The international financial architecture under pressure

Chapter 5. The international financial architecture under pressure Norbert Gaillard and Michael Waibel https://orcid.org/0000-0003-3584-5428 https://orcid.org/0000-0002-3777-8487 Abstract The present international financial architecture (IFA) has been weakening since the early 2010s. Several factors have hindered the reorganization of the current IFA, accelerated the bipolarization of international financial relations, and reshaped the balance of power between sovereign debtors and creditors as well as between creditors themselves. The post-Bretton Woods IFA has been centered around the United States. The U.S. dollar has remained the world’s most important reserve currency. The Federal Reserve and the U.S. Treasury have acted as the only reliable international lenders of last resort since 2008. Further, the United States has a veto at the International Monetary Fund. China has launched regional initiatives that threaten to fragment the IFA. It has signed central banks swaps agreements to prevent cross-border spillovers and internationalize the renminbi. The Asian Infrastructure Investment Bank is a key institution to support the Belt and Road Initiative. The New Development Bank is another innovative and independent institution. In fact, China is reshaping the IFA primarily through its sovereign lending and debt restructuring practices. Chinese contracts are built on harder terms than Western contracts, showing that China wants its creditors to obtain preferential treatment in the event of a default. ******* Section 1. Introduction1 The international financial architecture (IFA) can be defined as the governance rules and practices established and implemented by formal and informal international financial organizations as well as by some powerful national institutions and firms (e.g., central banks, financial institutions, and credit rating agencies) to ensure an efficient, successful, and sustainable global monetary and financial system. The current IFA has evolved significantly since the Bretton Woods Agreement of 1944. The intensification of economic and financial relations between industrialized and emerging countries, the collapse of economic planning, the growing public and private debts in all regions of the world have made the IFA increasingly complex, which has led to heated debates. For example, the key role played by the International Monetary Fund (IMF) since the 1980s has stirred controversy (Flores Zendejas and Gaillard, 2022). Second, the efficiency of macroprudential rules – established since the 2000s to preserve the stability of the banking system and fight systemic risk – has been seriously questioned (see Montanaro’s chapter in this volume). Third and more importantly, the increasing financialization of the U.S. economy (as well as other economies) has 1 been endangering the IFA since the late 2000s, which requires ambitious reforms to transform U.S. capitalism (Gaillard and Michalek, 2022b).2 However, the economic and political rise of the People’s Republic of China (PRC) may also have destabilizing effects on the IFA. Echoing the arguments advanced in China and emerging countries, Chin and Thakur (2010, p. 119) point out that “the multilateral order cannot hold if the power and influence embedded in international institutions is significantly misaligned with the real distribution of power.” This chapter puts this statement into perspective and argues that the present IFA has been weakening since the early 2010s, partly because of the U.S.-China rivalry. Several factors have hindered the reorganization of the IFA, accelerated the bipolarization of international financial relations, and reshaped the balance of power between sovereign debtors and creditors as well as between creditors themselves. Section 2 shows that the post-Bretton Woods IFA is centered around the United States. The U.S. dollar has remained by far the world’s reserve currency and the largest credit rating agencies (e.g., Moody’s and Standard & Poor’s) and financial institutions (e.g., JPMorgan Chase and Bank of America) are headquartered in the United States. Next, the Federal Reserve and the U.S. Treasury have become more powerful than ever, acting as the only reliable international lenders of last resort (ILOLR) since the global financial crisis of 2008. Further, the United States has managed to keep its veto at the IMF and has prevented any large-scale reform. Lastly, Washington can exclude countries (e.g., Cuba, Iran, and Russia) from the international financial system by imposing economic and financial sanctions. Section 3 argues that the PRC has challenged the international institutions promoting the existing liberal international order at the margins. China is now ranked third in terms of voting power at the IMF and the World Bank and self-classifies as a developing country in the World Trade Organization (WTO), but it is not a Paris Club member and does not participate in the Organisation for Economic Co-operation and Development (OECD) Arrangement on Officially Supported Export Credits. Instead, China launched initiatives that may be fragmenting the IFA, reflecting a shift from a reformist to a revisionist stance (Nicolas, 2014). China signed central banks swaps agreements with East Asian, European, and Latin American authorities to prevent cross-border spillovers, preserve regional value chains, and internationalize the renminbi. Next, the BRICS (Brazil, Russia, India, China, and South Africa) Contingent Reserve Arrangement could become an alternative to the IMF in the medium-long term. Although the Asian Infrastructure Investment Bank is a key institution to support the Belt and Road Initiative (BRI), it works with the World Bank on various projects. The New Development Bank is a more innovative and independent institution. Section 4 investigates why and how China is reshaping the IFA through its sovereign lending and debt restructuring practices. Chinese contracts are built on harder terms (e. g., collateral arrangements, confidentiality, cancellation, acceleration, stabilization, and cross-default clauses) than Western contracts. Chinese interests abroad are also considered interdependent and “solidary” by the PRC, which involves diplomatic pressures on foreign debtors. In addition, the features of Chinese debt restructuring practices are idiosyncratic: ‘No Paris Club’ clauses and the controversy 2 regarding the status of China Development Bank show that the PRC wants its creditors to obtain preferential treatment in the event of a default. Section 5 contends that the growing debt of developing countries, partly driven by the U.S.