China provides more than $30 billion in emergency loans

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In recent years, China has handed out tens of billions of dollars in secret “emergency loans” to countries threatened by financial crises, making Beijing a formidable competitor to the Western-led IMF.

The bailouts represent a pivot from the huge infrastructure loans China has provided over nearly a decade under its $838 billion Belt and Road Initiative, a program that has seen it eclipse the World Bank. as the largest public works funder in the world.

Three of the biggest recipients of China’s bailout loans have been Pakistan, Sri Lanka and Argentina, which have together received up to $32.83 billion since 2017, according to data compiled by AidData, a lab research from William & Mary, a university in the United States. .

Other countries have received bailout loans from Chinese state institutions, including Kenya, Venezuela, Ecuador, Angola, Laos, Suriname, Belarus, Egypt, Mongolia and Ukraine, according to AidData, which did not provide details for those countries.

This credit aims to allow countries to continue to repay their external debt and to continue to buy imports, by warding off the difficulties of the balance of payments (BoP) which can turn into real storms such as the Asian crisis of 1997 and the Latin American crisis of the 1980s. The austere prescriptions of the IMF in the aftermath of the Asian crisis were deeply unpopular, reinforcing a backlash against it that persists to this day.

Incomplete train tracks for the standard gauge railway line lie on the ground near Duka Moja, Kenya © Luis Tato/Bloomberg

Unlike the IMF, which announces details of its credit lines, debt relief and restructuring programs to debtor countries, China operates largely in secret. Chinese financial institutions publish few details of the credits they issue and Beijing does not base its loans on debt restructuring or economic reforms in recipient countries, analysts said. In most cases, the goal of China’s emergency loans is to prevent defaults on infrastructure loans issued under the Belt and Road Initiative, officials said. analysts.

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

The AidData Research Lab maintains the world’s most comprehensive database of China’s global financing activities, primarily by compiling data from countries that receive Chinese loans. The dataset captures thousands of loans from more than 300 Chinese government institutions and public entities in 165 low- and middle-income countries.

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

“When Beijing acts as an alternative lender of last resort and bails out a troubled sovereign without demanding economic policy discipline or pursuing coordinated debt rescheduling with major creditors, it is kicking the box and leaving it to d It’s up to others to fix the underlying solvency issue,” Parks said.

A study of individual loans extended by Chinese financial institutions since 2017 to Pakistan, a key participant in the Belt and Road Initiative, shows drip support in the form of loans from public banks and SAFE , the agency that controls Beijing’s $3 billion in foreign exchange reserves.

The terms of these loans are far from concessional, often relying on a margin of around 3% above benchmark funding costs. In addition to these loans, the People’s Bank of China, the central bank, has a currency swap agreement with its Pakistani counterpart that allows Islamabad to draw funds when it needs them, according to AidData records. The PBoC declined to comment.

Commentators have said China’s bailout loans risk prolonging and exacerbating debt overhangs and the crises that often ensue in debtor countries. “I see them as a major obstacle to resolving the crisis,” said Gabriel Sterne, head of emerging macroeconomics at Oxford Economics and former senior economist at the IMF.

As Sri Lanka’s current financial crisis demonstrates, support from Beijing is sometimes insufficient, analysts said. “The suspicion is that countries are seeking the loan to avoid going to the IMF, which requires painful reform,” Sterne added. “There may be circumstances in which the redemption wager works, but usually – as in the case of Sri Lanka – it 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 makes grants conditional on democratic governance and economic transparency, said China’s loans were made in pursuit of long term in competition with rival powers.

“It’s not about one loan or one country in particular. . . They want to have the ear of governments where the raw materials are, or the big markets, or the strategic ports, or where there is access to shipping lanes,” he said. “It’s a way to narrow the strategic options for the United States and for the West, in terms of global access and influence.”