovereign debt restructurings in which countries like Argentina
    and Ecuador have had the terms of their debt amended by their
    creditors to be a success. Continuing with this restructuring
    argument, however, I think touting these restructurings as
    successful ignores the pain and suffering that any sovereign
    debt crisis inflicts on a country's citizens, especially the
    poor.
        And let me just say what I think I have learned about some
    of these agreements that these countries get into. They are
    desperate. Many of them want to increase their infrastructure.
    Some of them are trying to increase tourism as an effort to
    shore up the economy in their countries. And so, while they are
    desperate and they sign on to these agreements, they don't
    really anticipate that they are not going to be able to repay
    the debt, and that has caused harm to their citizens.
        So, what do you say about their plight and the
    restructuring, et cetera, et cetera?
        Ms. Gelpern. Chairwoman Waters, thank you for your
    question. And I agree wholeheartedly, and not just that you
    can't measure a restructuring's success by its speed; you also
    have to look at actual human beings' well-being. But also, just
    the durability of them. Argentina and Ecuador are in distress
    weeks after they restructure.
        And I think reiterating and amplifying some of what my
    colleagues said, building better capacity and agency in the
    borrowing countries that do need tremendous infrastructure
    investment, I think should be an absolute priority. I know
    transparency can sound like meaningless sort of pablum, but if
    you have standardized terms that everyone is aware of, if you
    know when terms deviate from the standard, if there is
    multilateral capacity building, I think that we are going to be
    way better off if countries have these domestic laws that my
    colleague mentioned.
        By the way, the carveouts include laws in other countries.
    If anybody passes a law requiring disclosure, I think that is
    going to embarrass a whole lot of creditors into at least
    somewhat less abusive terms.
        Chairwoman Waters. Thank you very much. What can be done to
    incentivize the borrowing countries to seek some help in
    dissecting the agreement to see if it is in their best interest
    and perhaps get some advice before signing off on these
    agreements?
        Ms. Gelpern. I think there is tremendous demand, and this
    is completely in my different capacity. We have this initiative
    called the Sovereign Debt Forum, where we have done training
    sessions with developing country debt managers, and the
    attendance is very high. I think having standard contracts out
    there, because everybody who gets a contract put in front of
    them is told, ``Oh, this is perfectly normal.'' And just like a
    homeowner who borrows from a bank and on abusive terms,
    everybody thinks they are going to repay.
        And there is genuine humanitarian need, so we can't say we
    will just stop borrowing.
        Chairwoman Waters. That is right.
        Ms. Gelpern. And we need concessional surge capacity and
    multilaterals. Maybe Mr. Morris can talk some more about that,
    but there needs to be affordable funding for basic human needs
    so that countries aren't driven into abusive terms.
        Chairwoman Waters. Thank you very much.
        Let me take a moment here to direct a question to Mr.
    Morris. In the G20's Debt Service Suspension Initiative, which
    temporarily suspends the debt service payments of poor
    countries to G20 nations, China did not suspend service
    payments to the China Development Bank (CDB), asserting that
    the CDB is a commercial entity, despite the fact that it is
    under the control of the Communist Party state council. Some of
    China's contracts that you examined in your report contain
    false default and acceleration clauses to which one defaulted
    China loan in a country would trigger a default across-the-
    board on all China loans in the country. Linking all China
    investments in a country this way suggests, as a matter of
    contract, that China is presenting itself as a unitary entity.
    Mr. Morris, isn't this inconsistent with the Chinese
    government's propaganda in debt discussions, and not all loans,
    such as those by the China Development Bank, are centrally
    controlled?
        Mr. Morris. Thank you, Chairwoman Waters. I think this is a
    real challenge, and I think our research provides additional
    evidence that if we are looking at the China Development Bank,
    not only is it unambiguously owned by the Chinese government,
    but it is a policy lever for the Chinese government, and that
    ought to add to the burden on China to continue--the argument
    that it is a commercial bank with no policy ties to the
    government just doesn't hold up. And so, I think the U.S. ought
    to be pressing aggressively on this point.
        And as Anna Gelpern said, in principle, it shouldn't matter
    if we have an agreement that all creditors have to be on board,
    but we know in practice that commercial creditors haven't been
    participating. So, that gives CDB room to sit on the sidelines
    on these discussions.
        Chairwoman Waters. I want to thank you. My time has long
    since expired, and as we go on with the hearing, perhaps we can
    get more involvement in this aspect of it. Thank you very much.
        I yield back to the Chair, Mr. Himes. Thank you.
        Chairman Himes. The chairwoman's time has expired.
        The gentleman from Texas, Mr. Williams, is recognized for 5
    minutes.
        Mr. Williams of Texas. Thank you, Mr. Chairman. And I am
    glad we're having this hearing today because we need to find a
    way to properly counter the growing influence of China around
    the world. However, China's centrally controlled command
    economy is going to make it impossible for the United States to
    compete in terms of spending. By some estimates, the Belt and
    Road Initiative is estimated to have funded over 3,000
    projects, with a total value of over $4 trillion, since it
    began. We should not be looking to try to outmatch China in
    terms of dollars and cents.
