China In Eurasia

Over the last decade, China has rapidly expanded its financial presence across the globe.

It has issued massive loans through its flagship foreign policy project, the Belt and Road Initiative. It has inked contracts with governments from Latin America to Africa and Eastern Europe to South Asia.

But despite being the world's largest official creditor, many of the basic facts around Beijing's foreign lending are still unknown.

Crucial details about the terms and conditions of China and its state-owned entities' development and infrastructure loans in such places are still murky. Few of those contracts between foreign governments and Chinese lenders have been made public.

But a recent study by the Center for Global Development, a Washington-based think tank, aims to pull the curtain back on Chinese lending practices by offering a first-of-its-kind analysis of 100 contracts across 24 developing countries in Africa, Asia, Europe, and Latin America, including Montenegro, Kyrgyzstan, and Serbia.

“China is the top lender in the world, so it matters how it approaches these contracts,” Scott Morris, a senior fellow at the Center for Global Development and one of the report’s authors, told RFE/RL.

“What we see is a unique set of restrictions alongside other provisions in contracts that contribute to China being a muscular lender that can strengthen its position vis-a-vis the borrowing country,” Morris added. “Generally, there is a lack of transparency across the board and wide-ranging terms that make sure China can protect its investments.”

Unsustainable debt and the constrictive terms of Chinese loans have come under increased scrutiny in recent years as more governments have signed deals with China’s state-owned lenders. Concerns have particularly focused on some clauses that allow Chinese entities to seize property or assets when payments can’t be met, prompting fears of land or other assets being taken and massive debts leaving governments beholden to Beijing.

Such worries flared up again in April after Montenegro’s government said that it needs help from the European Union to pay off a $1 billion Chinese loan for a controversial highway project.

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No Clear Option For Montenegro As It Tries To Repay $1 Billion Highway Debt To China

Similarly, Kyrgyzstan is also grappling with how to pay back the $1.8 billion -- more than 40 percent of its foreign debt -- it owes to Chinese lenders as repayment dates draw closer and it faces financial hurdles brought on by the pandemic.

'A Muscular Lender'

The Center for Global Development report, which was released in late March, was produced in collaboration with AidData, a research lab at the College of William and Mary, to break down shared features of Chinese debt contracts and how they compare to lending practices by other multilateral or commercial creditors.

The study looked at contracts signed around the world with China’s two main state-backed lenders, the Export-Import Bank of China and the China Development Bank.

The authors were able to identify three key features: a reliance on secrecy clauses to keep borrowing governments from revealing the details of their debt; terms meant to keep Chinese debt out of collective restructuring; and clauses allowing for the cancellation of debt or accelerated repayments, which could potentially influence the policies of debtor countries.

The Chinese government has largely resisted efforts to reveal the full scope of its global lending program around the world. Beijing is part of neither the Organization for Economic Cooperation and Development's (OECD) Creditor Reporting System nor its Export Credit Group, which are designed to create more transparency around the loan process.

China also is not a member of the Paris Club, a group of creditor nations created more than half a century ago to help countries experiencing payment difficulties with their debt.

More recently, Beijing committed to the G20 Common Framework among G20 and Paris Club members in 2020, extending debt relief to developing countries worth a combined $2.1 billion, perhaps signaling a shift on the issue.

Still, much of Chinese lending remains shrouded in secrecy.

According to the Center for Global Development study, all of the China Development Bank contracts and 43 percent of the Export-Import Bank of China deals seen by the authors included confidentiality clauses about the terms of the loans.

While the authors note that confidentiality is a feature in many loans, the Chinese contracts flip standard practice on its head -- committing the borrowing government, rather than the lender, to nondisclosure.

Similarly, the Chinese deals are far more sweeping in their secrecy, covering all details of the loan and even the existence of debt itself in some cases.

“Commercial confidentiality is meant to protect the borrower because they need to give the creditor access to lots of sensitive information,” Morris said. “But the Chinese confidentiality provisions put a much higher value on secrecy and tend to protect the lender.”

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Another unique aspect of the Chinese loans is what the report refers to as “no Paris Club” clauses, which prevent a borrowing government from restructuring a loan from a Chinese entity elsewhere or seeking debt relief from another source.

Finally, the report cautions about the prevalence of clauses that allow Chinese creditors to cancel a contract or demand immediate repayment in case of major changes to the law or policy within the borrowing country.

