Shining a Light on China's Opaque Currency Swap Deals

The United States is raising new concerns about China's practice of making emergency loans to debt-ridden countries, warning that a lack of transparency surrounding such financing can mask the fiscal predicaments facing fragile economies that have turned to China for help.

Uncovering the Hidden Risks of China's Lending Practices

Concerns Over Lack of Transparency

A senior Treasury official, Brent Neiman, has publicly aired concerns about China's practice of making emergency loans to struggling countries through its central bank using so-called "swap agreements." These agreements allow countries to borrow Chinese renminbi and keep those funds in their central reserves while using the U.S. dollars that they hold to repay foreign debts. The Biden administration has also broached the issue directly with Chinese officials in Washington this year during a meeting of a recently created bilateral economic and financial working group.The lack of transparency surrounding these currency swap deals is a major concern. Such financing is essentially a line of credit, in which a country swaps its own currency for renminbi and agrees to pay Beijing a high interest rate. The arrangement allows those countries to use their dollar reserves to finance trade or other government needs, or to pay debts owed to Chinese banks or to make purchases from China, creating even deeper ties to its economy. However, these loans do not always appear on the balance sheet of the borrowing nation, obscuring the extent of its liabilities. This lack of information can make it harder for other investors to know how deeply in debt a country is and has fueled criticism that the Chinese loans could leave the recipients worse off.

The Scale of China's Emergency Lending

China has provided more than $200 billion in emergency financing in recent years. Chinese state media reported this year that the central bank had 31 currency swap agreements in force worth a combined $586 billion. These Chinese currency loans tend to come with higher interest rates than those offered by the Federal Reserve or the International Monetary Fund (IMF).

Calls for Greater Transparency

The Treasury official, Brent Neiman, has urged the IMF to push China for greater clarity about its lending terms. The lack of transparency surrounding these currency swap deals is a major concern, as it can obscure the true extent of a country's debt and make it harder for other investors to assess the risks. By shining a light on these opaque lending practices, the U.S. is hoping to ensure that struggling economies are not being further burdened by China's emergency financing.