How China helps developing economies repay their debts - Printable Version

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How China helps developing economies repay their debts - Bigiron - 14-12-2022

How China helps developing economies repay their debts
#Econgram_China





Facts:
1) Over the past decade, the People’s Bank of China* directed billions of yuans to ~20 developing countries such as Pakistan, Argentina, Sri Lanka and Laos. The money was lent through the swap lines*. 

2) The swap lines allow the foreign CBs to exchange their currencies for yuan. Analysts estimated the average interest rate for using the Chinese swap lines at 6%.

Analysis:
1) By keeping the swap lines open, China’s CB helps the indebted countries refill their reserves. That, in turn, assists the developing economies in evading borrowing cost* rises. 

2) That is so because the currencies of developing economies are unstable and currently depreciate relative to the dollar, which increases borrowing costs. In contrast, the yuan is more stable. Hence, by “fixing” the exchange rate of their currencies to the yuan during the swap transactions, the indebted countries minimise the volatility of the borrowing costs.

3) China’s motive to sustain risky swap lines is to support the governments that borrowed heavily from it. As long as their borrowers receive assistance, the Chinese lenders get repaid. Besides, the PBOC wishes to promote the yuan’s global adoption.

Inspired by WSJ

The Econgram

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