March 24, 2023

In recent years, China has provided tens of billions of dollars in secret “emergency loans” to countries at risk of a financial crisis, making Beijing a formidable competitor to the western-led IMF.

The bailouts represent a linchpin of the massive infrastructure loans China has provided over nearly a decade as part of its $838 billion Belt and Road Initiative, a program that has seen it eclipse the World Bank as the world’s largest public works financier.

Three of the largest recipients of Chinese bailout loans are Pakistan, Sri Lanka and Argentina, which together have received a staggering $32.83 billion since 2017, according to data collected by AidData, a research lab at William & Mary, a university in the US. .

Other countries that received rescue loans from Chinese state agencies were Kenya, Venezuela, Ecuador, Angola, Laos, Suriname, Belarus, Egypt, Mongolia and Ukraine, according to AidData, which did not provide details for these countries.

Such credit is intended to enable countries to maintain payments on foreign debts and continue to buy imports, to avert balance of payments problems that can develop into violent storms such as the 1997 Asian crisis and the Latin American crisis. of the 1980s. The strict regulations of the IMF in the wake of the Asian crisis were highly unpopular and reinforced the opposition to the IMF that continues to this day.

Incomplete tracks for the Standard Gauge Railway line lay on the ground near Duka Moja, Kenya on Thursday, May 9, 2019
Incomplete tracks for the Standard Gauge Railway line lay on the ground at Duka Moja, Kenya © Luis Tato/Bloomberg

Unlike the IMF, which discloses the details of its credit lines, debt relief and restructuring programs to debtor countries, China operates largely in secrecy. China’s financial institutions are releasing few details about the credit it is extending, and Beijing is not basing its lending on debt restructuring or economic reforms in recipient countries, analysts say. In most cases, the purpose of China’s emergency loans is to prevent defaults on infrastructure loans provided under the Belt and Road Initiative, analysts say.

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“Beijing has tried to keep these countries afloat by providing emergency loans after emergency loans without asking borrowers to restore economic policy discipline or pursue debt relief through a coordinated restructuring process with all major creditors,” said Bradley Parks, executive director of AidData. . .

The AidData research lab maintains the world’s most comprehensive database on China’s global financing activities, primarily by collecting data from countries receiving Chinese loans. The dataset includes thousands of loans from more than 300 Chinese government agencies and state-owned enterprises in 165 low- and middle-income countries.

Parks added that China’s approach often “postpones the day of reckoning”.

“When Beijing acts as an alternative lender of last resort and rescues an ailing sovereign without demanding economic policy discipline or pursuing coordinated debt restructuring with major creditors, it effectively kicks the ass and leaves it to others to solve the problems.” to solve. underlying solvency problem,” said Parks.

An investigation into the individual loans made since 2017 by Chinese financial institutions to Pakistan, a key participant in the Belt and Road Initiative, shows a flood of support in the form of loans from state-owned banks and SAFE, the agency that stocks Beijing’s stock. foreign exchange reserves of $3 trillion.

The terms for such loans are far from favorable, often building in a margin of about 3 percent above the benchmark’s borrowing cost. In addition to these loans, the People’s Bank of China, the central bank, has a currency swap agreement with its Pakistani counterpart, allowing Islamabad to withdraw money when it needs it, AidData records show. The PBoC has declined to comment.

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Commentators said China’s bailouts risked prolonging and exacerbating the debt burden and the crises that often follow in debtor countries. “I see this as a major barrier to solving crises,” said Gabriel Sterne, head of EM macro at Oxford Economics and former senior economist at the IMF.

As Sri Lanka’s current financial collapse shows, Beijing’s support is sometimes insufficient, analysts say. “It is suspected that countries are seeking the loan to avoid going to the IMF, which is demanding painful reforms,” ​​Sterne added. “There may be circumstances where the gamble for redemption works, but in general — as in the case of Sri Lanka — it only makes the adjustment more painful when it actually happens.”

Sean Cairncross, former chief executive of the Millennium Challenge Corporation, a US government foreign aid agency that provides grants on the condition of democratic governance and economic transparency, said China’s loans were made to pursue long-term goals in competition with rival powers.

“This is not about a particular loan or a particular country. . . They want to hear from governments where raw materials are located, or large markets, or strategic ports, or where there is access to shipping lanes,” he said. “It’s a way to narrow the strategic options for the US and for the West, in terms of access and influence globally.”