Beijing has developed a system that helps debtor countries avoid default and continue to service their Belt and Road Initiative debts.
Following the more than decade-long boom in overseas lending and investment, the Beijing Belt and Road Initiative (BRI) has come under pressure in recent years, as many beneficiary (debtor) countries, especially developing countries have had financial difficulties.
It is known that Chinese state creditors have responded to this crisis by reducing new loans flows to the Global South while negotiating dozens of sovereign debt restructurings.
What is less known is the growing number of Chinese bailouts to troubled countries over the past 15 years.
- The geography of bilateral bailouts from China
- Chinese bailouts of countries in crisis increased in the last 15 years.
Research conducted by AidData (an international development research laboratory based at William & Mary’s Global Research Institute) shows that the Beijing government has created a new transnational bailout loan system, also taking on the role of international lender of last resort.
In particular, the emerging Chinese system rests on two main pillars; first, balance of payments support through the People’s Bank of China (PBOC) trading network, and second, liquidity support through loans and deposits from Chinese state-owned banks and commercial enterprises.
- China’s bilateral bailouts.
- Annual loan amounts for international bailouts.
As for China’s overseas swap lines, it is well known that the PBOC has, since 2008, built a global market with a network of approximately 40 foreign central banks.
Officially, the main purpose of exchange lines is to promote the use of Renminbi (RMB) for trading and investment settlement purposes.
However, it has been shown that swap lines are mostly drawn in difficult financial and macroeconomic situations by countries with low reserve ratios and weak credit ratings. Out of 17 countries that so far have traded along the PBOC trading lines, only four have done so in normal times. This is consistent with central banker surveys showing that countries stockpile reserves to avoid rollover and default crises.
It is clear that drawdowns from PBOC swap lines bolster gross government reserves, but there is a lack of clarity about how the funds are actually used, especially if they are used to directly pay foreign debts to China.
Therefore, one of the main observations is that China’s network of trading lines has become an important tool for crisis management overseas. In total, $170 billion has been documented to have been extended by the PBOC to central banks of countries in financial or macroeconomic distress.
- China’s international bailouts by country.
- The PBOC lent $170 billion to central banks of countries under financial crisis.
This large amount also results in a high number of rollovers, as the PBOC’s short-term swap loans are often repeatedly extended, resulting in a de facto maturity of more than three years, on average.
To complement the new swap statement data, balance of payments (bridge lending) support from Chinese state-owned banks, state-owned commercial banks and state-owned enterprises to central banks and governments of the euro area economies was also monitored. More than 70 bailout loans to 13 different EMDEs worth $70 billion were traced. These loans are mostly denominated in USD and often explicitly allow borrowers to use the funds to repay existing debts, including those owed to Chinese institutions.
The commodity prepayment facilities through which China’s state-owned oil and gas companies (such as CNPC and UNIPEC) provide large cash advances for commodity imports have also been traced.
In total, more than 20 debtor countries have received $240 billion in Chinese bailout loans since 2000.
The scale of China’s global bailout loan program is also growing rapidly. More than $185 billion has been rolled over in the past five years alone (2016-2021).
China has therefore emerged as a last-resort key lender for a growing number of developing countries. However, its role in the international financial system is less central and far below that of global lenders of last resort.
- Bailout loans go towards countries with high debt with China.
- China emerged as a last-resort lender for a growing number of developing countries.
China’s bailouts are small compared to the IMF’s global loan portfolio and dwarfed by the U.S.’s broad international support for USD liquidity by the Federal Reserve (FED) since 2007, mainly to advanced economies.
Beijing has targeted a limited group of potential recipients, as nearly all of China’s bailout loans have been targeted at low- and middle-income BRI countries with significant debts to the same Chinese banks, at higher interest rates.
- Average interest rates between different last-resort lenders.
- Beijing developed a system that helps indebted countries to avoid default and keep honoring their BRI debt.
In summary, Beijing has developed a "Belt and Road bailout" system that helps debtor countries avoid default and continue to service their BRI debts, at least in the short run.
China’s role as international crisis manager can therefore be compared to that of the United States during previous Latin American debt crises or to a regional financial institution such as the European Stability Mechanism, which helped avert, delay or resolve the defaults of many indebted borrowers, rather than comprehensive financial support with deep pockets.
In conclusion, China’s role as international crisis manager has grown exponentially in recent years after the long boom in foreign loans. However, it is far from rivaling that of the United States or the IMF, which are at the heart of today’s international financial and monetary system.
Nonetheless, historical parallels can be seen with the era in which the United States began its rise as a global financial power, especially in the 1930s and after World War II, when it used the US Ex-Im Bank, the US Exchange Stabilization Fund and the Fed to provide bailout to countries with large liabilities to US banks and exporters.
Over time, these ad hoc activities on the part of the United States have evolved into a proven global crisis management system, a path that perhaps China could follow as well.
Original article published on Money.it Italy 2023-04-22 08:21:01. Original title: La Cina come prestatore internazionale di ultima istanza
