How China Is Offering an Alternative to the IMF

CP Chandrashekhar in this new INET paper:

China seems poised to take leadership of regional efforts to forge a safety net that protects countries in East Asia from the fragility that cross-border financial flows engender. My new INET Working Paper analyses why: Leadership stems from China’s important role in production value chains spread across the region and the support provided to those networks by the massive investments facilitated by China in projects launched as part of the Belt and Road Initiative (BRI). The Council on Foreign Relations estimates that by early 2020 China had spent an estimated $200 billion on BRI projects. But aside from the capital flows associated with the BRI, the People’s Bank of China (PBoC) has put in place a network of bilateral, local currency central bank swap arrangements that provide countries a much-needed safety net. These swaps are less highlighted instruments that have contributed to China’s growing global influence in developing countries worldwide. Between January 2009 and January 2020, the PBoC entered into such arrangements with 41 countries, including many in Asia.

These bilateral swap arrangements (BSAs), denominated in RMB and the currency of the relevant partner central bank, allow the latter to access RMB liquidity for short periods at relatively low rates of interest, in return for its own currency as implicit collateral. Under a swap arrangement, while the borrowing central bank has access to the foreign currency liquidity line, it can lend it to institutions and agents in its own jurisdiction that face shortages of the relevant foreign currency, in this case the RMB. For partner countries, the greater the availability of RMB swap lines, the larger their leeway in using available dollar earnings and reserves to settle transactions with other countries. They can also, as Argentina and Pakistan did, use, or showcase their ability to use, the RMB accessed through the swap line, to acquire dollars and shore up their dollar reserves to meet commitments to third parties.

In principle, the bilateral swap network provides countries a means of addressing foreign currency shortages and tide over balance of payments difficulties resulting from boom-bust capital flow cycles, without having to turn to the US and the IMF for assistance. Access to such a regional, IMF-independent safety net has been a need felt in the region ever since the 1997 Southeast Asian financial crisis, in the aftermath of which leading Southeast Asian nations availed of bail-out packages, which, though funded substantially by governments in the region, were crafted by the IMF. The policy conditions that accompanied the bail-outs severely damaged Southeast Asian economies, leading to the conviction that the IMF “didn’t know Asia” and that “its remedies were likely to do great damage to the Asian economy”. This experience triggered a search for regional, IMF- and US- independent arrangements that could be accessed in times of financial difficulty, without having to implement policies detrimental to the economic interests of countries in the region.

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