The United States has expressed fresh concerns about China’s practice of providing emergency loans to debt-stricken countries, and the lack of transparency surrounding such loans is facing fragile economies that look to China for support. It warns that it could mask financial distress.
Brent Neiman, a senior Treasury official, publicly expressed concerns about the practice in a speech on Tuesday, calling on the International Monetary Fund to seek more clarity from China on loan terms. The Biden administration broached the issue directly with Chinese officials in Washington this year at a meeting of the recently created Bilateral Economic and Financial Working Group.
China’s loans to countries already struggling to service their debts are channeled through China’s central bank using so-called swap agreements. These agreements allow countries to borrow Chinese yuan and keep the money in central reserves, while using their US dollar holdings to pay down foreign debts.
The loan is essentially a line of credit, in which the country agrees to exchange its currency for renminbi and pay high interest rates to the Chinese government. This arrangement allows these countries to use their dollar reserves to fund trade and other government needs. They can also use the funds to pay debts to Chinese banks and buy goods from China, further deepening their ties to the Chinese economy.
China has provided more than $200 billion in emergency loans in recent years. Chinese state media reported this year that the People’s Bank of China had entered into 31 currency swap agreements worth a total of $586 billion. Loans in Chinese currency tend to have higher interest rates than loans provided by the Federal Reserve or the IMF.
Such currency loans do not always appear on the borrowing country’s balance sheet, making the scope of the liability ambiguous. Critics say a lack of information could make it difficult for other investors to know how deep a country’s debt is, and that Chinese loans could make recipients’ lives even worse. is increasing.
In a speech at the Official Monetary and Financial Institutions Forum in Washington, Neiman highlighted how the IMF has struggled to assess the fiscal health of countries such as Laos, Suriname and Argentina due to the opacity of Chinese currency lending. I explained what I was doing.
“This confusion and inconsistent treatment partly reflects the People’s Bank of China’s failure to report on the details of each swap agreement,” Neiman said, referring to the People’s Bank of China.
It is unclear how much money China’s central bank is lending to a country, what it can use it for, and how it is repaid, leaving investors and the IMF to make their own decisions about new loans and debt relief. It’s becoming difficult to put down.
On Tuesday, three weeks before the IMF and World Bank are scheduled to hold their annual meetings in Washington, Neiman said: “We stand united to continue building enthusiasm and securing commitments from the public sector to invest in support of the Fund’s programs. We need to secure it.” “However, we believe that the result will be transparent, reliable, expanded in-budget financing flows and debt relief for countries making reforms, rather than potentially damaging forms of financing. I have to make sure there is.”
China has long faced criticism from the United States and other Western countries for over-indebting poor countries through its Belt and Road Initiative, which includes nearly $1 trillion in construction loans. International policymakers are pressuring China to restructure hundreds of billions of dollars in debt owed by poor countries facing default, but progress has been slow.
Eswar Prasad, former head of the IMF’s China division, said the U.S. focus on Chinese currency lending is due to Biden’s response to China’s exchange rate controls and the subsidies China provides to both state-owned and private companies. He said it reflected the administration’s dissatisfaction.
“These are important in demonstrating the overall tough stance that the United States is taking toward China on all issues, including economic issues,” Prasad said.
In some cases, China protects state-owned banks from losses by providing currency loans to countries that owe money to them.
Brad Setzer, a senior fellow at the Council on Foreign Relations, suggested that China should follow the same reporting practices as other major central banks that offer currency swaps. He said the uncertainty surrounding the accounting for the loans raises questions about whether countries that already lend heavily owe China “hidden debts.” .
“I don’t think the PBOC has been very transparent,” Setzer said.
