Spring 2022 — Sovereign Debt Architecture, Suspended
Elya J. Zhang, Looking into the Black Box of Chinese Sovereign Lending

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June 20, 2022

Elya J. Zhang, University of Rochester

Building a broader and nimbler international debt “architecture” requires both agreeable lenders and borrowers. China’s outsized loan portfolio and opaque lending practices pose a challenge: would it turn out to be a major building block or a roadblock in any potential reforms? Considering reform prospects from the history angle, I look for human soft spots on institutional walls. After all, nations do not think; only people who power the state machines do. This leads me to another question: are the Chinese creditors of foreign sovereigns as unitary, centrally controlled, opaque and inaccessible as they are commonly portrayed from afar? This piece considers who these Chinese lenders are, paying special attention to the specific group of “Chinese company creditors.” It includes a brief typology of 92 Chinese lenders, a case study of Chinese company ZTE’s telecom loan to Ethiopia, and a look at the predicament of Chinese company creditors amidst the fading Chinese lending boom.

Nuances among the “State-Owned” Chinese Lenders to Foreign Sovereigns

A recent “Global Chinese Development Finance Dataset,” assembled by AidData, captured over 13,000 Chinese government-financed projects, of which 4,053 are labeled as straightforward loans or export credits.[1] I identified a total of 92 different Chinese lending entities in the latter group and detailed them in Table 2 in the Appendix. Although all 92 creditors in the dataset carry the “Chinese state-owned” label, they include a variety of institutional forms and mandates. I further divide them into five groups: government agencies (Group I), fully state-owned policy banks & funds (Group II), state-controlled commercial banks (Group III), companies under full to partial state ownership (Group IV), and unspecified government institutions and banks (Group V). Those in the first two groups are fully funded by state budgets and function as Chinese government instruments. The eleven Chinese commercial banks in Group III can be viewed as state-controlled for-profit businesses. They are all publicly traded companies, with a majority of their voting shares held by the Chinese Ministry of Finance and Chinese sovereign wealth funds.

[Table 1. List of Chinese Lenders to Foreign Sovereigns, 2000-2017]
Sources: 1) Table 2 in Appendix, compiled by the author; 2) AidData, 2021. Global Chinese Development Finance Dataset, Version 2.0. Retrieved from: https://www.aiddata.org/data/aiddatas-global-chinese-development-finance-dataset-version-2-0

Group IV, Chinese operating companies, has the largest number of lenders (71), but is responsible for financing only 4.9% of China’s total loans and export credits, or $80.4 billion, during the AidData coverage period. Nonetheless, this “underweight” group provides a unique angle into Chinese foreign lending. Collectively these companies employ more than five million people in China, and with their large workforce, most of them also function as the “implementing agencies” of thousands of Chinese infrastructure loans. Known business rivals from the same sector such as Harbin Electric and Shanghai Electric, as well as Gezhouba Group and SinoHydro Corporation, fiercely competed against each other for foreign project financing. State ownership of these Group IV companies varies from 40% to 100%. Over half are also publicly traded companies, 39 listed on one stock exchange and 21 listed on multiple, under the watch of regulators and investors.

Case Study of a Company Creditor: ZTE in Ethiopia

With their ground operations and large workforces, operating companies better reflect the domestic business and human aspects of the China lending story than their government agency and bank peers. Moreover, within this group of companies, those that are “partially” state-owned (42 out of 71) have financed far more foreign loans (four times the lending volume) than their “fully” state-owned peers and encountered more difficulties in debt collection. The following case study on one company with mixed ownership offers a glimpse of the challenges that operating companies faced in the lending boom between 2007 and 2019. I focus on a thirteen-year $1.5 billion U.S. dollar loan involving Chinese telecommunications company ZTE, the state of Ethiopia, and the China Development Bank. Uniquely, the story also had a third-party “witness” in real time—video journalists from Japan’s public television broadcaster NHK.

