Over the past decade, China has been actively lending huge sums of money to governments across Asia, Africa, and Europe as part of its Belt and Road infrastructure megaproject. This move has enabled China to increase its global influence and emerge as one of the world’s largest creditors. However, a recent study has revealed that Beijing has also become a significant emergency rescue lender to many of these countries, which are struggling to repay their debts.
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According to the study published by researchers from the World Bank, Harvard Kennedy School, Kiel Institute for the World Economy, and the US-based research lab AidData, China has spent $240 billion between 2008 and 2021 bailing out 22 countries. These countries are almost exclusively Belt and Road project debtors, including Turkey, Kenya, Argentina, and Pakistan.
Loan amounts of China given to other countries
China’s overseas lending portfolio has undergone a significant shift in recent years, with more than 60% of its portfolio supporting countries in debt distress, according to a report by AidData. This figure represents a significant increase from less than 5% in 2010.
The report notes that China has ramped up its rescue operations and moved away from the infrastructure investments that characterised its Belt and Road campaign in the early 2010s. Most of the loans were made in the last five years of the study, from 2016 to 2021.
Of the total bailout loans amounting to $240 billion, $170 billion came from the People’s Bank of China’s (PBOC) swap line network, while the remaining $70 billion was lent by Chinese state-owned banks and enterprises, including oil and gas companies. The report found that most of the countries drawing from China’s swap lines were deep in financial crisis, with problems exacerbated by the COVID-19 pandemic.
However, the bailouts come at a cost, with the PBOC requiring an interest rate of 5%, compared to 2% for IMF rescue loans. The report also notes that most of the loans are extended to middle-income countries considered more important to China’s banking sector, while low-income countries receive little to no new money and are offered debt restructuring instead.
“Beijing is ultimately trying to rescue its own banks. That’s why it has gotten into the risky business of international bailout lending,” said Carmen Reinhart, a co-author of the study, in a blog post by AidData.
China maintains more secrecy in loan disbursements
A recent study conducted by researchers from AidData, a development research lab at the College of William & Mary in Virginia, has revealed that China’s lending practices to other countries are shrouded in secrecy. The study notes that China’s loans are far more secretive compared to those offered by other countries, with most of its operations and transactions concealed from public view.
According to the research team, China’s central bank does not disclose any data on loans or currency swap agreements with other foreign central banks. Additionally, China’s state-owned banks and enterprises do not publish detailed information about their lending to other countries. As a result, the research team had to rely on annual reports and financial statements of other countries that have agreements with Chinese banks, news reports, press releases, and other documents to compile their dataset.
The study highlights the lack of transparency and coordination in China’s lending practices, which reflect the world’s financial system becoming “less institutionalised, less transparent, and more piecemeal.” The researchers note that much more research is needed to measure the impacts of China’s rescue loans, especially the large swap lines administered by the People’s Bank of China (PBOC).
Brad Parks, a co-author of the study, said in a blog post by AidData that “Beijing has created a new global system for cross-border rescue lending, but it has done so in an opaque and uncoordinated way.” The lack of transparency in China’s lending practices has raised concerns among experts about the potential risks and consequences of such lending on the global financial system.
Significance of China’s loan
Although China’s bailouts are still smaller than those provided by the United States or the International Monetary Fund (IMF), they have made China a crucial player in the economic well-being of many developing countries. The study highlights that China’s emergency loans are significant, as they are not subject to the same conditionalities and reform requirements as those provided by traditional lenders such as the IMF.
Moreover, China’s approach has also been perceived positively in many debtor countries, as it offers an alternative to the Western-dominated global financial system.
The report draws parallels between Beijing’s approach to crisis management and that of the US, which has been providing bailouts to high-debt countries for almost a century. During the 1980s debt crisis, the US offered bailouts to several Latin American countries. Moreover, China’s rise as an international crisis manager resembles the period when the US established itself as a global financial power, particularly in the 1930s and after World War 2.
Despite similarities in approach, there are differences between China and the US’s strategies, according to a report. As China continues to grow as an international crisis manager, it will be interesting to see how its approach evolves and how it may differ from that of the US.