        But what I hope we pay attention to is how China is
    currently taking advantage of the international financial
    institutions and examine how we can close some of the loopholes
    that are being exploited. If we can better understand how China
    is using these institutions to their benefit, we will be able
    to counter some of their influence without breaking the bank.
        So my first question, Dr. Horn, is to you. Can you talk
    about some of the ways China is taking advantage of
    international financial institutions?
        Mr. Horn. I am not exactly sure what you are referring to.
        Mr. Williams of Texas. How is China taking advantage of
    international financial institutions?
        Mr. Horn. I think that one problematic element that comes
    back to what Mr. Morris just said is the ability of Chinese
    lenders, and I think that it is a flaw of the general
    international architecture to self-select into specific
    categories depending on the situation and to seek structural
    advantages. The self-identification of CDB as an official
    lender when it comes to mapping international capital markets,
    but then as a commercial creditor when it comes to burden
    sharing under the DSSI, I think is one example where this sort
    of discretion is harmful.
        Mr. Williams of Texas. Okay. Thank you.
        Mr. Morris. I can speak to that.
        Mr. Williams of Texas. COVID-19 has been devastating to
    every country across the globe, but particularly for less-
    developed nations. For poorer countries that are in need of
    financing and desperate need of outside investment, this opened
    up a great opportunity for China to step in and offer
    assistance. Even though China knows they might not get all of
    their money back, they are investing and they realize that they
    will be able to assert influence over the borrowing country.
        So, Dr. Horn, again, can you talk about how China has been
    exploiting the COVID-19 pandemic to expand their influence
    across the globe?
        Mr. Horn. I think this is not necessarily specific to the
    COVID pandemic, but I think as a general point, foreign
    assistance always comes with some form of foreign influence.
    That is also true in the case of Chinese official lending
    overseas. My colleagues have already mentioned a variety of
    examples of how this sort of political influence plays through
    the contract. I think a key issue here is the writing, the
    inclusion of fraud acceleration and cancellation clauses that
    allow you to give a lot of bargaining power to the creditor and
    allow it to impose influence on certain domestic or foreign
    political issues. I think these sort of contractual provisions
    are an issue in that context.
        Mr. Williams of Texas. Okay. We have heard how China is not
    transparent with disclosing the details of their lending
    practices and the problems that are created within the
    international system. This is not surprising, given China's
    track record of covering up human rights violations, stealing
    IT, and theft from companies across the world, and silencing
    descending voices across the government.
        Finally, Dr. Horn, with our inability to affect China's
    behavior in these areas, why do you think that this time will
    be different as we push for greater transparency in their
    financial dealings?
        Mr. Horn. Again, I share some of the skepticism that has
    already been voiced, that repeated commitments might not really
    make a material difference this time. So again, I think that
    the most powerful way to try to create transparency, if the
    creditors and buildings are unwilling to do so, is to really
    enable the debtors to put out the contracts and the debts and
    their terms into the public space.
        Mr. Williams of Texas. Okay.
        Thank you, Mr. Chairman, and what time I have, I yield
    back.
        Chairman Himes. The gentleman from Texas yields back.
        The gentleman from Massachusetts, Mr. Lynch, is recognized
    for 5 minutes.
        Mr. Lynch. Thank you very much, Mr. Chairman. This is a
    great topic, and I appreciate your good work on this.
        Just before this pandemic, we had an opportunity to travel
    to quite a few countries in Africa. We went to Mali, Somalia,
    Ethiopia, and Nigeria. And the onerous terms of some of the
    lending by the Chinese Communist Party, by the Chinese
    government was not only egregious in in terms, but in many
    cases, as a number of the witnesses will point out, those loans
    were backed by collateral, and in many cases, it was the
    maritime ports of these countries. So it really controlled
    the--well, not Mali, but in the other countries, it was really
    almost a sale of part of their maritime ports, which in the
    long term really affects the long-term interest and the
    national security of those individual countries.
        We also visited Darwin, Australia, where a private investor
    with close ties to the Chinese communist government effectuated
    a 99-year lease, basically a purchase of the Port of Darwin,
    not very far, about 2 miles from the United States Marines'
    facility there in northern Australia.
        Is there a way that we might adopt within the Common
    Framework a policy or requirement that that we discourage or
    deny the opportunity for the Chinese government to actually
    acquire this infrastructure, especially when it is so essential
    to the future of these countries? Many of these countries,
    especially in Africa, are so desperate for capital, for
    lending, some of them--obviously there is a level of corruption
    there, but it I would just ask any of the witnesses, are there
    any opportunities that we might have using the IMF, using some
    of our international organizations and lending platforms, is
    there any [inaudible]--a requirement that we disallow or we
    prevent the acquisition of these major ports by the Chinese
    communist government? Mr. Atienza?
        Mr. Atienza. Thank you for the question. I think the way in
    which we should look at this issue is to try to think about how
    to turn things around, so if there are capital needs, why is it
    the Chinese that are providing? Who else can provide and in
    which terms that will help support? So, that is a way of
    turning it around. And if they benefit from the lack of
    transparency and from the lack of rules, why not set a rules-
    based system?
        Even the Paris Club, that we know has clear rules and all
    members work well with each other, it is just an informal club.
