China has emerged as a lender of last resort for developing countries that are having difficulty repaying their Belt and Road Initiative (BRI) debts. According to a new study by researchers at AidData, the World Bank, the Harvard Kennedy School, and the Kiel Institute for the World Economy, Beijing has dramatically expanded emergency rescue lending to sovereign borrowers in financial distress—or outright default.
Analysis of a new dataset demonstrates that, by the end of 2021, China had undertaken 128 rescue loan operations across 22 debtor countries worth $240bn. These operations include many so-called “rollovers,” in which the same short-term loans are extended again and again to refinance maturing debts.
According to the authors, Beijing does not offer bailouts to all BRI borrowers in distress: low-income countries are typically offered a debt restructuring that involves a grace period or final repayment date extension but no new money, while middle-income countries tend to receive new money—via balance of payments (BOP) support—to avoid or delay default.
Chinese banks have an interest in ensuring that their biggest overseas borrowers are sufficiently liquid to continue servicing outstanding BRI project debts. Middle-income countries, which represent 80 percent or more than $500bn of China’s total overseas lending, pose major balance sheet risks, so Chinese banks have incentives to keep them afloat via bailouts. Low-income countries, which represent only 20 percent of China’s total overseas lending, are less important to the health of the Chinese banking sector and rarely get bailed out.
“Beijing is ultimately trying to rescue its own banks. That’s why it has gotten into the risky business of international bailout lending,” said Carmen Reinhart, one of the study’s authors. “But if you are going to bail out a borrower that is in default or teetering on the edge of default, it’s important to have a clear understanding of whether you are trying to solve a short-term liquidity problem or a long-term solvency problem.”
The authors of the new study find that China has channeled bailout funds to countries with low foreign exchange reserve levels and weak sovereign credit ratings. To date, it has undertaken rescue lending operations in 22 countries, including Argentina, Belarus, Ecuador, Egypt, Laos, Mongolia, Pakistan, Suriname, Sri Lanka, Turkey, Ukraine, and Venezuela.
