The Central Bank of China is becoming the “payday lender” of the developing world

In our recent commentary for barron’swe argued that China’s central bank’s foreign exchange swap lines have become a hidden lifeline for poor and heavily indebted nations. It’s also expensive, with rates much higher than those charged on Fed swaps or IMF and World Bank loans.

Our CFR Central Bank Currency Swaps Tracker shows that the People’s Bank of China (PBoC) has signed about 40 swap line agreements since 2009, giving its partner central banks access to about $600 billion in Chinese currency ( RMB). Last year’s total amount outstanding reached a new high of nearly $33 billion.

Although the PBoC swap lines are marketed as a means of facilitating trade settlement in RMB, more than three-quarters of their partners have used them to address individual solvency issues, those related to the balance of payments and the sovereign debt In contrast, the Fed’s standing swap lines have been issued to only a handful of the world’s richest countries in order to meet short-term liquidity needs during times of global financial stress, such as during the financial crisis of 2007-2008 and the Covid-19 of 2022. pandemic.

The Fed’s and PBoC’s use of the swap line differ not only in purpose, but also in terms of effective maturity. As shown in the figure on the left, the amount drawn from the Fed’s swap lines peaks during global liquidity constraints, while the amount outstanding remains low due to rapid liquidation of the transactions. Many PBoC swap line partners, on the other hand, roll over their debt each year, extending loan maturities and keeping the amount outstanding high, and usually rising. This can be clearly seen in the figure on the right. Most notably, heavily indebted Pakistan and Mongolia have been continuously renewing their RMB swaps for over a decade.

PBoC swap lines complicate debt monitoring, as the agreements often have ambiguous usage restrictions that confound the determination of reserve adequacy. In addition, the World Bank does not require countries to report line of trade loans with maturities of less than one year, resulting in inconsistencies in measures of foreign reserves and debt obligations. With the growing use of these expensive and opaque “payday loans,” the IMF and the World Bank, the developing world’s biggest creditors, must demand much greater transparency from Beijing.