The Shenzhen-based ZTE Corporation is Huawei’s major rival in the businesses of building carrier networks and terminals. Incorporated in 1993 with infusion of Chinese state capital, ZTE became a publicly traded company with an IPO on the Shenzhen stock exchange in 1997 and another on the Hong Kong exchange in 2004. By 2006, ZTE was a partially state-owned (“semi-private”) company with 41% of shares held by Chinese government-owned enterprises and 56% allocated for private investors.[2]

In late 2006, ZTE beat six global and Chinese telecom giants—Ericsson, Nokia, Siemens, Lucent, Huawei, and China Comservice—and was selected to set up Ethiopia’s very first national mobile phone network. Until then, less than 1% of the Ethiopian population owned a cell phone, and the average rural resident walked over ten miles to the nearest landline phone.[3] ZTE proposed a radical plan to “leap” over the landline phase and build 3,500 cell towers to provide mobile phone coverage for about 64% of Ethiopian territory. Since each cell tower could substitute for 25-30 cable-linked utility poles, wireless signals could arrive at many remote villages sooner than electric power lines.

At the outset, this plan was estimated to cost $1.5 billion, or 10% of Ethiopia’s GDP and fourteen times of ZTE’s gross profits in 2006. The China Development Bank (CDB) stepped in to extend dollar-denominated export credit. Given the option of export buyer’s credit (requiring direct repayment from the Ethiopian government to CDB) and export supplier’s credit (holding ZTE as the main responsible party for repayment), the Ethiopian government requested the latter, and ZTE and CDB agreed. A tri-party relationship was formalized in a series of agreements signed in March 2007, as follows: (1) CDB agreed to advance up to $1.5 billion (USD) to ZTE based on project request orders; (2) ZTE agreed to use these funds to pay for labor and materials in a three-phase cellular rollout by 2010; (3) the Ethiopian government agreed to repay the $1.5 billion in project costs between 2007 and 2019, including interest on billed but unpaid balances at LIBOR plus 1% beginning in 2010; and (4) ZTE signed a similar ten-year debt contract with CDB, premised on timely repayments of U.S. dollars by Ethiopia.[4]

The combined effect of these agreements made ZTE—the only semi-private entity in this project—at once the builder, the borrower, and the lender. Instead of distributing risks among diverse participants in a project financing, this venture concentrated them in one relatively small player, ZTE. Between 2007 and 2010, several thousand employees of ZTE and its subcontractors left China to work in Ethiopia, and over twenty of them died.[5] Thousands of cell towers needed to be built from scratch across a land bigger than France and averaging 1,300 meters above sea level. On many building sites, the rainy season lasted over three months, roads were unpaved, trucks were scarce (therefore donkeys were enlisted), and cranes were nonexistent.

By the time reporters from Japan’s NHK started filming this project in the summer of 2009, two of the three project phases had been completed. In NHK’s footage, ZTE engineers were seen pushing cars on muddy roads in pouring rain, building towers one layer at a time without scaffolds, using ropes and tree branches to lift heavy antenna dishes, climbing the tower without safety rigs, squatting against doorways to quickly finish meals, chain-smoking in a packed control room, and staying in dormitories without running water. These engineers’ average salary was around $1,200 per month, but almost all of them sounded optimistic in the Japanese documentary as they spoke about “the future market” and “the next ten years.”

[Figure 1. Summer 2009, rural Southern Ethiopia: A man made his very first wireless call after engineers from Chinese company ZTE built a cell tower in his village.]
Screenshot from China Power, Episode 2, NHK World-Japan Program (aired November 29, 2009). Retrieved from: https://www2.nhk.or.jp/archives/tv60bin/detail/index.cgi?das_id=D0009010770_00000. Accessed May 19, 2022.

The project was completed as scheduled in March 2010, but the risks of lending to a government in a conflict-ridden, resource-strapped country were also catching up with ZTE. Despite the sixteen-fold jump of mobile phone subscribers in Ethiopia from 2006 (0.86 million) to 2011 (14.1 million), the Ethiopian Communications Authority (ECA) was behind on its payment to ZTE, citing difficulty converting local currency revenues into U.S. dollars.

After receiving only slightly more than $100 million out of the over $450 million owed to it by 2011, ZTE had to dip into its cash reserves to continue servicing the CDB loan. ZTE soon also fell behind on payments to its Chinese subcontractors and suppliers. When journalists from Caixin, a reputable Chinese investigative media outlet, travelled to Ethiopia in late 2011, they met disgruntled subcontractors of ZTE coming all the way from China to ZTE’s Addis Ababa office, demanding money.[6]

As a publicly traded company, ZTE could not hide its financial stress. In the third quarter of 2011, ZTE reported the biggest revenue loss since its 2004 Hong Kong IPO. The loss stayed on its books for the following six quarters, sending the company’s stock tumbling from $22 (HKD) to $9 (HKD). To raise funds and cut costs, ZTE not only sold substantial shares of affiliated companies but also laid off one eighth of its entire workforce by the end of 2012.[7]

