hello and welcome, you are listening to Patrick boil on finance a podcast, exploring ideas, from quantitative Finance examining events occurring in markets right now and financial history to see what lessons can be taken away including interviews with some of the most interesting people in the world of Finance to learn more about the podcast, visit on finance 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. Thanks for tuning in to today's podcast, if you enjoyed it, make sure you recommend it to some of your friends as that's really how podcasts grow. There's no real recommendations algorithm. Thanks for tuning in.
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