From Trade to Investment: How Chinese Banks Are Reshaping Lending to Emerging Economies
The paper explores how Chinese banks have shifted from trade-driven to FDI-driven lending to EMDEs, especially through the Belt and Road Initiative, focusing on high-risk markets with governance and debt issues. It highlights Chinese banks' growing role in long-term economic integration despite geopolitical fragmentation and Western sanctions.
A study by Catherine Casanova, Eugenio Cerutti, and Swapan-Kumar Pradhan explores how Chinese banks' lending behavior toward emerging market and developing economies (EMDEs) has evolved, particularly in light of the COVID-19 pandemic and increasing global fragmentation. These authors, affiliated with the Swiss National Bank, the International Monetary Fund, and the Bank for International Settlements, respectively, examine lending patterns between 2017 and 2022, offering insight into how Chinese banks, as major creditors, are shifting their strategies in these uncertain times.
A Shift from Trade to Investment-Driven Lending
The study's primary finding is that Chinese banks have moved away from a trade-centered approach to lending and are now focusing more on foreign direct investment (FDI). Before the pandemic, the banks' cross-border lending was strongly linked to China’s trade relationships with EMDEs. This correlation, however, weakened during the pandemic period from 2020 to 2022, when FDI became a more critical factor in driving lending behavior. This shift represents a significant change in China’s economic strategy, reflecting its growing emphasis on long-term investments that solidify its presence in key markets. One key driver of this shift is China’s Belt and Road Initiative (BRI), which promotes infrastructure development and trade routes, often supported by Chinese financing. The BRI is particularly associated with large-scale investments in infrastructure, which align more closely with FDI than with trade-related loans. The growing correlation between FDI and Chinese bank lending is especially visible in countries involved in the BRI, suggesting that China’s banks are increasingly aligning their lending strategies with the country’s long-term geopolitical and economic goals.
High-Risk Lending with Greater Tolerance
Another major focus of the research is the impact of borrower country characteristics, especially regarding risk factors such as corruption and debt burdens. Chinese banks exhibit a higher tolerance for risk compared to their Western counterparts, especially in relation to governance issues. The study finds that Chinese banks are more willing to lend to countries with higher perceived levels of corruption and greater debt burdens. This trend is particularly noticeable in countries that are commodity exporters. While Western banks tend to reduce their exposure to countries with high governance risks, Chinese banks have maintained or even expanded their market share in these areas, particularly after the pandemic. This behavior highlights a key difference in risk perception between Chinese banks and other global financial institutions. It reflects China’s broader geopolitical strategy, which prioritizes maintaining influence and access in high-risk markets, especially those connected to the BRI. The increased market share of Chinese banks in these countries suggests a willingness to engage with borrowers that other lenders may avoid, signaling a strategic decision to overlook certain risks in exchange for long-term economic and political gains.
Limited Impact of Sanctions and Global Fragmentation
The paper also explores the role of geopolitical fragmentation and sanctions in shaping Chinese banks' lending strategies. The authors find that sanctions imposed by Western countries, whether military, financial, or trade-related, have had limited impact on Chinese banks' lending behavior. In some cases, particularly when both China and Western nations imposed sanctions simultaneously, Chinese banks even increased their lending. This pattern suggests that Chinese banks may be stepping in to fill gaps left by Western financial institutions, further expanding China’s influence in certain regions. However, the study also notes that countries benefiting from the shifting global trade and investment flows caused by geopolitical fragmentation those that have strengthened ties with both China and the United States have not seen increased FDI-lending relationships with Chinese banks. This indicates that, while China’s banks are expanding globally, they are not necessarily targeting these “connector” countries for enhanced lending based on geopolitical shifts.
The Central Role of the Belt and Road Initiative
The BRI remains a central element of Chinese banks' lending strategies, particularly in the post-pandemic period. The initiative has reinforced the growing correlation between FDI and cross-border lending, as BRI member countries receive increased investments from China, which, in turn, strengthens their borrowing relationships with Chinese banks. This contrasts with the earlier trade-based lending model, demonstrating that Chinese banks are now more focused on investments that foster long-term economic ties rather than short-term financial engagements. In this context, the use of central bank swap lines agreements that allow countries to exchange currencies with China has also been a significant factor in maintaining Chinese banks' market shares, particularly in certain regions before the pandemic. However, the importance of these swap lines has diminished somewhat in recent years, with the BRI playing an increasingly central role in Chinese lending strategies.
A Strategic Pivot Toward Long-Term Economic Integration
In conclusion, the research underscores that Chinese banks continue to be key lenders to EMDEs, even as their lending patterns evolve in response to the pandemic and global economic changes. The shift from trade-driven lending to FDI-driven lending, particularly in BRI countries, highlights China’s strategic focus on fostering deeper, long-term economic relationships. At the same time, Chinese banks' willingness to engage with countries that have higher governance risks and debt burdens reflects a broader geopolitical strategy that prioritizes maintaining influence in regions that other lenders may deem too risky. As global economic fragmentation continues, the evolving role of Chinese banks in cross-border lending, particularly to EMDEs, is likely to remain a critical area of interest for both policymakers and researchers, shaping the future of international finance and economic relations.
- FIRST PUBLISHED IN:
- Devdiscourse