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China as an International Lender of Last Resort
China's role as a global lender for countries in debt distress, revealing the establishment of a new cross-border rescue lending system. A significant point is that the global swap line network, created by the China, has been increasingly employed as a financial rescue mechanism. Over $170 billion in liquidity support has been extended to crisis-stricken countries, including the repeated rollovers of swaps nearing maturity.
These swaps primarily support countries with low liquidity ratios. Chinese state-owned banks and enterprises have provided an additional $70 billion in rescue loans for balance of payments support.
Overall, China's overseas bailouts account for more than 20% of total IMF lending in the past decade, with bailout amounts rapidly increasing. However, China's rescue loans differ from established international lenders in that they are opaque, carry higher interest rates, and predominantly target debtors within the Belt and Road Initiative. The monetary architecture involving China is evolving and is becoming more multipolar, less institutionalized, and less transparent.
In this link, is a breakdown and explanation of the key points of the report:
Comprehensive dataset:
- Detail: The dataset covers China's overseas bailouts from 2000 to 2021, providing a valuable source for understanding China's role in the global financial system.
- Concern: Lack of historical data on Chinese bailout practices may limit the ability of Western countries and international organizations to accurately assess risks and policy implications.
- Suggestion: Encourage transparency and data sharing among countries to improve understanding of global financial dynamics and make informed policy decisions.
Global swap line network:
- Detail: The People's Bank of China has established swap lines with other central banks, facilitating currency exchanges for financial support during crises.
- Concern: China's growing swap line network may undermine the influence of Western countries and institutions like the IMF in global financial markets.
- Suggestion: Western countries and the IMF could engage with China and other emerging lenders to create a more inclusive, cooperative, and coordinated global financial system.
Liquidity support
- Detail: China has provided over $170 billion to countries in crisis through its swap line network, supporting their financial stability.
- Concern: China's liquidity support may lead to increased dependency on Chinese financing, reducing borrowers' reliance on Western countries and the IMF.
- Suggestion: Western countries and the IMF could work on improving their financial support mechanisms and policies to remain competitive and relevant in the global financial landscape.
Targeted countries
- Detail: China's swaps primarily support countries with low liquidity ratios, indicating acute financial stress.
- Concern: China's targeted support may increase these countries' vulnerability to Chinese influence, potentially affecting the geopolitical balance of power.
- Suggestion: Western countries and the IMF should monitor the impact of China's financial support on geopolitics and consider offering alternative support to these countries.
Additional rescue loans
- Detail: Chinese state-owned banks and enterprises have provided $70 billion in rescue loans for balance of payment support, in addition to swap line support.
- Concern: The growing presence of Chinese financial institutions may threaten the dominance of Western financial institutions and the IMF in providing financial assistance.
- Suggestion: Western financial institutions should adapt to the changing financial landscape and consider collaborating with Chinese institutions to promote global financial stability.
Comparison to IMF lending
- Detail: China's overseas bailouts account for more than 20% of total IMF lending over the past decade, and the bailout amounts are growing rapidly.
- Concern: China's rising influence may challenge the IMF's role as the primary provider of financial assistance to countries in crisis.
- Suggestion: The IMF should consider working with China and other emerging lenders to coordinate financial assistance efforts and share best practices.
Differences from established lenders
- Detail: China's rescue loans are less transparent, have higher interest rates, and focus on debtors within the Belt and Road Initiative.
- Concern: These differences may lead to increased debt burdens for borrowers, undermining debt sustainability, and potentially destabilizing the global financial system.
- Suggestion: Western countries and the IMF could encourage China to adopt more transparent and sustainable lending practices, while also offering alternative financing options to borrowers.
Implications
- Detail: The international financial and monetary architecture is becoming more multipolar, less institutionalized, and less transparent due to China's growing role.
- Concern: This shift may create uncertainties and challenges for Western countries and the IMF, as well as increase risks for borrowers.
- Suggestion: Western countries, the IMF, and borrowers should engage in dialogue and cooperation with China to promote a more stable, transparent, and inclusive global financial system.
