China Makes Headway as a Lender of the Last Resort

China Makes Headway as a Lender of the Last Resort

According to a new study from Harvard Kennedy School, the World Bank, Kiel Institute for the World Economy, and the US-based research lab AidData, Beijing has dramatically expanded emergency rescue lending to countries in financial distress—or outright default. Between 2008 and 2021, China provided $240 billion in rescue loan operations to 22 countries with low foreign exchange reserve levels and weak sovereign credit ratings including Argentina, Belarus, Ecuador, Egypt, Laos, Mongolia, Pakistan, Suriname, Sri Lanka, Turkey, Ukraine, and Venezuela. In 2021 alone China allocated $40.5 billion in such funding.

“These operations include many so-called “rollovers,” in which the same short-term loans are extended again and again to refinance maturing debts”, says the research.

By comparison, in 2021 the IMF lent $68.6 billion to financially-distressed countries. In many ways, China has replaced the United States in bailing out indebted low- and middle-income countries. The U.S. Treasury’s last large rescue loan to a middle-income country was a $1.5 billion credit to Uruguay in 2002.

The authors of the research also find that borrowing from Beijing in emergencies is not cheap: whereas a typical rescue loan from the International Monetary Fund (IMF) carries a 2% interest rate, the average interest rate attached to a Chinese rescue loan is 5%.

“Our findings have implications for the global financial and monetary system, which we see becoming more multipolar, less institutionalized, and less transparent,” said Christoph Trebesch, a co-author of the study. “We see clear historical parallels to when the US started its rise as a global financial power, from the 1930s onwards and especially after World War II.”

Another key finding of the study is that the global swap line network overseen by China’s central bank—the People’s Bank of China (PBOC)—has become an increasingly important tool of overseas crisis management. By 2022, the PBOC had used its swap line network to provide $170 billion in emergency liquidity support to central banks around the globe.

To find out more about the findings of the report, follow the link:

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