A new major global player has emerged in the provision of emergency loans to countries in debt: China. Although traditionally America and the I.M.F have been thought of as the lenders to countries in debt-ridden situations, new data reveals that China is providing even more loans to countries that include Argentina, Sri Lanka, and Turkey.
China has been focusing the funding on countries with either geopolitical significance or that are abundant in natural resources. According to experts, drawing on statistics from AidData, a research institute at the College of William & Mary in Virginia, China gave $40.5 billion in emergency financing in 2021. Comparatively, in 2021 the I.M.F lent $68.6 billion, a typical amount for the fund (aside from 2020, where funding was increased due to the pandemic).
China has, in many ways, replaced the U.S. in terms of its provision of emergency loans to indebted low-and-middle income countries.The last significant rescue loan that the U.S. provided was in 2002 when it loaned $1.5 billion credit to Uruguay.
This new role for China, as lender to countries in significant debt, is a reflection of the country’s ever more evolving position as an economic superpower during a time of global downturn. Many countries are struggling to pay their debts due to rising interest rates and a slowing economy.
Recently, the I.M.F has also increased its own bailout loans as a response to the consequences of the pandemic and the conflict in Ukraine. Last week, the fund approved a $3 billion loan to Sri Lanka and reached a preliminary agreement to lend $15.6 billion to war-torn Ukraine.
China’s new role is an evolution of its leader Xi Jinping’s 2013 Belt and Road Initiative, which aimed to strengthen and develop diplomatic ties to other nations both commercially and financially. In the decade since the inception of the initiative, China has lent $900 billion to 151 low-income countries throughout the world. These loans have been mainly for infrastructure projects such as the construction of dams, bridges, and highways.
While American officials have accused China of saddling countries with untenable debt for projects that are carried out by Chinese companies, Chinese officials argue that they are building necessary infrastructure that the West has discussed for decades but never started.
China’s state-controlled financial institutions give out loans at adjustable rates, which is not common practice for lenders who provide loans to developing countries. Because of the current global economic situation, the payments that are due on many of the loans given out by China have doubled in the last year. China blames this situation on the Federal Reserve for hiking up interest rates.
China’s central bank is currently extending the separate, emergency loans to countries such as Suriname, Laos, Pakistan, and other countries in financial distress. If countries stay current on their debt payments, China’s state-owned banks stand to profit but conversely may suffer losses if Bejing does not bail out their borrowers.
China charges high interest rates, typically 5%, to distressed middle-income countries relative to the I.M.F which generally charges 2%, according to the AidData study. Although the U.S. Treasury charged a very similar rate of 4.8% when it doled out rescue loans in the 1990s through to 2002.China’s emergency loans have gone almost wholly to middle-income countries that currently owe a lot of money to state-controlled Chinese banks
More than 90% of China’s 2021 emergency loans were in its own country, the renminbi. By lending in its own currency, China is furthering its efforts to destabilize the global reliance on the U.S. dollar as the typical form of global currency. Brad Parks, executive director of AidData and author of the study, claims that several countries, such as Mongolia, now hold most of their currency reserves in renminbi, even though they previously held them mostly in dollars. This move ties countries ever more closely to China, as the renminbi is difficult to spend other than on Chinese goods and services.
Christoph Trebesch, research director for international finance and macroeconomics at the Kiel Institute for the World Economy in Germany claims:“We are seeing the emergence of another big financial rescue player in the international financial system.”