    My colleagues, Dr. Gelpern and Dr. Lienau, already spoke to the
    need to have an architecture that is strong enough so that
    everyone will have to abide. I think moving in these two
    directions in the provision of finance for the right things and
    in the right terms and in the provision of a rule set, a strong
    set of rules including a system for debt management and debt
    restructuring, would be direct ways to go. That would be my
    take on this one. Thank you.
        Mr. Lynch. Thank you.
        Ms. Gelpern, could you add to that?
        Ms. Gelpern. Sure.
        Mr. Lynch. Thank you.
        Ms. Gelpern. If I may amplify? First of all, multilateral
    banks have negative pledge clauses that prohibit debtors from
    pledging collateral or at least restrict it heavily without
    going to the banks. They have to be made more uniform and
    revisited and taken more seriously. And then, the IMF and the
    World Bank put out a paper before COVID hit on the rise in
    collateralized debt where the collateral is unrelated to the
    revenue generated project and discouraging that. I think that
    we can be a lot more muscular in the institutions, the
    multilaterals can be a lot more muscular in encouraging
    collateral only when it is a revenue-generating project that
    actually has returns in terms of human development.
        Ms. Lienau. Could I jump in on that as well, quickly?
        Mr. Lynch. Ms. Lienau?
        Ms. Lienau. Yes. I would also point out, and I am sure that
    you realize this in your travels, that these types of terms are
    very unpopular on the ground once they become well-known.
    Emphasizing, again, transparency from both the debtor side and
    also the creditor side, especially because some range of these
    contracts might have been eased in the--facilitated by side
    payments, I think this means that we need transparency from
    both sides so that these types of things become known on the
    ground by the broader citizenry, and they can object to it at
    the time.
        Mr. Lynch. Thank you.
        Mr. Chairman, I yield back. Thank you for your courtesy.
        Chairman Himes. The gentleman's time has expired.
        The gentleman from Ohio, Mr. Davidson, is recognized for 5
    minutes.
        Mr. Davidson. Thank you, Chairman Himes. And thank you to
    our witnesses for spending time discussing this important and
    prevalent issue with us today.
        China's economic infiltration across developing countries
    has grown very worrisome. We have known for some time that the
    Chinese RMB is prone to manipulation, and this means that we
    must look to ensure that anything the RMB touches is not
    undermined by activity from the Chinese Communist Party and the
    People's Bank of China.
        To address these concerns, I am now working on the Chinese
    Currency Accountability Act. The IMF's special drawing rights
    are comprised of five of the world's largest currencies,
    including the RMB. The bill would require that the United
    States oppose and vote against any increase in the RMB
    inclusion of the SDR currency basket unless the Treasury
    Secretary can provide a report to this committee and to the
    Senate Banking Committee that certifies China is abiding by
    fair monetary practices. Effectively, this would ensure that
    there would be no RMB increase in the currency basket unless
    China adheres to the principles of the Paris Club. I look
    forward to working with the subcommittee and my colleagues on
    holding China accountable to the same standards that the rest
    of the world is abiding by.
        A question for Mr. Morris, in your testimony, you state
    that suggesting that that these borrower countries could
    selectively default on their legal obligations to Chinese
    lenders is misguided and would ultimately be damaging to the
    countries. Could you explain a little more as to why this is a
    bad idea for those countries to selectively default on debt?
        Mr. Morris. Thank you, Congressman. I think as much as we
    do view China as a singular actor and certainly just in the
    scale of its lending for a lot of these countries it stands
    out. Nonetheless, it is a creditor among creditors, and I think
    the challenge for borrowing countries is if you default on a
    single creditor, whether it is China or any other, it is going
    to make your life more difficult, more generally as a borrower
    for all creditors, because you are violating the terms of a
    contract you made. And maybe, I will leave it at that. I know
    that Dr. Gelpern can speak to this issue from deep expertise.
        Mr. Davidson. Yes. So just to pick up there, and I will
    open it up, but what kinds of tools could the U.S. use more
    effectively in our kit bag, and how could developing countries
    interact with the United States--they have already gotten
    caught in the snare that China laid for them when they have
    taken some of these debt instruments. What kind of tools do we
    have and how could we work with some of these countries?
        Mr. Morris. Thank you. If I could just emphasize, in my
    recommendations I started by emphasizing the financing these
    countries have during this crisis, which is a little bit odd.
    We are talking about the debt vulnerabilities they face, so it
    seems odd to be thinking about new financing coming in. But I
    think we have to find ways to get money into these economies as
    they grapple with this crisis and that means financing terms
    that are appropriate to their circumstances.
        I think the best way to do that is to give our full support
    to institutions like the World Bank and the IMF so that they
    can be stepping up at a time, by the way, that Chinese lending
    has actually fallen off a lot. For a lot of these countries, on
    a net basis, they are paying a lot more back to the Chinese
    than they are receiving in new loans. So, that is all the more
    a drag on their economies, and I think all the more reason why
    the lenders that reflect our values and our way of doing things
    could be stepping up right now.
        Mr. Davidson. Yes. So, I will open it up to the panel.
    There is already a problem within countries that have taken on
    too much debt. What, short of just pumping U.S. dollars into
    other countries, frankly, at a time when they are needed in our
    own, what kinds of tools could we use to work with these
    countries?
