China’s BRI bailout lending at record levels

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 US$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.

Less than 5% of Beijing’s overseas lending portfolio supported borrower countries in distress in 2010, but that figure soared to 60% 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.

Interest

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 US$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,” Reinhart said.

Not cheap

The authors of the new study find that China has channelled 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. Namibia is not included in this group, according to the study’s data.

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 institutionalised, 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.”

Central bank

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 US$170 billion 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.

Inflate

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.” - Aiddata.org