Flow control: the work of collateral in Chinese overseas lending

Abstract This symposium contribution draws on newly identified contract texts and other primary sources to analyse transaction design patterns in secured overseas lending by Chinese institutions. Together with its companion quantitative study of 620 collateralized debt transactions between Chinese lenders and public sector borrowers in emerging market and developing economies (EMDEs), it offers a rare window into some of the relationships and practices that animate debates about geopolitics and finance. Collateralization is a regular feature of Chinese lending in EMDEs. Contrary to stereotype, Chinese lenders are far more likely to use control over liquid assets—revenue streams and bank accounts—than ports or mineral deposits to secure risky public and publicly guaranteed (PPG) debt. We trace the design, provenance, and functions of secured credit in the most common transaction structure in the dataset, and examine two variations on the theme: a railway construction project in Kenya and a road construction program in Ghana. In the case studies and in the companion dataset, we find that Chinese lenders adapt and scale market-standard tools, experimenting with legal techniques to maximise recovery, broaden and deepen the debtor–creditor relationship. Transactions that give creditors the ability to block or capture foreign currency cash flows are commonplace in our dataset and have roots in 19th and 20th century sovereign debt practice. Design experiments for risk mitigation can give creditors economically and politically significant control over export revenue flows in vulnerable borrowing countries. They can also set off competition for flow control among lenders, which can delay or derail crisis resolution when the borrower falls into debt distress. Complex collateralized debt structures obscure governance problems and misaligned incentives and undercut borrower agency. Their apparent prevalence, and the fact that they have gone unaddressed for decades, point to significant gaps in the legacy international financial architecture.