        Mr. Atienza. If I can speak to that? I would just say that
    there are some obvious ones. We have lost the chance, in my
    view, in this 2020 year of providing debt cancellation to
    countries that were already under strong debt distress. And I
    think that is a road to go. It is not new cash. Of course, it
    has some impact, but it is much cheaper than postponing the
    crisis and putting a new pile of resources on countries.
        And second would be, the countries need ODA. They need
    additional aid, and they need concessional financing.
    Concessional financing can allow them to cope with repaying
    back, but with a grace period and with low interest rates, and
    that can make the matching.
        Mr. Davidson. Yes. Thank you, and my time unfortunately has
    expired.
        Chairman Himes. The gentleman's time has expired.
        The gentlewoman from Pennsylvania, Ms. Dean, is recognized
    for 5 minutes.
        Ms. Dean. Thank you, Chairman Himes, and I also thank the
    ranking member.
        And thank you, Chairwoman Waters.
        I do want to say to our expert witnesses, thank you. I hope
    you will forgive me for moving between this important
    subcommittee hearing and a markup in the Judiciary Committee.
    So, don't take my in and out as anything other than trying to
    do two jobs at once. But I do thank the witnesses.
        Professor Gelpern, I wanted to start with you. Could you go
    into greater depth as to the opaqueness of Chinese foreign
    lending policies and what concrete steps we can take for
    greater transparency?
        Ms. Gelpern. This is probably something that I should share
    with Dr. Horn, who has looked at the numbers, and I've looked
    at the contracts. What the contracts have is inordinately
    expansive confidentiality terms, and more so in recent years.
    The really interesting thing to me is that there are carveouts
    for disclosure required by law. Well, then, let's require
    disclosure by law. My preference is to start with the borrowing
    countries, because, as Professor Lienau has said, there needs
    to be accountability to the people whose work is repaying the
    debt. But I think that any legal statutory requirement of
    disclosure would actually take the wind out of a lot of these
    contractual terms.
        And just to flag, and I think this connects to the G7, the
    French have very similar confidentiality clauses. So, going
    through the G7 actually is a very good idea because China can
    always point to AFD and say, hey, we are no different.
        Ms. Dean. Dr. Horton, do you want to add to that?
        Mr. Horn. I fully agree with what Professor Gelpern said.
    Maybe just to add one additional suggestion, I am fully in
    favor of having a global debt census in which we try to create
    a global database that has detailed and comprehensive long-
    level data on sovereign debt, and that, of course, requires
    information sharing from both the debtors and the creditors.
    But having that in place, perhaps hosted by an international
    organization such as the World Bank, I think will help to raise
    the pressure on those creditors that refuse to disclose.
        Ms. Dean. That is really helpful. Thank you.
        Professor Lienau, could you please offer us a little
    greater detail about the concern you raise in your testimony
    regarding the corruption in Chinese lending practices in
    addition to simple bribery? And that seems like a crazy
    oxymoron, ``simple bribery.'' Are there other criminal aspects
    that we should be considering when talking about Chinese
    sovereign debt deals?
        Ms. Lienau. On the specific issues of Chinese lending, I
    think that some of my fellow witnesses might be able to speak
    more fully on particular issues. But I think, in general, you
    are highlighting that corruption is an issue and it can distort
    the way sovereign lending is done.
        In particular, sovereign debt terms is a major problem. Of
    course, this is not just Chinese entities. This is a broader
    issue in the international financial architecture. So, I think
    we need to think about dealing with that problem, and again,
    embedding our response to Chinese issues in a more broader
    international approach, because I think that is much more
    likely to stick. I think that has been one of the themes of
    this hearing, and I want to emphasize that.
        So if you're thinking about this broader approach in which
    you are enmeshing Chinese lending, I think you need to remember
    that it takes two to tango, or sometimes more than two to
    tango, so you really need a multi-pronged approach. First, we
    want to think about constraining the capacity of corrupt
    officials in these borrowing countries to hide funds.
        And because that's going to limit incentives for the type
    of corruption that we are thinking about, both straight-up
    bribery and also the use of sort of side accounts and middlemen
    and these other types of more hidden mechanisms that are not
    pay-for-play direct bribery, but are akin to that. So, we want
    to make sure that any of these types of funds become more
    easily discoverable, so, strengthening efforts to target tax
    havens and to discover ultimate beneficial owners of shell
    corporations would help.
        In addition, I think we need to make clear that bad faith
    creditors can't recover on debt. They should be sure that the
    debt signing authority actually exists in these countries. And
    so, this emphasis on clarifying laws and making sure that there
    are laws in place in the borrower countries for this, I think
    would help a lot.
        And again, I think creditor-side transparency in lending is
    very important, especially when there are debtor-side
    corruption concerns. So, I think you really need to think about
    this as a whole package in which Chinese actions are embedded.
        Ms. Dean. Thank you.
        I see my time has expired. Thank you, Mr. Chairman. I yield
    back.
        Chairman Himes. The gentlelady's time has expired.
        The gentleman from Ohio, Mr. Gonzalez, is recognized for 5
    minutes.
        Mr. Gonzalez of Ohio. Thank you, Mr. Chairman, and thank
    you to our great panel. This is an awesome and very timely
    discussion, so I do thank the chairman and the ranking member
    and the witnesses.
