[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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