China has emerged as a lender of last resort for developing countries that are having difficulty repaying their Belt and Road Initiative (BRI) debts. According to a new study by researchers at AidData, the World Bank, the Harvard Kennedy School, and the Kiel Institute for the World Economy, Beijing has dramatically expanded emergency rescue lending to sovereign borrowers in financial distress—or outright default.
Analysis of a new dataset demonstrates that, by the end of 2021, China had undertaken 128 rescue loan operations across 22 debtor countries worth $240 billion. These operations include many so-called “rollovers,” in which the same short-term loans are extended again and again to refinance maturing debts.
China’s bilateral bailouts: yearly amounts of cross-border rescue lending
Less than 5 percent of Beijing’s overseas lending portfolio supported borrower countries in distress in 2010, but that figure soared to 60 percent by 2022. China has responded to the rising tide of debt distress by pivoting away from infrastructure project lending and ramping up liquidity support operations. Nearly 80% of its emergency rescue lending was issued between 2016 and 2021.
“China as an International Lender of Last Resort” was written by Sebastian Horn of the World Bank; Brad Parks, Executive Director of AidData and Research Professor at William & Mary; Carmen Reinhart, former World Bank Group Chief Economist and current Professor at the Harvard Kennedy School; and Christoph Trebesch, Director at the Kiel Institute for the World Economy.
The study, and the new emergency lending dataset upon which it is based, have been made available at https://www.aiddata.org/publications/china-as-an-international-lender-of-last-resort and https://www.aiddata.org/data/china-as-an-international-lender-of-last-resort-dataset-version-1-0.
According to the authors, Beijing does not offer bailouts to all BRI borrowers in distress: low-income countries are typically offered a debt restructuring that involves a grace period or final repayment date extension but no new money, while middle-income countries tend to receive new money—via balance of payments (BOP) support—to avoid or delay default.
Chinese banks have an interest in ensuring that their biggest overseas borrowers are sufficiently liquid to continue servicing outstanding BRI project debts. Middle-income countries, which represent 80% or more than $500 billion of China’s total overseas lending, pose major balance sheet risks, so Chinese banks have incentives to keep them afloat via bailouts. Low-income countries, which represent only 20% of China’s total overseas lending, are less important to the health of the Chinese banking sector and rarely get bailed out.
“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, one of the study’s authors. “But if you are going to bail out a borrower that is in default or teetering on the edge of default, it’s important to have a clear understanding of whether you are trying to solve a short-term liquidity problem or a long-term solvency problem.”
The authors of the new study find that China has channeled bailout funds to countries with low foreign exchange reserve levels and weak sovereign credit ratings. To date, it has undertaken rescue lending operations in 22 countries, including Argentina, Belarus, Ecuador, Egypt, Laos, Mongolia, Pakistan, Suriname, Sri Lanka, Turkey, Ukraine, and Venezuela.
The authors also find that borrowing from Beijing in emergency situations 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 insight from the study is that the global swap line network overseen by China’s central bank—the People’s Bank of China’s (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 USD in emergency liquidity support to central banks around the globe.
Central bank borrowings from the PBOC have introduced a new set of surveillance challenges for credit rating agencies and international institutions that monitor the adequacy of the foreign exchange reserve holdings and levels of public debt exposure. Nearly all PBOC swap line borrowings are initially scheduled for repayment within 3-12 months. However, many central banks that borrow from the PBOC see their final repayment dates repeatedly extended.
The authors find that the de facto repayment period of the average PBOC swap line borrowing is 40 months, after accounting for “serial rollovers.” The discrepancy between de jure and de facto maturities has made it easier for governments to not acknowledge PBOC swap line borrowings as sources of public debt exposure, since international reporting rules only require disclosure of public debts with maturities that exceed one year.
The study also highlights another controversial issue: whether central banks may be using (unreported) PBOC swap line drawings to artificially inflate their headline foreign exchange reserve numbers. If a borrower can use PBOC swap line drawings to repay dollar- and euro-denominated debts, then such drawings may be especially useful during a balance of payments or debt crisis. However, if a borrower can only use the RMB liquidity from its PBOC swap line as “window dressing” to bolster gross foreign exchange reserves, then its net reserve position and ability to service dollar- and euro-denominated debt remains unchanged. “Much more research is needed to measure the impacts of China’s rescue loans—in particular, the large swap lines administered by the PBOC,” said Brad Parks, a co-author of the study.
“Beijing has created a new global system for cross-border rescue lending, but it has done so in an opaque and uncoordinated way,” said Parks. “Its strictly bilateral approach has made it more difficult to coordinate the activities of all major emergency lenders, which is concerning because sovereign debt crisis resolution usually requires some level of inter-creditor coordination.”
Data collection sources and methods
There is no centralized source of information or data on PBOC swap line borrowings. The PBOC does not voluntarily disclose country-level data on borrowings under its currency swap agreements with other central banks. Nor do China’s state-owned policy banks, state-owned commercial banks, and state-owned enterprises publish detailed information about their balance of payments lending activities on a country-by-country basis.
To compile data on PBOC swap line borrowings, the research team systematically reviewed the annual reports and financial statements of every central bank that has signed a currency swap agreement with the PBOC and retrieved data on drawdowns and amounts outstanding under these agreements. They also conducted a review of central bank press releases and media reports in international and local newspapers for additional information on swap line usage and borrowing terms and conditions. These primary data collection activities were undertaken in collaboration with the AidData research lab at William & Mary. In a final step, the research team conducted a validation exercise by comparing the micro (transaction-level) data retrieved from primary sources to the macro data published via the World Bank’s Quarterly Debt Statistics, the IMF’s Balance of Payments Statistics, and central banks in recipient countries.
The PBOC is not the only official sector institution in China that is engaged in international rescue lending operations. China’s state-owned policy banks (e.g. China Development Bank, China Eximbank), state-owned commercial banks (e.g., Bank of China, Industrial and Commercial Bank of China), state-owned oil and gas companies (e.g. CNPC, UNIPEC), and the State Administration of Foreign Exchange (SAFE) offer a wider array of rescue lending instruments—including liquidity support facilities, foreign currency term financing facility agreements, deposit loans, commodity prepayment facilities, and so-called “sovereign loans” (主权贷). To systematically track the rescue lending activities of these additional creditors, the research team used AidData’s Tracking Underreported Financial Flows (TUFF) methodology to identify all loans issued by Chinese state-owned creditors between 2000 and 2021 that authorized government borrowing institutions in low-income and middle-income countries to use the proceeds of their loans to (a) repay existing debts, (b) finance general budgetary expenditures, and/or (c) shore up foreign exchange reserves.
AidData: Alex Wooley; +1.757.585.9875; firstname.lastname@example.org
Kiel Institute for the World Economy: Mathias Rauck, +49 431 8814 411, email@example.com