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