The researchers said Chinese loan disbursements to the 46 countries that applied for DSSI relief fell from US$30 billion in the two years before the pandemic, to US$15 billion in 2020-2021.

CARI founding director Deborah Brautigam, professor of international political economy at Johns Hopkins University, and Yufan Huang, a PhD student at Cornell University’s department of government, examined a number of possibilities for the scale of the drop.

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A popular explanation is that “China Eximbank used slowdowns in disbursement as leverage to put pressure on countries to withdraw applications for relief”, they said. It was also possible that the DSSI-imposed moratorium was interpreted as a default event, leading to automatic suspension of loan disbursements.

However, a third possibility identified by the study was that the pandemic had exacerbated the administrative challenges of prompt invoicing, which proved more significant for Chinese invoices.

The authors noted that most projects financed by Chinese loans are set up to disburse funds from the banks directly to contractors after receiving an invoice from the borrower, a process that may have been disrupted during the pandemic.

But the drop in disbursements was not limited to the countries requesting DSSI relief from China. The study also found new loan commitments from Chinese banks decreased by 53 per cent to both DSSI participants and eligible countries that did not apply.

“It is possible that there was no overall policy, but the Chinese lender was reacting to newly sharpened risks,” Brautigam said in the study.

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The researchers said Kenya – which owed around US$7.4 billion to Chinese banks in 2021 – “was regularly used … as an example of China Eximbank using leverage to avoid providing debt relief”.

According to World Bank data, China holds 21 per cent of Kenya’s public external debt, with private creditors holding another 24 per cent and multilaterals on 45 per cent.

IMF figures show Eximbank is the country’s biggest Chinese lender, at US$7.1 billion, while China Development Bank (CDB) has agreed loans of US$283 million.

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Kenya did not take part in the first round of DSSI relief, but applied for the initiative’s second phase in December 2020. Eximbank agreed to suspend US$260 million in semi-annual payments due in January and March 2021 on its US$7.1 billion in loans to Kenya.

These included commercial debts as well as concessional lending provided by the bank on behalf of the Chinese government.

Chinese-funded projects in the East African nation were starved of cash during the two-year debt relief period. The disbursement slowdowns prompted Kenyan officials to withdraw a request for the third phase of DSSI.

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The study said Kenya continued to repay CDB and its other Chinese commercial creditors. When DSSI was extended for the third phase, Nairobi again asked for relief from all of its bilateral lenders. But Eximbank appeared reluctant to provide further help.

“Kenya had several ongoing projects financed by China Eximbank, and the second DSSI request seems to have triggered a halt in the bank’s disbursements to Chinese contractors,” the study said.

According to the researchers, Eximbank gave no written response to the Kenyan request in the third DSSI phase. Kenyan officials who asked for a status update were told the bank was “awaiting further guidance from the ministries at the policy level”, the study said.

“Loan disbursements stopped in May. Our interviews suggested that the China Eximbank sovereign client department in charge of disbursements may not have consulted different Chinese ministries when it made the decision some time early in 2021 to withhold disbursements for [some] DSSI participants,” it said.

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Kenya opens massive US$1.5 billion railway project funded and built by China

Kenya opens massive US$1.5 billion railway project funded and built by China

In July, as the third phase of the DSSI was starting, Kenya received settlement notes from Eximbank and resumed repayments. Disbursements soon followed.

The researchers said the Kenyan case shows how China’s bureaucratic politics can be a hurdle to its implementation of the DSSI and the G20 Common Framework.

“Although the Chinese central government is obviously powerful, China Eximbank had considerable leeway to implement the moratorium based on its own understanding of what the DSSI meant and its interests,” they said.

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A Chinese businessman who faced payment delays in one African country told the researchers that China’s banks generally do not allow loan disbursements during debt service moratoriums.

“When the borrower applies to revise the terms, either the interest rate or maturity, that is essentially a request to not follow the original contract,” said the businessman, whose project received no funds for nearly two years, before payments resumed in February 2022.

“The way I understand it, from the moment you made that request till the end of the moratorium, you are not allowed to withdraw any money. Because making the request suggests you can’t afford to repay, and if you can’t afford it, why would I continue disbursing?”

The researchers also found that China’s disbursements to DSSI-eligible countries that chose not to ask for the moratorium also dropped significantly, although not as much as those that took part.

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Ethiopia’s experience reflected this heightened risk perception, following its application in January 2021 to the Common Framework – established to extend relief beyond the DSSI.

Eximbank, which was funding 12 transport and power projects in the country, held back nearly US$339 million in disbursements in August 2021. “They said it will create more pressure on our debt stock,” an Ethiopian finance ministry official said, according to a Reuters report.

“The evidence suggests that the slowdown of disbursements from China in DSSI countries and non-DSSI countries alike was not just about the contract clauses, administrative challenges or threats, but relates to a newly cautious stance by Chinese banks,” the CARI study said.

“The DSSI was the first time that China Eximbank faced an across-the-board suspension of debt service. This moment of reckoning sent a chill through the entire system, reflected in the sharp declines in disbursement and similar declines in new loan commitments,” it said.

“The real story is more complicated than the rumours that China Eximbank was privately punishing countries to dissuade them from asking for relief.”