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China – In the past decade, China lent massive amounts of cash to governments across Asia, Africa, and Europe.
The loans are believed to be a power play to help the country grow its global influence by helping with infrastructure megaprojects to become one of the globe’s most prominent creditors.
A new report says Beijing became a major emergency lender to the aforementioned countries, most of whom are struggling to repay their debts.
The loans
China spent $240 billion between 2008 and 2021 to bail out 22 countries that are debits in Xi Jinping’s signature Belt and Road infrastructure project.
According to a study from the World Bank, Harvard Kennedy School, Kiel Institute for the World Economy, and AidData, among the countries under Beijing’s debt are Argentina, Kenya, and Pakistan, to name a few.
China’s bailouts are still miniscule compared to the United States or the International Monetary Fund (IMF), making it a prominent name for developing countries.
Meanwhile, the IMF regularly sends emergency loans to countries that are going through a crisis.
Similarities
China’s rise to power as international crisis manager parallels the United States’ strategy for almost a century.
The US offered bailouts for high-debt countries, including Latin America during the 1980 debt crisis.
“We see historical parallels to the era when the US started its rise as a global financial power, especially in the 1930s and after World War 2,” the report said.
However, there are also some differences.
For example, China’s loans are secretive – its operations and transactions are withheld from public view.
The report noted that the loans reflect the current financial system becoming less institutionalized and transparent and becoming more piecemeal.
Additionally, the Chinese central bank didn’t disclose data on loans or currency swap agreements with other foreign central banks.
China’s state-owned banks and companies don’t publish details about their loans to other countries.
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Instead, the research team relied on annual reports and financial statements from countries linked to Chinese banks, news reports, press releases, and other documents.
Brad Parks, a co-author of the study, said:
“Much more research is needed to measure the impacts of China’s rescue loans – in particular, the large swap lines administered by the PBOC (People’s Bank of China).
“Beijing has created a new global system for cross-border rescue lending, but it has done so in an opaque and uncoordinated way.”
The loans
According to the report, less than 5% of China’s overseas lending portfolio helped countries with debt problems in 2010.
Last year, the figures soared to 60%, which showed Beijing ramping up rescue operations and steering away from the infrastructure that characterized its Belt and Road campaign in the early 2010s.
Furthermore, most of the loans were made in the last half decade of the study, between 2016 and 2021.
$170 billion of the $240 billion in total bailout loans came from the PBOC’s swap line network, indicating agreements between central banks and exchange currencies.
The remaining $70 billion was lent by Chinese state-owned banks and enterprises, such as oil and gas companies.
The report said that most countries involved in China’s swap lines were deep in financial crisis, with problems escalating because of the Covid-19 pandemic.
For example, Argentina defaulted twice (2014 and 2020) after struggling with its national debt for decades.
Pakistan also saw its currency drop following the shaky foreign exchange reserves’ status.
In 2021, Sri Lanka borrowed from China, a little ways before its political and economical crisis last year.
Due to the rationing of goods like fuel and medicine, protests erupted.
Despite its charitable offers, China’s bailouts come at a price.
The report says that PBOC requires an interest rate of 5%, which is higher than IMF rescue loans’ 2%.
Additionally, most loans are extended to middle-income countries, which are more important to China’s banking sector.
Meanwhile, low-income countries that generate little to no money are instead offered debt restructuring.
“Beijing is ultimately trying to rescue its own banks,” said study co-author Carmen Reinhart.
“That’s why it has gotten into the risky business of international bailout lending.”
