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 wielding broad influence over the global economy. Now a new heavyweight has emerged in providing emergency loans to debt-ridden countries: China.
New data shows that China is providing ever more emergency loans to countries, including Turkey, Argentina and Sri Lanka. China has been helping countries that have either geopolitical significance, like a strategic location, or lots 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 I.M.F., it is catching up fast, providing $240 billion of emergency financing in recent years. China gave $40.5 billion in such loans to distressed countries in 2021, according to a new study by American and European experts who drew on statistics from AidData, a research institute at William and Mary University. China provided $10 billion in 2014 and none in 2010.
By comparison, the I.M.F. lent $68.6 billion to countries in financial distress in 2021 — a pace that has stayed 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 indebted low- and middle-income countries. The U.S. Treasury’s last sizable rescue loan to a middle-income country was a $1.5 billion credit to Uruguay in 2002. The Federal Reserve still provides very short-term financing to other industrialized countries when they need extra dollars for a few days or weeks.
China’s emerging position as a lender of last resort reflects its evolving status as an economic superpower at a time of global weakness. Dozens of countries are struggling to pay their debts, as a slowing economy and rising interest rates push many nations to the brink.
The I.M.F. has also stepped up its own bailouts in recent weeks, in response to Russia’s war in Ukraine and the aftereffects of the pandemic. The I.M.F. reached a preliminary agreement last Tuesday to lend $15.6 billion to Ukraine, a day after its board approved 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 top leader, to develop geopolitical and diplomatic ties through financial and commercial efforts. China has lent $900 billion to 151 lower-income countries around the world, mainly for the construction of highways, bridges, hydroelectric dams and other infrastructure.
American officials have accused China of engaging in “debt trap diplomacy” that is saddling countries with excessive debt for construction projects carried out by Chinese companies often using Chinese engineers, Chinese workers and Chinese equipment. Chinese officials contend that they have built much-needed infrastructure that the West talked about for decades but never completed.
Unlike many lenders to developing countries, state-controlled financial institutions in China largely doled out loans at adjustable rates. The payments due on many of these loans have doubled in the past year, putting many nations in a difficult financial spot. China, for its part, blames the U.S. central bank, the Federal Reserve, for putting pressure on countries by pushing up interest rates.
China’s central bank is extending the separate, emergency loans at fairly high interest rates to Laos, Pakistan, Nigeria, Suriname and other financially distressed countries. China’s state-owned banks face losses if Beijing does not bail out their borrowers but may profit if other countries manage to stay current on their debt payments.
China charges somewhat high interest rates for emergency credit to middle-income countries in distress, typically 5 percent. That compares with 2 percent for loans from the I.M.F., the new study found.
The U.S. Treasury charged almost the same interest rate as China — 4.8 percent — when it made rescue loans to middle-income countries in the 1990s through 2002. The Fed has recently been charging about 1 percent for its very short-term loans to other industrialized countries.
China’s emergency lending has gone almost entirely to middle-income countries that owe a lot of money to state-controlled Chinese 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 in international rescues. The dollar displaced European currencies in the borrowing of many developing countries after the United States played a central role in resolving the Latin American debt crisis in the 1980s.
In lending renminbi, Beijing is furthering its efforts to limit reliance on the U.S. dollar as the go-to global currency. When borrowing renminbi from China’s central bank using so-called swap agreements, the indebted countries then keep the renminbi in their central reserves while spending their dollars to repay foreign debts.
Some countries, like Mongolia, now hold most of their currency reserves in renminbi, after previously holding them mainly in dollars, said Brad Parks, the executive director of AidData and an author of the study.
Such financial moves tether countries more closely to China, since the renminbi is hard to spend except to buy Chinese goods and services. In their meeting last week, Mr. Xi and President Vladimir V. Putin of Russia agreed that more of their countries’ trade and other commercial ties will be connected to the renminbi.
Foreign Minister Qin Gang of China has strongly defended his country’s debt record, noting that China allowed dozens of the world’s poorest countries to delay debt repayments in 2020 and 2021.
“China has suspended more debt service payments than any other Group of 20 member,” he said in a March 2 speech at a gathering of foreign ministers of the large Group of 20 countries.
As China increasingly steps into the role of emergency lender and its own economy slows, it is also reassessing its broader lending program. More recently, it has begun pulling back from infrastructure loans. According to data from China’s Ministry of Commerce, the annual value of completed contracts 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 financial rescue player in the international financial system,” as the cost of Belt and Road Initiative loans becomes clear, said Christoph Trebesch, the research director for international finance and macroeconomics at the Kiel Institute for the World Economy in Germany and an author of the study.
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