When the Argentine peso was in trouble last month, Argentina asked the International Monetary Fund for a $50 billion loan. But the government in Buenos Aires also reached out to Beijing for help — reportedly looking for as much as $30 billion.
Argentina wants Beijing to bump up an existing “currency swap” agreement between the two countries’ central banks. Currency swaps effectively act like direct lines of credit between two countries, giving a country access it needs to foreign exchange to reassure investors that all’s well.
Over the last five years, Beijing has doled out emergency loans to several other economies on the brink — a clear sign of China’s growing financial power and influence. But what does China’s emerging role as an international financial stabilizer mean for the United States and the existing set of institutions that govern the international financial system today?
Chinese bailouts complement the existing system, by and large. There’s an added twist, though: China could use its newfound power to insulate U.S. adversaries — or punish countries economically.
Chinese bailouts can complement the IMF’s work
China isn’t the first country to provide direct emergency loans to economies facing financial crises. As I explain in my book, “Brother, Can You Spare a Billion?,” it was the United States that established this practice. Throughout the 1980s and 1990s, the U.S. Treasury provided more than $100 billion in loans to dozens of developing and emerging market economies.
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Here’s how it worked. Typically, the United States required borrowing countries to have a separate deal with the IMF before Treasury would agree to provide additional resources. U.S. involvement helped make IMF credits more effective by increasing the size of the rescue package or by providing resources in advance of an IMF loan that was taking too long to get out the door.
Some of China’s credit lines have functioned in a similar manner. Before providing funds to cash-strapped governments, the IMF often will require a country to secure additional outside sources of funding.
On several recent occasions, China has played this role. Both Ukraine and Mongolia recently activated swap lines with China, which appear to have helped each country receive IMF assistance.
Similarly, when Egypt sought IMF assistance in 2016, the fund agreed in principle to provide a $12 billion loan package. However, the IMF required Cairo to secure an additional $6 billion in bilateral financing before it would release the funds. Egypt was ultimately successful — thanks to a nearly $3 billion Chinese swap line.
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The IMF, for its part, refers to Beijing’s credit lines as part of a broader global financial “safety net,” acknowledging the complementary role China can play.
Do Chinese bailouts undermine U.S. power?
But Beijing’s financial largesse may also strengthen China’s influence in dependent economies — and that could diminish U.S. power.
The potential for increased Chinese influence is straightforward. By throwing lifelines to otherwise drowning economies, Beijing can strengthen existing friendships and build new ones. For example, when Pakistan’s economy slumped in 2013 and Islamabad drew on its Chinese credit, the country’s central banker noted,“ China helped us weather the storm.”
Beijing may also be using China’s swap lines to blunt U.S. financial power. In 2015, as the Russian economy was suffering under the bite of Western sanctions, China signaled its willingness to ride to Moscow’s rescue. Chinese officials publicly agreed to increase the size of an existing swap agreement in light of the political challenges facing the Kremlin. While the two sides did not end up enlarging the deal, a besieged Russia drew on the initial line several times in 2015 and 2016 when other forms of credit were unavailable.
Then, in 2017, China may have used an existing swap agreement with South Korea as leverage in a row over the installation of the U.S. THAAD missile system on Korean soil, which Beijing opposed on security grounds. Though Beijing’s remarks were not made public, there was widespread speculation in South Korea that China would hold the swap deal hostage unless Seoul agreed to remove the missile system.
When the finance deal temporarily expired in October 2017, analysts attributed it to the missile dispute. Ultimately, however, Beijing and Seoul renewed the agreement a few days later and the missiles stayed. If China did try to use its currency swap as leverage, it backed down in this case.
These examples show the potential for China to broker liquidity — or the denial of it, in Korea’s case — to increase its own influence while diminishing U.S. influence.
What’s the longer-term impact, though?
So far, China has only dipped its toes in the water when it comes to acting as an international lender of last resort — the country willing and able to offer these types of bailouts. It’s difficult to know what Beijing’s motivations are and what the long-term implications of this lending will be. China’s swap lines could be used to gain influence, protect friends — and dampen U.S. financial power.
But Chinese actions may also undergird the operations of the IMF, reinforcing and enhancing the existing international financial architecture.
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Argentina’s urgent request for assistance this month seems in line with this second track. Indeed, it is possible that the IMF encouraged Buenos Aires to see if Beijing was willing to chip in additional resources as part of an outside funding package, similar to what the scenario in Egypt two years earlier.
For now, analysts are keeping an eye on these events. A decision by China to continue working alongside the IMF would suggest that Beijing believes its own lending activities work best when they are embedded within existing global rules and institutions.
However, if Beijing begins to pursue an emergency lending strategy that diverges from this approach, the IMF and the United States may one day find themselves with serious new competition in the arena of international financial stabilization.
Daniel McDowell is an associate professor of political science at the Maxwell School at Syracuse University. You can follow him on Twitter @daniel_mcdowell.