        I want to start my questions with Dr. Horn. When we talk
    about, how do we combat this and what sort of counter do we
    have, I think the instinct is to say, okay, let's look at our
    multilaterals as a counterweight to what China is doing. And I
    think that makes sense in some respects. Having said that, I am
    skeptical that the World Bank and the IMF are equipped to do
    that, only because my impression, from speaking with former
    executive directors at the World Bank and folks who are very
    familiar with the World Bank, is that China in many ways has
    blocked any attempt at getting the transparency that we want,
    because of their shareholder rights and their ability to build
    coalitions inside the World Bank.
        And by the way, I say that as somebody who supports the
    World Bank. I think these multilaterals are necessary, despite
    their frustrations, so I think we do need to support them. But
    that being said, Dr. Horn, my first question is, one, do you
    agree with the perspective that the World Bank has not been as
    effective as we might hope vis-a-vis transparency because of
    China's influence? And then, if yes, should we be looking to
    create an alternative either through the D10 or the G7 or some
    sort of alternative financing mechanism that can push back on
    this stuff?
        Mr. Horn. I am not familiar with the internal discussions
    within the World Bank on debt transparency and what has slowed
    the progress. My personal observation is that there has been
    progress over the course of the last couple of months. One
    specific example is the publication of creditor compositions of
    the international public debt data, which I think is the first
    time that an official institution has really put quantities out
    there and has tried to sort of publish the actual debt stocks
    that I think these countries owe to China. So, I think that
    that has been a significant step forward.
        I also share your initial statement that these multilateral
    institutions will need to play a very important role in making
    offers to these countries that lessen their dependence on China
    when it comes to spending for infrastructure and energy. I
    think one more general point that I would like to make is that
    part of the attractiveness of Chinese lending for these
    countries over the course of the past years and the past
    decades has really been the lack of alternatives when it comes
    to financing large-scale projects in high-risk countries. And I
    think to do that and to offer these countries alternatives, the
    multilateral institutions will need to play a key role.
        Mr. Gonzalez of Ohio. Thank you.
        Professor Gelpern, do you have any thoughts on that? Is
    your perspective that China has not--or I guess, what would you
    say to the initial claim that the World Bank and the IMF have
    largely been blocked due to Chinese influence from demanding
    the type of transparency that we would need?
        Ms. Gelpern. I wouldn't say, ``blocked.'' I would say,
    ``occasionally gummed up.'' And it is a meaningful distinction
    in my mind. I do want to refocus attention on something Mr.
    Morris said, which is that Chinese lending is going down, their
    net repayments. And the really interesting question now is what
    is going to replace that? Right at the time when countries
    accumulated unprecedented amounts of debt in 2020, we haven't
    had defaults. Why? Because countries that maybe shouldn't have
    borrowed, borrowed up a storm.
        And so, we are facing a delicate moment right now, and I do
    think that is where multilaterals can come in. IDA can borrow.
    IDA is enormously conservative. They can borrow and that would
    diminish any given shareholders' influence in some sense.
        Mr. Gonzalez of Ohio. Yes.
        Ms. Lienau. May I speak to something that you said,
    Representative Gonzales? You began by expressing concern about
    the possible politicization of the World Bank, and I agree with
    Professor Gelpern that, ``gumming up'' is more accurate than
    ``blocked.'' I would emphasize that I think the U.S. needs to
    maintain its voice in these institutions rather than
    withdrawing, because I think withdrawing from these
    institutions is not the way to go. I also do think that given
    the changing balance of power over time, the U.S. should
    consider support for an independent expert institution, because
    experts from every country basically agree on what is needed.
    And so, if we want to be supporting that, then an independent
    institution, even a consultative one, is not a bad idea.
        Mr. Gonzalez of Ohio. Thank you. I am not as sanguine about
    the world. I agree we absolutely need to be at the table and we
    need to be leading at the World Bank to the extent that we can.
    But absent that, I do hope we consider alternatives.
        But with that, I yield back. Thank you.
        Chairman Himes. The gentleman's time has expired.
        The gentleman from New York, Mr. Torres, is recognized for
    5 minutes.
        Mr. Torres. Thank you.
        I guess my first question is about the G20 Common
    Framework. My understanding is that China agreed to participate
    in the G20's Common Framework. How does one reconcile China's
    participation in the Common Framework with China's insistence
    on no Paris-Club clause? Professor Gelpern?
        Ms. Gelpern. I think that also, Mr. Morris may have more
    economy color to add, but look, the clauses all predated last
    November. Some of them very recently predated. Yes, we have
    some contracts of 2020 that have these clauses, but we don't
    have anything since the Common Framework. It is embarrassing.
    They need to get up and say--they and we--need to get up and
    say, now that there is the Common Framework, nobody is going to
    ask for this and nobody is going to enforce what is there now.
    Otherwise, it is just--why would you sign up for something just
    to be publicly embarrassed? I am being simplistic here.
