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Lending frombriBRIYour browser does not support the element. China posed a dilemma to leaders in cash-strapped poor countries. In the 2010s, as the Belt and Road Initiative () got going, China began to invest vast sums in overseas infrastructure. All told, throughout the initiative’s first decade, officials disbursed hundreds of billions of dollars to 150-odd countries. They helped build pipelines, ports, railways and much else, aiming to expand the country’s influence over trade. But emerging-market officials and Western foreign-policy hawks feared something darker was going on: that the initiative was deliberately saddling poor countries with too much debt. Once they inevitably defaulted, China would seize assets and enjoy not just influence over trade, but a chokehold.Fortunately, such fears now seem overblown. China’s loan book has grown to doorstopper-size, and the country has become low- and middle-income countries’ largest bilateral creditor. Many of their governments have had difficulty with repayments over the years. Yet no wave of land grabs has followed. Instead, Chinese lenders have almost always given them longer to cough up. As a consequence, cash-strapped governments might feel much more tempted than they once would have been to turn to China as their lender of last resort.Two things should give them pause for thought. The first is the amount by which their debts have ballooned since the began. Nominal interest payments by the 78 countries eligible for the World Bank’s cheapest development loans quadrupled between 2012 and 2022, to an all-time high of $24bn. The second is a new paper by Qi Liu and Layna Mosley of Harvard and Princeton universities, respectively. Having analysed 139 announcements of loans from China to emerging-market countries, which were made between 2007 and 2022, they conclude that borrowing from China is not just costly in itself. It also makes borrowing from others more expensive.If that seems unsurprising, consider the ways in which new borrowing could lower the cost of other debt. As Bob Hope, a comedian, once quipped, a bank is a place that will lend you money if you can prove you do not need it. The sovereign-bond market might function similarly, and a new loan could be just the proof a government needs. It can clearly still get access to credit, making it less likely to run out of cash and default. A new lender—China rather than, say, the bond market or a multilateral outfit—also shows that the borrower has several sources of funding, making it safer still. What is more, loans used to fund profitable infrastructure projects, for instance, might make a country more productive and therefore better able to repay all its debt.As it turns out, only some of this logic prevails when countries borrow from China. Ms Liu and Ms Mosley discovered this by studying the yields on individual emerging markets’ government bonds before and after announcements of Chinese loans to those governments. Compared with an index of 56 similar countries, the average borrower saw its bond yield rise by 0.05 percentage points following the announcement. The rise was larger for loans to provide liquidity, or to support a budget, and smaller for those intended to finance projects such as new infrastructure. Intriguingly, borrowing costs rose even if the announcement concerned an old loan rather than a recently disbursed one.Do bondholders object to all new borrowing, or just that from China? To answer this, the authors repeated their study, but using announcements of loans from the World Bank instead. After these they found no significant increase in yields. They also looked at loans co-funded by China and other lenders. Whereas those solely from China raised yields, those involving other lenders lowered them. All this suggests that the bond market views Chinese lending in particular as riskier than other sorts.Ms Mosley muses that the secrecy shrouding Chinese loans could be to blame, with other lenders fearing “some iceberg of Chinese debt hidden beneath the surface”. It does not help that China is notoriously unwilling to co-operate with other lenders when debt must be restructured. Rather than being caused by fears of nefariousness, though, Ms Mosley suggests a simpler reason for the bearish signal sent by Chinese loans. “I think they are not necessarily doing their commercial due diligence,” she says, “because the loan is for political reasons instead.” If a new lender seems unconcerned about being paid back, do not be surprised by the old ones taking fright.
