# China's Overseas Bailouts!

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 30 Mar 2023, 17 min.

Audio: https://anchor.fm/s/fc0914e0/podcast/play/92761856/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2024-9-8%2F387759621-44100-1-1e2362534b27f2b9.mp3

Send us a textChina has significantly expanded its bailout lending as its Belt and Road Initiative blows up following a series of debt write-offs, scandal-ridden projects and allegations of corruption according to a new paper "China as an International Lender of Last Resort" by Sebastian Horn of the World Bank; Brad Parks, a research professor at William & Mary University; Harvard’s Carmen Reinhart; and Christoph Trebesch, a director at the Kiel Institute. The researchers found 128 bailou...

## Transcript

[0:00] hello and welcome, you are listening to Patrick boil on
[0:03] finance a podcast, exploring ideas, from quantitative Finance
[0:07] examining events occurring in markets right now and financial
[0:11] history to see what lessons can be taken away including
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[0:22] dot-org, China's belt and Road initiative is The largest
[0:30] transnational infrastructure program ever undertaken by a
[0:34] single country. It was launched in 2013 and is
[0:38] President geez signature policy. Its goal was to build our Global
[0:43] infrastructure and boost China's influence around the world.
[0:47] Most of the countries that signed up to borrow under the
[0:50] program were developing nations with weak credit ratings over
[0:55] the last decade China's, cumulative engagement in, the
[0:58] project comes to know. 132 billion dollars which is made up
[1:03] of five hundred and sixty 1 billion dollars in construction
[1:06] contracts and 371 billion dollars in investment.
[1:11] A lot of important infrastructure projects were
[1:14] built around the world under the belt and Road initiative a
[1:18] railway line from the Ethiopian Capital Addis Ababa to the port
[1:22] of Djibouti has cut the journey time from around three days to
[1:27] 12 hours, a huge Improvement. Movement hydropower dams built
[1:32] in. Uganda have provided electricity
[1:35] and been opened up as tourist destinations roads and pipelines
[1:39] built across Central, Asia and Southeast.
[1:42] Asia have driven growth in those parts of the world.
[1:45] To unfortunately there have also been quite a few wasteful
[1:49] projects like huge skyscrapers and sports stadiums in
[1:53] developing countries that run up debt and do little to benefit
[1:58] the population. Allegations of corruption have
[2:02] dogged, many of the high-profile belt and Road initiative
[2:05] projects, to the core project was and is hugely ambitious
[2:10] affecting around 65 percent of the world's population covering
[2:15] 1/3 of the world's GDP and about a quarter of all of the goods
[2:20] and services that get moved around the world.
[2:23] Now a decade into the project, many of the Emerging Market
[2:27] countries who borrowed from China have found Themselves in
[2:30] financial distress and not just because of the size of the
[2:34] loans, they've taken the pandemic and then food and
[2:37] energy inflation driven by the war in Ukraine.
[2:40] Have put many of the debtor countries under extreme stress
[2:44] over the last few years, Rising Global interest rates and a
[2:48] strong US dollar have raised additional concerns about the
[2:52] ability of developing countries to repay their creditors.
[2:56] It's well-known that China reduced its Landing in Response
[3:00] to these problems. I've discussed that in Prior
[3:03] videos, net transfers from Chinese lenders, to developing
[3:07] country. Recipients turned - in 2019
[3:11] after peaking in 2016. What this means is the Chinese
[3:16] policy banks have flipped from being a source of capital for
[3:19] emerging market growth into their new role of global debt
[3:24] collector. What's been less?
[3:26] Well, understood until this week, when a new paper came out,
[3:29] Out is the large number of bailouts to China.
[3:32] Has been extending to countries and distress over the last 15
[3:36] years or so the paper by horn Parks Reinhard and tribush shows
[3:42] how the Chinese government has created a new system of
[3:46] International Rescue lending, which is up until now not been
[3:51] documented or studied. This paper has gotten a lot of
[3:55] attention from people in the Emerging Market space, as it's
[3:58] the first real. We've had at how China is
[4:02] dealing with distressed borrowers.
[4:04] This matters. As there are a lot of distressed
[4:07] borrowers out there who owe money to China for the huge
[4:10] infrastructure projects that have been built in the last
[4:13] decade, the new paper catalogs. All of the bilateral rescue
[4:18] Landing, the different Chinese State entities have done, trying
[4:22] to avoid any double counting. The authors acknowledge that
[4:26] this is a difficult and imprecise task as as the Chinese
[4:30] institutions in question, don't report their exposure to key
[4:34] countries. So the numbers had to be pieced
[4:37] together, specifically the author's, studied the two main
[4:40] pillars of China's emerging system of cross-border bailouts,
[4:45] first balance of payment support, via the People's Bank
[4:48] of China swap line Network and second liquidity support via
[4:53] loans and deposits from Chinese state-owned Banks and commodity
[4:58] Enterprises. Collected their data from the
[5:01] annual reports and financial statements of central banks in