While such provisions are normally used by lending institutions around the world to protect against changes that could prevent repayment, the study finds that Chinese contracts use a more ambiguous definition that could allow the creditor to politically pressure an indebted government.

“The terms are so broadly written that it could cover any change of policy or law that would affect the relationship,” Morris said. “If the state-owned creditor becomes unhappy with the government, it can call in the loan early, cancel it, or change the repayment schedule. It provides many levers for influence.”

Debt Traps Or Playing A Different Game?

The motives for such provision in contracts issued by China’s state-owned lenders has been a source of much debate.

Critics argue that they amount to a “debt trap” deliberately set by Beijing in order to saddle a country with debt and thereby increase its influence and control over that government.

Accusations of such practices resurfaced in the case of Montenegro’s highway debt to China, which stems from a 2014 loan under a previous government in Podgorica.

The Montenegrin government that came to power last year has warned of the dependency on China that the massive loan could create, and some European officials have echoed those concerns. The terms of the contract, which was signed with the Export-Import Bank of China, could allow that bank to take control of the highway or seize other assets, although there is no indication that the Chinese bank intends to do so.

Having examined the Montenegrin contract and other Chinese deals around the world, Morris said that they don’t appear to point toward Beijing deliberately lending in order to draw countries into unsustainable debt situations.

“The obligations they place on the borrowing governments are extraordinary compared to other lenders,” Morris said. “But a general conclusion after looking at the contracts is that Chinese entities are issuing loans with the full intention of getting their money back.”

In the case of Montenegro, the European Union rebuffed Podgorica's call for assistance to repay the loan, but Brussels has also indicated it will search for other ways to help the EU candidate country.

According to Morris, the nature of the contract limits the options that Montenegro can pursue elsewhere. And while he does not rule out the possibility of Beijing offering some form of debt deferment or restructuring, the design of the contract ensures that China will have at least a voice in whatever solution is reached.

“Any relief [Montenegro] is seeking will need to come from the Chinese and be agreed upon with them,” Morris said. “There is not a path forward that can ignore the Chinese.”

PODGORICA -- Montenegro says it needs help from the European Union to pay off a whopping $1 billion Chinese loan for a controversial road project that has left the Balkan country in a dire financial situation.

But EU spokeswoman Ana Pisonero told RFE/RL that the bloc "does not repay loans from third parties," though she added that Brussels did have concerns over "the socioeconomic and financial effects some of China's investments can have," as well as the risks of economic imbalances and "debt dependency."

She did say, however, that the EU was willing to offer support through its $10 billion Economic and Investment Plan for the Western Balkans. "The Economic and Investment plan will help leverage funding from other public and private investors, including from the European Investment Bank at very favorable conditions," Pisonero said.

The long-delayed and still-incomplete highway finds itself at the heart of a wider geopolitical contest on the EU's doorstep, where China's influence in the Balkans has expanded dramatically in recent years.

The rebuffed call to Brussels for assistance comes as Montenegro faces a looming repayment deadline for the highway -- which is being built by the China Road and Bridge Corporation (CRBC) -- and is grappling with a host of political and financial challenges, including a tourism-dependent economy that has contracted significantly due to the pandemic and weakened its repayment ability.

China holds approximately one-quarter of Montenegro's total debt, which reached 103 percent of GDP last year, and if Podgorica defaults on its loan the contract for the road project gives China the possibility to access land and assets in the Balkan country as collateral.

According to the current contract with the Export-Import Bank of China, the first loan payments are due in July.

The stakes are now high for both Brussels and Podgorica.

Montenegro must now search for other options for its financial future, while the EU must look for a way to shore up its standing in the Western Balkans, a region where China continues to improve its ties amid the pandemic by strategically donating vaccines and providing aid in a time of crisis.

"It's not a surprise to see where the project ended up, it was trouble in the making from the start," Vuk Vuksanovic, a researcher at the Belgrade Center for Security Policy, told RFE/RL.

Debt Politics

With debt help from the EU not on the table, the new Montenegrin government that was narrowly voted into power in December must find a new solution. The loan was taken out by a previous government led by current President Milo Djukanovic, who continues to be a long-term force in the country's politics.

Montenegro, which became an independent country again when it broke away from Serbia in 2006, joined NATO in 2017 and is working to get the green light to join the EU. Like many countries in the Balkans, it also has strong ties to Russia and has increasingly looked to China -- under the guise of Beijing's Belt and Road Initiative -- for infrastructure and investment.