At about the same time, ZTE signed a $130 million contract with the Iranian government. This was its fatal strategic mistake, trading long-term legal integrity for short-term profits. Despite knowing of the U.S. government’s economic sanctions against Iran, ZTE secretly transshipped U.S.-origin items to Iran by incorporating them into the company’s own equipment starting in 2011. The U.S. Department of Justice started investigating ZTE after Reuters revealed these transactions in 2012. In March 2017, ZTE pleaded guilty to violating U.S. export control laws and agreed to pay a fine of $890 million. One year later, ZTE was banned from importing U.S. semiconductors, the essential core of any delicate telecom product. Finally, in June 2020, ZTE was designated by the U.S. Federal Communications Commission (FCC) as a “national security threat,” a restriction that bars U.S. firms from using government funds to purchase equipment from ZTE.

While ZTE was essentially barred from the U.S. market, its foothold in Ethiopia was crumbling. In 2013, the Ethiopian government asked to borrow another US$1.6 billion from China in the form of export supplier’s credits to bring its mobile phone coverage up to 85%. Since ZTE could only risk financing $300 million this time, it lost most of its market share to domestic and international competitors offering bigger loans: Huawei secured contracts for seven out of thirteen regional networks by offering a $800 million loan; Ericsson got four networks with its offer of a $500 million loan; leaving only two networks to ZTE.[8]

ZTE’s fortunes kept going downhill from there. In May 2021, the three-year long bidding war for Ethio Telecom’s first foreign license concluded, with a U.S.-U.K.-backed consortium winning over a China-South Africa-backed consortium. Both ZTE and Huawei lost the race for Ethiopia’s crown jewel telecom project, the privatization of state-monopolized Ethio Telecom.

In the telecom industry, infrastructure construction is a very thin-profit-margin business; service operation has higher profit margins. The two represent separate stages of development and sectors of the industry. For a low-income country with challenging topography like Ethiopia, the work of building the first network of cellular towers from scratch was the hardest. ZTE and Huawei built close to seven thousand cell bases in Ethiopia between 2007 and 2017, and rendered mobile signals available in 85% of the country. Afterwards, other foreign telecom companies could use the existing structure and mount their own antennae on these towers. In this case and many others, Chinese firms’ contribution to the first stage through loans and labor was not enough to give them a durable foothold in the later stages.

Chinese Company Creditors at the Sour End of the Chinese Lending Boom

“No feast lasts forever,” goes an old Chinese saying. China’s lending stride started in 2002 after it gained WTO membership, picked up speed in 2007 following the first summit of the Forum on China-Africa Cooperation (FOCAC), accelerated in 2013 with the “Belt and Road Initiative,” peaked in 2016 with the formation of the China-led Asian Infrastructure Investment Bank (AIIB), notably slowed within a year, and declined faster after 2018 amid the Sino-U.S. trade war.[9] Like all international lending booms in history, China’s had run out and “turned sour” by 2022.[10] 

In this new time of debt distress and defaults as COVID-19 challenges persist around the world, Chinese operating company creditors are likely to suffer more visible losses than banking or government agency creditors. Their loans are almost all project-based, and in practice incoming repayments hinge upon the completion and smooth operation of a project—a process that has been disrupted by the pandemic and the Chinese government’s stringent “Zero-Covid” lockdown policy. Companies in construction, manufacturing, mining, and telecom sectors have large workforces to support, and equipment to maintain. Those listed on multiple stock exchanges inside and outside the Chinese mainland face the persistent pressure of quarterly earnings reports.

Debt defaults on Chinese operating companies are more directly linked to layoffs of their workers, and their human and political costs. Back in 2012, ZTE laid off over 11,000 employees after incurring heavy losses on the Ethiopian loan. Other operating company creditors facing losses of their foreign loans would likely deal with them in a similar fashion; suppliers and others who depend on them would also have to cut workers. However, because these operating company loans are much smaller than those extended by Chinese state banks, they do not get the policy attention the banks do.

A Potential Starting Point for Cracking the Opacity of Chinese Lending

I offer the ZTE case study here to show that the “Chinese state-owned” label does not reveal much about the lenders’ likely behavior in distress. Focusing on particular types of lenders, such as operating companies, is more promising.