[5:05] borrowing countries. The paper shows the China,
[5:09] granted 104 billion dollars worth of rescue loans to
[5:13] developing countries between 2019 and the end of 2021 this
[5:18] figure is almost as large as China's, entire bailout Landing
[5:22] over the prior 20 years between 2000 and the end of 2021.
[5:28] China undertook a 128 bail out operations in 22, debtor
[5:33] countries worth a total of 240 billion dollars.
[5:38] These bailouts are a huge change of direction for China whose
[5:42] prior infrastructure lending made it.
[5:45] The world's biggest financier of Public Works eclipsing the World
[5:49] Bank, three of the largest recipients of China's rescue
[5:54] Landing have been Pakistan, Sri Lanka and Argentina, other
[5:58] countries, receiving Rescue Landing included, Kenya
[6:02] Venezuela Ecuador. Angola Laos Suriname Belarus,
[6:07] Egypt Mongolia and Ukraine China's approach to bail out.
[6:12] Landing is quite different to other countries.
[6:15] Typically, when a country struggling to pay its external
[6:18] debt, it turns to the Paris Club for dead relief.
[6:22] The Paris Club is an informal group of creditor Nations that
[6:26] me to eight times a year to find solutions to Payment problems
[6:30] faced by debtor Nations. A debtor countries invited to a
[6:34] negotiation meeting with its Paris Club creditors when it has
[6:39] concluded an appropriate program with the IMF, that demonstrates
[6:43] that the country is not able to meet its external debt.
[6:46] Obligations and doesn't eat a new payment arrangement with its
[6:51] external creditors. The powers club members are
[6:54] mostly high-income countries but it also includes countries like
[6:58] Russia and Brazil. Other non-member countries can
[7:02] and do participate in the negotiations to and the Paris
[7:06] Club has successfully concluded. Hundreds of restructuring deals
[7:10] over the last 70 years, the 22 permanent members of the powers
[7:15] Club participate in the negotiations.
[7:18] If they have claims towards the invited debtor Nation,
[7:21] otherwise, they act as observers the most important point though,
[7:26] is that the creditors all agree to accept the In terms of a debt
[7:31] restructuring, which usually involves some kind of debt
[7:34] relief, China has not joined the Paris Club, and instead, aims to
[7:39] negotiate its own deals, privately with the countries,
[7:42] having trouble meeting their Debt Service obligations.
[7:45] The difficulty that this causes is that if China demands to be
[7:50] paid back in full, the other lenders are obviously than less
[7:54] willing to offer debt relief or cut the country and new low
[7:58] interest loan. No.
[7:59] That the money they provide will just go straight back out to
[8:03] China rather than be used to improve the situation in the
[8:07] debtor Nation. China's historic unwillingness
[8:10] to take a right down along with the other nations makes an IMF.
[8:15] LED rescue considerably more difficult to arrange this lack
[8:20] of coordination amongst creditors over the last few
[8:23] years, has been blamed for prolonging the crisis in
[8:26] countries like Sri Lanka and Zambia.
[8:29] Sri Lanka's president called on China last week to reach a
[8:33] compromise with other lenders on debt.
[8:36] Restructuring after the IMF approved, a 3 billion dollar for
[8:41] year lending program for the country Ghana Pakistan, and
[8:45] other troubled debtors that o large amounts to China are
[8:49] carefully watching what happens in the case of Sri Lanka and
[8:53] Zambia as it will give them a good idea of what their debt
[8:57] negotiations will eventually. Look like Beijing has so far.
[9:02] Tried to keep struggling debtor Nations afloat.
[9:06] By providing emergency loan after emergency loan without
[9:10] asking the powers, to improve their Economic Policy,
[9:13] discipline, or pursue debt relief through a coordinated
[9:17] restructuring process with all major creditors.
[9:21] The paper points out that there are notable differences between
[9:25] IMF programs and the Chinese bailouts that they've analyzed
[9:29] the Biggest difference is the Chinese.
[9:31] Bailout money is not cheap. A typical rescue loan from the
[9:35] IMF carries, a two percent interest rate.
[9:38] According to the study and the average interest rate attached
[9:42] to a Chinese rescue loan is 5%. The study also shows that
[9:47] Beijing does not offer bailouts to all belt and Road borrowers
[9:51] in distress big, recipients of belt and Road initiative
[9:55] financing, who represent a significant balance sheet risk
[9:59] for These banks are more likely to receive emergency aid,
[10:04] according to Carmen Reinhart. One of the authors Beijing is
[10:09] ultimately just trying to rescue its own Banks.
[10:12] And that's why it has gotten into the risky business of
[10:15] international bailout lending, China's lending.
[10:19] According to the paper, comes in two forms.
[10:22] The first is through a swap line, facility, where renamed be
[10:26] is dispersed by the Chinese Central Bank in In return for
[10:30] domestic currency about 170 billion dollars was dispersed in
[10:35] this manner. The second is through direct
[10:38] balance of payment support, which 70 billion dollars having
[10:42] been pledged in this manner, mostly from state-owned Chinese
[10:46] Banks, the scale of these bailout highlight, some of the
[10:50] problems with the overall belt and Road initiative, where
[10:54] Chinese lenders lent a lot of money to countries that already