        Mr. Torres. Your organization did a data report, if I
    understand correctly, and what is China's endgame? Is China
    seeking repayment or is debt a means to an end? I am thinking
    of the case of Sri Lanka, which could not repay the debt. And
    instead of repaying the debt, Sri Lanka ceded control of a port
    to China or an entity of China. And I am wondering, is it more
    important to China to be repaid or is it more important to
    leverage debt financing as well as integrated project delivery
    to secure control of other countries strategic assets? What is
    the end game here?
        Mr. Morris. Congressman, I think I will come in on that
    question. I think our interpretation, as authors of this study,
    is that we view these features as very aggressive measures to
    get repaid, that basically--and there are different
    interpretations. But I think ours would be that particularly
    lending in the high-risk debt environments, measures like these
    cash accounts, and other kinds of offshore accounts, are
    features that the lender is using to protect itself.
        But that is one interpretation and it can exist alongside
    other interpretations about broader strategic goals that the
    Chinese government might have, which is why the other features
    that we point to, these very broadly written provisions that
    implicate policy issues in the two countries. There's a lot of
    room for maneuverability there on the part of the Chinese
    government. And it is interesting that they would write those
    features into the contracts.
        I think it does speak to legitimate concerns we can have
    from a U.S. perspective about the degree of leverage that the
    government might have in these situations. And they don't need
    to be blending countries into default deliberately in order to
    find sort of avenues for strategic influence in these
    countries.
        Mr. Torres. This might be a challenging question to answer,
    but China has an ever-expanding web of debt contracts with
    collateral clauses and confidentiality clauses, and all of
    these contracts contribute toward a lack of debt transparency.
    And it seems to me that these loans are structured to undermine
    multilateral institutions and the debt restructuring
    initiatives of those institutions. How close are we are to
    reaching the point of no return, where these contracts are just
    so widespread that it will derail the debt restructuring
    initiatives of multilateral institutions like G20 and others?
        Ms. Gelpern. Contracts are not the ten commandments. And at
    a certain point, they backfire. If you have a really brittle
    contract all that happens is your debtor defaults, and then
    what? I think we need to leverage the self-interest here. Now,
    Congressman, you are exactly right. Sovereigns are--
        Mr. Torres. But if you are a low-income country, the cost
    of defaulting and alienating a country as powerful China can be
    quite high, so--
        Ms. Gelpern. You are right, but--
        Mr. Torres. --you can lose access to markets and--
        Ms. Gelpern. But today, we have very diverse lenders and
    lots of them. So in some ways, putting creditors against one
    another can play against us or in favor of a more constructive
    financing model, and I think really it is about turning the
    ship around rather than a point of no return. I don't think we
    are there.
        Mr. Torres. Thank you.
        Chairman Himes. The gentleman's time has expired.
        The gentleman from Texas, Mr. Taylor, is recognized for 5
    minutes. Did we lose Mr. Taylor?
        Okay, hearing nothing from Mr. Taylor, the gentleman from
    Illinois, Mr. Garcia, is now recognized for 5 minutes.
        Mr. Garcia of Illinois. Thank you, Mr. Chairman, and
    Ranking Member Hill, for convening this very important hearing.
        And of course, thank you to all of the witnesses who came
    to shed light on this complicated topic. I know it is easy to
    get abstract when we talk about the impact of global debt, but
    my constituents know we are talking about people's lives too. I
    am from Chicago and when our interest rates go up in Chicago,
    in Cook County, we worry about pension cuts.
        I have a large Puerto Rican community in my district. Their
    loved ones are trying to rebuild the island while needed
    investments are going to bond holders on Wall Street. So if
    countries around the world have to cut their budgets to make
    that payment, whether it is to China or Wall Street, I worry
    that it will be impossible for us to recover from this
    pandemic.
        Mr. Atienza, your testimony painted an alarming picture of
    the global economy during COVID-19, but many of the existing
    debt relief programs are only focused on small or very low-
    income countries. Are larger economies like Mexico or Nigeria
    also likely to run into debt issues due to COVID-19, and does
    that jeopardize recovery for all of us?
        Mr. Atienza. Thank you for your question, Representative
    Garcia. Definitely, there are middle-income countries that are
    in debt trouble. I wouldn't mention Mexico in that stance at
    this point, but definitely Nigeria is part of this initiative;
    it is a large economy with deep troubles. And what we are
    seeing is that problems with debt are quite widespread, but we
    are finding or ways are being found of providing new liquidity
    that hides, to some extent, the depth of this crisis and
    postpones it.
        Our take is that we are going to need to set new mechanisms
    to protect countries from the worst in these debt storm--are
    going to need that cancellation. It is a bit of a lost
    opportunity that nothing else was done under DSSI, just
    postponing with the crisis going deeper payments to 2022-2026
    is not good enough, and we need to include mechanisms that
    allow for debt cancellation for middle-income countries that
    are under severe debt stress, and there are plenty of those.
        And definitely protecting and setting provisions to protect
    the citizens in countries in these situations is going to be an
    important step forward. And I want to add that you need civil
    society oversight, and you need the eyes and the testimony of
    ordinary people to speak to the impacts of this debt crisis and
    to the reality that this COVID crisis is not going to get
    better yet, because the uncertainties and the slow path of
    vaccination in developing countries is not allowing for that.
    So, all of our provisions and all of the numbers that we are
    reading are too optimistic, currently. We need to be ready for
    things getting worse and for action coming forward urgently.