The current government of Prime Minister Zdravko Krivokapic has tried to distance itself from the highway project, raising concerns over being able to meet its debt obligations and tying the loan to its predecessors, who signed the deal in 2014.

Deputy Prime Minister Dritan Abazovic first publicly raised concerns in March, when he told Montenegrin lawmakers that the EU should help refinance the loan to protect the country from becoming dependent on China.

Montenegrin Finance Minister Milojko Spajic also joined the public effort, telling the Financial Times on April 11 that the EU helping the country with the Chinese loan was an "easy win" and "low-hanging fruit" for the bloc.

A Winding Road

Accepting the loan from the Export-Import Bank of China and building the highway was controversial from the very start. The project was designed to link the port of Bar on Montenegro's Adriatic coast to landlocked neighbor Serbia. The highway itself is divided into three sections, with the Chinese loan only covering the first 41 kilometers.

That stretch, which passes through mountains north of the capital, has been the most demanding, with an estimated 60 percent of it made up of bridges and tunnels. The first section of the highway is not yet completed, having faced planning problems and delays due to the pandemic. The government recently said it intended for the first section to be complete this year.

When the current government was the opposition it criticized the government for agreeing to the loan, raising concerns over the cost, a lack of transparency in the tender process, potential corruption, and the long-term economic risk it brought to the small Balkan country of 620,000.

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It's impossible to tell the biggest stories shaping Eurasia without considering China’s resurgent influence.

China In Eurasia is a newsletter by correspondent Reid Standish in which he builds on local reporting from RFE/RL’s journalists to give you unique insights into Beijing’s ambitions. It's sent on the first and third Wednesdays of each month.

To subscribe, click here.

Doubts about the highway first surfaced after two feasibility studies, conducted in 2006 and 2012, showed it was not economically viable. Montenegro had tried and failed to secure funding from European sources before it turned to China.

"Some projects haven't been built for a reason," Jonathan Hillman, the director of the Reconnecting Asia Project at the Center for Strategic and International Studies, told RFE/RL. "Just because financing becomes available it doesn't mean that it should be accepted."

MANS, an EU-financed anti-corruption watchdog, also pressed the government at the time to provide lawmakers with data to support its vision and how the project would generate revenue before a vote to approve the Chinese-funded highway in 2014. But the government refused to do so and many details around the contract for the loan remain hidden.

Even before the current problems posed by the debt repayment deadline, the Chinese loan caused economic pain to the country, forcing the government to raise taxes and partially freeze public-sector wages in order to get its finances in order.

Because the government did not hedge against currency swings and failed to include a turnpike in its original plans, the cost of the project continued to soar, pointing to a looming debt problem. The highway itself proved to be extremely expensive, with an average estimated cost of $23.8 million per kilometer.

In 2018, the Center for Global Development, a Washington-based think tank, listed Montenegro as one of eight countries at risk of a debt crisis after receiving a Chinese loan.

"The risks around this highway were clear at the beginning," Hillman said. "This shows what can happen when there isn't proper accountability and effective oversight for these big infrastructure projects."

China In The Balkans

In addition to the economic problems it poses to Montenegro, the current saga also puts the EU in a difficult position in regard to China in the region.

China continues to loom large in the Balkans, deepening its footprint through infrastructure and energy projects. Beijing has also begun to build up stronger political ties in the region, forging a comprehensive partnership with Serbia that has allowed it to expand out to neighboring countries.

Montenegro is potentially attractive to China for a number of reasons. It gives Beijing a European presence on the Adriatic coast and closer political ties and heightened influence within the country could prove useful if Podgorica joins the EU.

For Brussels, how it decides to navigate this situation will impact its credibility in the Balkans, which has been negatively affected during the pandemic over problematic episodes involving the supply of medical equipment and vaccines.

Still, the EU is the region's top investor and main market and is exploring other avenues to assist Podgorica.

On April 12, French European Affairs Minister Clement Beaune tweeted that Paris was working with the European Commission to find a solution to Montenegro's debt problem and "reduce the dependence on China in the Balkans."

"This is a rare opportunity for the EU to step up in its backyard and push back against China," Vuksanovic said.

"But it also wouldn't be the first strategic opportunity that the bloc has squandered in the Balkans," he added. "Doing so would be a bad signal to the region and a green light to Beijing."

Reid Standish and Asja Hafner reported from Prague, Gjeraqina Tuhina from Brussels, and Slavica Brajovic from Podgorica