The latest turn in the ZTE drama amplifies the point.

On March 23, 2022, a U.S. federal judge in Texas ended ZTE’s five-year probation from the 2017 guilty plea after it had served the maximum amount of probation and paid the imposed fines. Within a day, ZTE shares surged 27% in Hong Kong and 10% in Shenzhen from its three-year low point.

Foreign court rulings in favor of Chinese firms may encourage more of them to place their trust in foreign laws and institutions. Because of their thin margins and more limited policy leverage at home, operating companies may be more inclined to pursue dispute resolution abroad. To the extent international norms, foreign laws, or tribunals require disclosure of contracts and transactions, it would take just a few successful cases within the cohort of 71 operating company creditors to start a trend of giving up secrecy for potential economic gains. When these companies step out from under the state umbrella to pursue more conventional debt enforcement, they morph from stereotypical “Chinese state-owned lenders” into “hybrid creditors” with a mix of public and private attributes, akin to other internationally active firms.

Some sovereign debt scholars have been calling for reform on the Common Framework for Debt Treatments beyond the DSSI to embrace “hybrid creditors” as a growing part of the new sovereign debt landscape. “I don’t care if you are official, I don’t care if you are private. Everyone has to contribute to comparable debt relief,” stated Anna Gelpern in a May 2021 U.S. Congressional Hearing. Interestingly, this reminds me of a famous line by Chinese leader Deng Xiaoping, the architect of China’s “Opening Up” economic reforms back in the 1980s, that “Black cat or white cat, if it can catch mice, it’s a good cat.” The more Chinese operating company creditors could find peers and partners outside Chinese borders in addressing their sovereign debt collection and restructuring problems, the more likely they can serve as a starting point for cracking the opacity and negotiating greater transparency and mutual accessibility between China and the international debt architecture. By drawing attention to a Chinese operating company creditor in this roundtable, I hope to point out the potential of a “bottom up” entry point into the black box of China’s international lending front.


[Table 2. Information on Chinese Creditors of Foreign Sovereign Loans]

[1] “Global Chinese Development Finance Dataset, Version 2.0,” AidData (2021), TUFF Project ID: 59129, https://www.aiddata.org/data/aiddatas-global-chinese-development-finance-dataset-version-2-0. BACK TO POST

[2] ZTE Corporation, 2006 Annual Report, https://www.zte.com.cn/china/about/investorrelations/corporate_report/annual_report. BACK TO POST

[3] “Ethiopia: Fixed telephone subscriptions (per 100) people,” World Bank Data, https://data.worldbank.org/indicator/IT.MLT.MAIN.P2. Also see Ethiopia: Mobile cellular subscriptions (per 100 people), World Bank Data, https://data.worldbank.org/indicator/IT.CEL.SETS.P2?locations=ET. BACK TO POST

[4] AidData, “Global Chinese Development Finance Dataset, Version 2.0.” BACK TO POST

[5] Hejuan Zhao, “电信战非洲 (Dianxin zhan feizhou)” [Telecom battles in Africa], Caixin Magazine, Issue 3 (2012), January 16, 2012, https://magazine.caixin.com/2012-01-13/100348416.html. BACK TO POST

[6] Ibid. BACK TO POST

[7] Jiaxia Sun, “巨亏之后中兴以何中兴(Jukui zhihou Zhongxing yihe zhongxing?)” [How shall the ZTE regenerate itself after heavy losses?], The National Business Daily, November 28, 2012, https://it.sohu.com/20121128/n358839530.shtml. BACK TO POST

[8] “Global Chinese Development Finance Dataset,” AidData, TUFF Project ID: 30884 & 69385. BACK TO POST

[9] “Figure 2. Total Chinese debt claims on the rest of the world, 1998-2018,” in Sebastian Horn, Carmen Reinhart and Christoph Trebesch, “China’s Overseas Lending,” KIEL Working Paper, No.2132 (June 2019), https://www.ifw-kiel.de/publications/kiel-working-papers/pre2021/chinas-overseas-lending-12820/. BACK TO POST

[10] Sebastian Horn, Carmen M. Reinhart, and Christoph Trebesch, “Hidden Defaults,” KIEL Working Paper, No.2208 (January 2022), https://www.ifw-kiel.de/publications/kiel-working-papers/2022/hidden-defaults-16954/. BACK TO POST

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