        Mr. Garcia of Illinois. Thank you for that.
        Professor Lienau, in your testimony you mentioned the
    importance of a fair, transparent restructuring process. We see
    in Puerto Rico how difficult restructuring can be and how
    important it is to get the process right. Can you talk about
    international efforts underway to create a fair restructuring
    mechanism for sovereign debt, and what Congress can do to
    support them?
        Ms. Lienau. Yes. Thank you for the question. There are
    important mechanisms or processes underway to try to improve
    debt restructuring. I think the current discussion, the move
    toward the Common Framework, including a broader range of
    countries and creditors, is very important. I think that, in
    addition though, we need to take broader steps, because I
    believe that this is just an initial step, and we need to take
    additional steps on both the sort of transparency side and on
    the actual fair restructuring side.
        We need to think more broadly about including not just
    public creditors but also private creditors, as you pointed
    out, because different countries and different entities like
    Puerto Rico are differently exposed to public as opposed to
    private approaches. I think comparability of treatment in the
    Common Framework is one way to try to encourage the
    collaboration and coordination that is so essential, but it is
    not going to be sufficient. Because, as you point out, a very
    small range of countries are covered, and also because it is
    very difficult to encourage private creditors, in addition to
    public creditors, to participate in that.
        We need to think a little bit more broadly both in terms of
    improving contract mechanisms to make sure that they are not
    just within a certain type of contract like bonds, but also
    include a broader range. We need to think about domestic
    legislation including legislation that, I believe, is under
    consideration in New York. And we just think we need to think
    more seriously about international mechanisms, even beyond the
    ones that are under consideration right now. I think it takes a
    multi-track approach.
        Mr. Garcia of Illinois. Thank you so much.
        Mr. Chairman, I yield back.
        Chairman Himes. The gentleman's time has expired.
        The gentleman from Massachusetts, Mr. Auchincloss, is
    recognized for 5 minutes.
        Mr. Auchincloss. Thank you, Chairman Himes, for convening
    this hearing today. I found this really, really edifying.
        I want to focus on China's practices as they relate to the
    Association of Southeast Asian Nations and the effect on
    geostrategy in the South China Sea. After World War II, the
    most important alliances and stabilization for the Pacific were
    the United States' relationships with Japan, with South Korea,
    with implicit security guarantees for Taiwan, our relationship
    with Australia, and now, the Association of Southeast Asian
    Nations. The Asian states are some of the fastest growing
    economies in the world. Their political heft is growing, and
    they have become the next battleground to be won in terms of
    influence in the in the Indo-Pacific. Partly because of the
    United States' failure to join in the trans-Pacific
    partnership, we left a vacuum in Asia, and China has filled
    that with more than $100 billion worth of infrastructure loans
    and investments.
        I will leave this question open for any of our witnesses
    who wish to answer it. Can you explain how China has been using
    cancellation acceleration stabilization contracts to influence
    the foreign policy of the Asian states in regards to its
    aggressive actions in the South China Sea, and what the United
    States might be able to do in working with Asian debtors to
    push back on these aggressive actions in the South China Sea?
        Mr. Morris. Congressman, maybe I will come in on this. I
    guess, I would say two things. One, is just to observe,
    entirely separate from these loan contracts, we do have to
    appreciate the nature of influence that comes with the scale of
    lending that you just described. This volume of financing just
    inherently creates significant leverage when it is between two
    governments, as it is in many of these cases. And as you said,
    while we are looking at China lending globally, there is no
    question that there is a particular concentration in southeast
    Asia and it is inextricably linked with a broader range of
    objectives on the part of the Chinese government that isn't
    strictly commercial or economic.
        With all of that in mind, it is particularly striking then
    to be able to look at these debt contracts and see that on top
    of all that, the Chinese lenders, government-owned lenders,
    have taken that step of making explicit this kind of leverage
    that basically, by writing pretty aggressive, broad terms to
    enable cancel cancellation-acceleration in ways that we can
    read into a lot of different kinds of behavior to be honest,
    speculative on our part because it is hard to observe in
    practice what this looks like. It is not transparent. But it is
    striking that these are written into the contracts.
        Mr. Auchincloss. And, Mr. Morris, are we seeing already
    evidence that the Asian states, as a coordinating body, are not
    particularly muscular yet in the Indo-Pacific affairs? Are we
    seeing evidence that they are being muted in their response to
    Chinese actions in the South China Sea because of the
    investments in the loans they are getting from China?
        Mr. Morris. Maybe I will avoid speaking directly to that,
    but more broadly, I would say that I am actually struck by how
    there is an opportunity here for the United States. The degree
    to which there is political blowback in the region, certainly
    to China's lending behavior. There is a desire to diversify
    sources of financing, and I think, as we heard from the other
    witnesses, that at the citizen level there is discomfort and
    resistance to their own governments as they have taken on these
    commitments that feel like there are strings attached and
    broader implications. So, I think there is an opportunity for
    us.
        Mr. Auchincloss. How can the United States use the
    potential for re-entry into the Trans-Pacific Partnership or
    some updated version of that to provide a counterbalance in
    Asian states?
