A new study reveals that China has become a major emergency rescue lender to BRI projects across Asia, Africa and Europe. It is a risky strategy that could further destabilise global finances.
A study published this week shows China granted US$104bn worth of rescue loans to developing countries between 2019 and the end of 2021, as its Belt and Road Initiative (BRI) falters. In just three years, China has lent as much in bailouts as it did over the last two decades. The study, China as an International Lender of Last Resort, conducted by researchers at AidData, World Bank, Harvard Kennedy School and Kiel Institute for the World Economy, is the first known attempt to capture total Chinese rescue lending on a global basis. Authors of the study have claimed this is a strategy to rescue China’s own banks. It is an extremely risky one and if China gets it wrong, global financial stability could suffer as a result.
As Brad Parks, Executive Director of AidData, pointed out in an interview with Treasury Today, emergency rescue lending is an inherently risky business. If you bail out borrowers that are in default or teetering on the edge of default, the challenge is knowing whether your borrower faces a short-term liquidity problem or a long-term solvency problem.
“When China first got into the emergency rescue lending business, I think it was operating under the optimistic assumption that some of its biggest borrowers were facing short-term liquidity challenges and they needed short-term bridge financing to weather a storm that would soon pass,” said Parks. “But I think Beijing is now learning that some of its biggest Belt and Road borrowers are insolvent and bridge funding alone is not going to solve the problem.”
If you’re dealing with a country that is insolvent, economic policy discipline needs to be restored and debt relief needs to be provided through a coordinated restructuring process with all major lenders. “If you go-it-alone and bail out a financially distressed government without requiring economic policy reform or a coordinated debt rescheduling with all major creditors, then you are basically kicking the can down the road and leaving it to others to address the underlying solvency problem,” said Parks. “You are postponing an inevitable day of reckoning.”
But ‘go-it-alone’ seems to be China’s strategy. It has declined to participate in multilateral debt resolution programmes even though it is a member of the IMF, making it difficult to co-ordinate the activities of all major emergency lenders. Even more concerning is China’s emergence as a major international lender of last resort has led to the global financial architecture becoming less coherent, less institutionalised and less transparent. According to Parks, Beijing has created a new global system for cross-border rescue lending, but it has done so in an opaque and uncoordinated way. China’s loans are far more secretive, with most of its operations and transactions concealed from public view.
At the moment, there is no way to accurately predict the ramifications globally but the long-term financial stability of the BRI is now in question. There have been concerns in the past about China’s own BRI debt levels and China now seems to be over-extended as a lender. “Many borrowers are having difficulty repaying their infrastructure project debts to Beijing,” said Parks. “Back in 2010, only 5% of China’s overseas lending portfolio supported borrowers in financial distress. Today, that figure stands at 60%.”
If there is going to be a mess, the IMF will need to step in to help clear it up, according to Scott Morris, Director of the US Development Policy Initiative, Co-Director of Sustainable Finance, and Senior Fellow at the Centre for Global Development.
“I do think there is a risk the swap lines simply kick the can down the road, buying the lenders and borrowers a bit of time,” he said. “But almost certainly in some of these cases, there will need to be IMF programmes accompanied by significant creditor haircuts to put the countries on a sustainable debt path. With this in mind, it is notable the swap lines are fairly expensive for countries that really need more concessional financing.”