[10:58] had severe. Economic problems and didn't
[11:01] worry about how the money was being spent developing country
[11:06] borrowing money is by no means a bad thing.
[11:09] As long as the money is spent productively many Emerging
[11:13] Market countries, have an infrastructure deficit and when
[11:17] they are able to borrow, they can spend the money on things
[11:20] like power plants, water supply ports, and transportation
[11:24] infrastructure. If doing this brings about an
[11:27] increase in worker productivity. T.
[11:30] That's greater than the cost of the debt, it's a win.
[11:33] But the return on these projects, in terms of economic
[11:36] growth has to be greater than the cost of the project
[11:40] otherwise it simply doesn't make sense.
[11:43] If money is borrowed and spent unproductively the dead ends up
[11:47] holding back economic growth. I mentioned a lot of good
[11:51] projects earlier but there are lots of bad projects to like the
[11:55] billion-dollar Road to Nowhere in Montenegro the pointless.
[11:59] This Tower in Sri Lanka, the Dam built next to an active volcano
[12:03] in Ecuador, by Chinese contractors that was found to be
[12:07] riddled with cracks, the planned monorails the abandoned ports
[12:12] and airports the money lost her corrupt politicians.
[12:16] All of this is just wasted spending that the countries now,
[12:20] o back and can't pay. There's an argument that the
[12:24] lender should have been more careful about the projects, they
[12:27] lent money to support the Chinese government pushed back
[12:31] on Tuesday against some of the criticism of their foreign
[12:34] lending practices, a Chinese foreign Ministry.
[12:37] Spokesperson mounting told the reporters to China has entered
[12:42] financing agreement with developing countries based on
[12:46] the principles of openness and transparency.
[12:49] She added the China has never compelled countries to take its
[12:54] loans or ever attached, political strings to such
[12:57] agreement. The Argues that the rescue loans
[13:02] are mostly just a bailout for China's Banks, which of
[13:05] underpinned much of the belt and Road initiative landing and have
[13:09] taken painful hits. As a result, the altars put
[13:13] forth, the China has launched a new global system for
[13:17] cross-border rescue lending. Two countries in debt distress,
[13:21] which is made the Global Financial system more opaque and
[13:25] fractured than before, one of the most interesting parts of
[13:29] the the paper is about how swap lines are increasingly being
[13:33] used in situations of Financial and macro economic distress, to
[13:38] help bolster growth, Reserve Holdings and address short-term.
[13:43] Liquidity needs the pboc began setting up swap lines in 2008
[13:49] would almost 40 overseas central banks.
[13:53] Their official purpose was to promote the use of the rename be
[13:57] for trade and investment and the Lines.
[14:00] Once in place, mostly went on used the paper points out that
[14:04] the swap lines were dormant for years and then mostly drawn in
[14:08] situations of Financial and macro economic distress by
[14:12] countries with low Reserve, ratios and weak, credit ratings
[14:17] out of the 17 countries that use their swap line so far only for
[14:22] did. So, in normal times, with no
[14:25] apparent signs of distress, the paper, argues the China's op
[14:29] line network has become an increasingly important tool of
[14:34] overseas crisis management. The authors say that, it's clear
[14:38] that the pboc, swap line, drawings, served the purpose of
[14:42] window dressing. But there's a lack of clarity
[14:45] about how the funds are actually being used especially if they're
[14:50] being used to directly serve as external debts to China.
[14:53] Come and do this paper, is the first.
[14:56] Look at the new system of bailouts on the belt.
[14:59] And Old developed by China that helps recipient countries to
[15:03] avoid default and continue servicing their belt and Road
[15:07] initiative debt, at least in the short, run the paper argues that
[15:12] the way the bailouts are structured using swap lines,
[15:15] complicates the challenge of monitoring debt vulnerabilities
[15:19] in the developing world. The reason for this is that the
[15:23] swap line borrowings are technically short-term
[15:26] repayment, obligations that fall outside.
[15:29] Add most International debt disclosure requirements since
[15:33] they've maturities of three to 12 months, but because the
[15:37] borrower's are allowed to roll these swaps over.
[15:40] Most of these loans are not paid back for an average of three and
[15:45] a half years. And thus, the authors argue that
[15:48] they should be reported as external public debt,
[15:51] obligations the paper, which I've linked to in the video
[15:54] description shows how much China has grown as an international.
[15:59] Manager in recent years its position is still far from
[16:03] rivaling that of the United States or the IMF and the
[16:07] effectiveness of its rescue lending operations are not yet.
[16:11] Well, understood China has shown that a major creditor country
[16:16] can create a large system of cross-border.
[16:19] Rescue lending to nearly two dozen recipient countries while
[16:24] keeping its bailout operations. Mostly outside, they conclude
[16:28] that more research is needed to understand how this Landing has
[16:33] and will change the Global Financial architecture.
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