        Mr. Morris. I do think the trade agenda is an important
    instrument. One thing I would say though is that if you look
    back historically, the U.S. has emphasized trade agreements as
    sort of a leading instrument of our foreign policy. That has
    fallen off a lot in recent years, obviously. What we have not
    emphasized that the Chinese have is financing, direct
    investment lending, equity stakes. And I think we have to
    grapple with that as part of our toolkit.
        Mr. Auchincloss. I yield back, Mr. Chairman.
        Chairman Himes. The gentleman from Massachusetts' time has
    expired.
        The gentleman from California, Mr. Sherman, is recognized
    for 5 minutes
        Mr. Sherman. Thank you, and Mr. Chairman, thank you for
    letting me participate in this subcommittee. I was Chair of the
    Asia Subcommittee back on May 8, 2019, when we had hearings
    focused on very much on the same subject. I want to observe
    that China providing capital to poor countries to help them
    develop is often a good thing. These loans are risky for China,
    and the most important loans, the most important financing in
    the world is when lenders aren't willing to take a risk. But we
    need to be concerned about three areas. One is when the loan is
    unfair, particularly when it is a trap designed, as it may have
    been in Sri Lanka, to make the loan not with the idea that it
    would ever be repaid, but as a way to seize the underlying
    security.
        The second issue that arises is aid, or concessionary
    loans, or financing a foreign policy bribe encouragement, and
    we do that too. We give aid and concessionary loans to
    countries hoping that they will support American foreign
    policy. And if we're going to compete with China around the
    world, I would much rather the competition be who can do the
    most to help poor countries and to compete for their votes at
    the U.N. or diplomatic support than it be a competition as to
    who can build the most aircraft carriers.
        A third issue that arises is the confidentiality. And that
    particularly concerns me because if I gather what our witnesses
    are testifying, China insists that the borrower not disclose
    the debt, which makes it impossible then for the borrower to be
    honest with its citizens and to be honest with other lenders.
    Do I have this right, that countries agree or even companies
    agree not to disclose their debts to China or Chinese entities
    to their citizens or to others they may be seeking credit from?
        Ms. Gelpern. Congressman, the answer is yes, but--
        Mr. Sherman. Isn't that fundamentally illegal? If you then
    go to another lender and you say, here is a list of all of my
    debts, do you then put a little note at the bottom and say,
    except for the ones to China, which I am not disclosing to you?
    And fraud doesn't count. ``I promised China that I would
    defraud the next lender, so the fraud is good fraud because I
    did it at Beijing's request.''
        Ms. Gelpern. Sir--
        Mr. Sherman. But, no, what is the good fraud here?
        Ms. Gelpern. There is no good fraud. I think there is
    broad-based agreement on that. I think the only thing, the only
    qualification to all of this is that we have the agreements
    either because--we have 100 that are 5 percent or however
    much--either because they are legal requirements or because
    somebody leaked. These are all from public sources. What we
    need is an international--
        Mr. Sherman. If I can interrupt for a second, the response
    of America should be, please, if you enter into an unfair
    contract with China, or a contract where you are required to
    conceal it from other debtors, including us, then please don't
    repay. And in order to encourage you not to repay, we will
    instruct all of the lending agencies under our control not to
    count it against your credit.
        Many countries will repay China because they want to
    maintain a good relationship with China. But at some point, the
    debt to China will be so enormous that the opportunity to just
    stiff them completely and not have it count against their
    credit rating anywhere else will be very inviting, or the
    opportunity to use that opportunity to negotiate with China
    will be helpful.
        When we evaluate a country's credit and count defaults to
    China, we are acting, in effect, as China's debt collector
    [inaudible].
        Ms. Gelpern. The trouble is that we don't have that
    leverage. We are not in a position to tell private creditors
    not to call a default or rating agencies to downgrade.
        Mr. Sherman. You don't know the power of our committee. We
    do have control of the agencies.
        I yield back.
        Ms. Gelpern. Well--
        Chairman Himes. Ms. Gelpern, I will give you a few seconds
    to respond, as you were starting a sentence there.
        Mr. Sherman. Thank you.
        Ms. Gelpern. Well, just that the victims are going to be
    the countries. That is my concern. That if we had all of the
    control and all of the money, and if we could replace all of
    the liquidity, I suppose we could consider that. But we are--
    Paris Club creditors are 5 percent, including us, of a lot of
    these countries' debt. So, who are we talking to? Who is the
    audience?
        Chairman Himes. Okay. The gentleman's time has expired.
        Thank you, Ms. Gelpern.
        The Chair does not see any more Members seeking time. Going
    once, going--
        Mr. Sherman. If I could seek 30 seconds?
        Chairman Himes. Mr. Sherman, you are recognized for 30
    seconds.
        Mr. Sherman. I just want to respond. What I am suggesting
    would just be an option for a country to use. And if they
    thought it wasn't in their interest, they wouldn't use it. And
    I will yield back.
        Chairman Himes. The gentleman yields back.
        Seeing no additional Members, I would like to extend a
    hearty thanks to all of the witnesses for a fascinating
    conversation and a lot to follow up on today.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
    With that, I thank our witnesses once again, and this hearing is
    adjourned.
    [Whereupon, at 11:46 a.m., the hearing was adjourned.]

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