Assessing repayment burdens and financial risks requires detailed knowledge on all outstanding debt instruments. Second, the private sector will misprice debt contracts, such as sovereign bonds, if it fails to grasp the true scope of debts that a government owes.
This problem is aggravated by the fact that many Chinese official loans have collateral clauses, so that China may be treated preferentially in case of repayment problems. As a result, private investors and other competing creditors may underestimate the risk of default on their claims. And, third, forecasters of global economic activity who are unaware of surges and stops of Chinese lending miss an important swing factor influencing aggregate global demand.
One could look to the lending surge of the s, when resource-rich, low-income countries received large amounts of syndicated bank loans from the U. That lending cycle ended badly once commodity prices and economic growth slumped, and dozens of developing countries went into default during the bust that followed.
Central bank swap lines can be understood as standing lines of credit, where central banks agree on exchanging their currencies to facilitate trade settlements and to address liquidity needs.
As of , the PBoC has signed swap agreements with more than 40 central banks ranging from Argentina to Ukraine , providing the right to exchange more than U. As a result, nations facing financial strains can turn to China before the international financial institutions, including the IMF.
Why does this matter? IMF lending is transparent, and it is usually conditioned on a plan to improve national policies. This is not necessarily the case for Chinese lending, which gives rise to important questions of creditor seniority. For example, if a nation indebted to China turns to the IMF, officials should be aware that any funds the IMF disburses may be used to pay another official creditor, China, rather than be used to blunt market strains.
Since , two dozen developing countries have restructured their debt to China. This recent increase in the incidence of sovereign debt restructurings of Chinese debt may have a benign interpretation, but given the slower growth and lower commodity prices of recent years, it may well be a sign of brewing liquidity and solvency problems in numerous developing countries. You have 1 free article s left this month. Are you worried or stressed? Click here for Expert Advice. Comment 0.
Post Comment. Disclaimer: Comments will be moderated by Jagranjosh editorial team. Comments that are abusive, personal, incendiary or irrelevant will not be published. Please use a genuine email ID and provide your name, to avoid rejection. Which Countries are the largest borrowers from the World Bank in ? China took loan of million dollar followed by the India with million dollar and Indonesia is on the third position by borrowing mn dollar in the FY As per the definition of the World Bank, India is no longer eligible to receive the loan under the IDA arm because it is no more considered as the poor country.
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