After forgoing huge loans, China is now bailing out countries

Since the end of World War II, the International Monetary Fund and the United States have been the world’s lenders of last resort, each with a broad influence on the global economy. Now a new heavyweight has emerged in providing emergency loans to heavily indebted countries: China.

New data shows that China is extending more emergency loans to countries, including Turkey, Argentina and Sri Lanka. China helps countries that have geopolitical importance, such as a strategic location, or a lot of natural resources. Many of them have been borrowing heavily from Beijing for years to pay for infrastructure or other projects.

While China is not yet equal to the International Monetary Fund, it is quickly catching up, providing $240 billion in emergency financing in recent years. China provided $40.5 billion in such loans to distressed countries in 2021, according to a new study by US and European experts that drew on statistics from AidDataChina, a research institute at William & Mary, a university in Williamsburg, Virginia, gave $10 billion in 2014 and nothing in 2010.

By comparison, the International Monetary Fund lent $68.6 billion to cash-strapped countries in 2021 — a pace that has held fairly steady in recent years except for a jump in 2020, at the start of the pandemic.

In many ways, China has replaced the United States in bailing out heavily indebted low- and middle-income countries. The last major US Treasury bailout for a middle-income country was a $1.5 billion loan to Uruguay in 2002. The Fed still provides very short-term financing to other industrialized countries when they need extra dollars for a few days or weeks.

China’s emerging status as a lender of last resort reflects its evolving status as an economic superpower in a time of global vulnerability. Dozens of countries are struggling to pay off their debts, as a slowing economy and rising interest rates push many countries to the brink.

The International Monetary Fund has also stepped up its bailouts in recent weeks, in response to Russia’s war in Ukraine and the effects of the pandemic. The International Monetary Fund reached a tentative agreement last Tuesday to Lend 15.6 billion dollars to Ukraineafter the approval of its Board of Directors A $3 billion loan to Sri Lanka.

Beijing’s new role is also an outgrowth of the decade-old Belt and Road Initiative, the signature project of Xi Jinping, China’s supreme leader, to develop geopolitical and diplomatic ties through financial and trade efforts. China has provided $900 billion to 151 low-income countries around the world, mainly to build highways, bridges, hydroelectric dams and other infrastructure.

US officials have accused China of engaging in “debt-trap diplomacy” that saddles countries with excessive debt for construction projects that Chinese companies often carry out using Chinese engineers, workers and equipment. Chinese officials maintain that they have built much-needed infrastructure that the West has talked about for decades but never completed.

Unlike many lenders to developing countries, China’s state-controlled financial institutions offer loans at adjustable rates. Payments on many of these loans have doubled in the past year, putting many countries in a difficult financial situation. For its part, China blames the US central bank, the Federal Reserve, for putting pressure on countries by raising interest rates.

China’s central bank extends separate and emergency loans at fairly high interest rates to Laos, Pakistan, Nigeria, Suriname and other cash-strapped countries. China’s state-owned banks face losses if Beijing does not bail out borrowers but may gain if other countries can continue to make payments on their debts.

China charges fairly high interest rates on emergency credit for middle-income countries in distress, usually 5 percent. The new study found that compares to 2 percent for loans from the International Monetary Fund.

The US Treasury charged roughly the same interest rate as China — 4.8 percent — when it provided bailout loans to middle-income countries in the 1990s through 2002. Countries.

China’s emergency loans have gone almost entirely to middle-income countries that owe much money to Chinese state-controlled banks. More than 90 percent of China’s emergency loans in 2021 were in its own currency, the renminbi.

It is not unusual for a country to use its own currency for international bailouts. The dollar replaced European currencies in borrowing by many developing countries after the United States played a central role in resolving the Latin American debt crisis in the 1980s.

In lending the renminbi, Beijing is stepping up its efforts to reduce dependence on the US dollar as the world’s currency of choice. When borrowing renminbi from China’s central bank using so-called swap agreements, debtor countries hold renminbi in their central reserves while spending their dollars to pay off their external debts.

Some countries, like Mongolia, now hold much of their currency reserves in renminbi, having previously held them in dollars, said Brad Parks, executive director of AidData and author of the study.

Such financial movements link countries closely to China, where it is difficult to spend renminbi except for the purchase of Chinese goods and services. In their meeting last week, Mr. Xi and Russian President Vladimir Putin agreed that more trade and other trade relations between their two countries would be tied to the renminbi.

Chinese Foreign Minister Chen Gang vigorously defended his country’s debt record, noting that China allowed dozens of the world’s poorest countries to defer debt payments in 2020 and 2021.

“China has suspended debt service payments more than any other G20 member,” he said in a March 2 speech at a meeting of the major G-20 foreign ministers.

As China increasingly steps into the emergency lender role and its economy slows, it is also reevaluating its broader lending programme. Recently, I started falling behind on infrastructure loans. According to data from the Chinese Ministry of Commerce, the annual value of contracts completed in Belt and Road Initiative countries fell to $85 billion last year, from a peak of $98 billion in 2019.

“We are seeing the emergence of another big bailout player in the international financial system,” Christoph Trebisch, Director of International Financial Research and Macroeconomics at the Keele Institute, told the world as the cost of BRI loans became clear. Economics in Germany and author of the study.

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