-China rivalry, may be the underrated weakness of the IFA. At least two nonexclusive scenarios can be envisaged in respect of the future path of debt in developing countries. The first is a possible “debt trap” caused by debt overhang, as illustrated by Sri Lanka and possibly several African countries. The second involves debtor and creditor moral hazard problems, which will inevitably weaken the position of certain creditors. In either case, developing economies may pay a high price for being at the fore of major geopolitical battles. Section 6 concludes. Section 2. How the United States defends the status quo Since the collapse of the Bretton Woods system in 1973, the IFA has been largely dominated and centered around the United States. Concretely, Washington has managed to maintain the status of the U.S. dollar as the foremost international currency, ensured the globalization of the world economy, averted systemic risk, preserved its influence on key international financial institutions (especially the IMF), and sanctioned “delinquent” countries financially. 2.1 The U.S. dollar as the foremost international currency The privileged status of the U.S. dollar (USD) is a fascinating and complex phenomenon. The U.S. currency is backed by the most powerful military in the world (thus reflecting the capacity to protect American vital interests worldwide), the largest economy in terms of gross domestic product (GDP), and a long-standing triple-A sovereign debt credit rating. As a result, it is not surprising that the USD accounted for more than 64% of the world’s foreign exchange reserves, on average, between 1973 and 20213 and played an outsized role in the invoicing of global exports (Boz et al., 2020). It is also noteworthy that T-Bonds and T-Bills remain safe-haven assets during high-risk aversion periods. For instance, the market yield on the U.S. 10-year bond declined, on average, by more than 15% during the six domestic recessions observed since 1980.4 2.2 International finance and globalization A second aspect of Washington’s dominance is its unique capacity to enlarge the “battlefield” where it has a decisive competitive advantage: international finance. Several factors coalesced to boost world financial globalization and support the U.S. hegemony on the IFA. On the eve of the fall of communism, the “Washington Consensus” – a term coined by economist John Williamson (1990) – served as a macroeconomic roadmap for many governments in advanced as well as emerging countries. This Consensus spurred free trade, liberalization of inward foreign direct investments (FDI), privatization, and deregulation. Between 1990 and 2020, annual world trade volume and FDI stock jumped 4% and 10%, respectively. 5 The financialization of the world 3 economy, especially through the development of derivatives markets and the decisive influence of the International Swaps and Derivatives Association, headquartered in New York City (Pistor, 2019), further strengthen this pattern. In this context, the increasing accommodative monetary policy conducted by the Federal Reserve6 has encouraged leverage strategies in the United States and abroad. Between 1990 and 2020, the total amount of international debt securities outstanding rose by a factor of 18, more than 42% of this debt being denominated in USD.7 In the meantime, globalization contributed to blur the lines between capital-exporting and capitalimporting nations. It also entailed a high degree of interdependence and competition between economies (Gaillard, 2020). Thus, it is not surprising that the tight co-movement in international assets prices reinforced the global financial cycle among industrialized economies by synchronizing risk appetite and exacerbating potential contagion and spillover effects (see Jordà et al., 2018). 2.3 Fighting systemic risk The latter point leads to the capacity of the United States to prevent major financial crises and fight systemic risk. The first “policy tool” used by Washington involves credit rating agencies, such as Moody’s and Standard & Poor’s (S&P), two U.S. firms. The basic job of rating agencies consists in assessing credit risk. Their methodologies compel borrowers to remain solvent on their bond debt because debt restructuring or missed payments can be considered a default and result in a downgrade to the bottom of the rating scale. The incorporation of credit ratings in international regulatory rules and investment funds’ prudential rules (very frequent until recently) transformed credit rating agencies into gatekeepers of capital markets and drove up the cost of default. 8 Countries that failed to restore their credit position (such as Argentina and Venezuela) went through severe economic and political crises. The second tool was the development of macroprudential policies in the aftermath of the global financial crisis (see Montanaro’s chapter in this volume). As early as 2009, the Financial Stability Forum (FSF) published a report designed to address procyclicality in the financial system (FSF, 2009).9 This report was followed by a rich academic literature advocating the implementation of macroprudential rules (e.g., additional capital requirements; additional liquidity requirements; restrictions on assets, liabilities, or specific activities; and taxation) to fight systemic risk. These rules were (and are still) considered indispensable in times of high interconnectedness between too-big-to-fail (TBTF) banks and TBTF non-bank financial institutions. The third tool was the extraordinary capacity of the United States to act as ILOLR. The first step occurred during the Mexican sovereign debt crisis in the second half of 1982. After hesitation to support Mexico and other Latin American economies in distress, President Ronald Reagan realized that a “laissez faire” stance was likely to endanger the U.S. banking system. As a result, within a few weeks, the White House approved a significant increase in IMF quotas, the Federal Reserve relaxed its monetary policy, U.S. commercial banks – main creditors of less developed countries – provided complementary financing to Mexico, and U.S. regulatory authorities agreed to classify 4 Mexican debt as performing loans on the books of U.S. banks (Gaillard and Michalek, 2022a). These measures precluded the collapse of international financial markets, as had happened in the early 1930s. In the subsequent years, Washington intervened in a timely manner to avert systemic risk. During the Asian crisis of 1997, the Clinton administration encouraged the IMF to rescue distressed countries10 while the Federal Reserve arranged a bridge loan for Thailand and convinced U.S. banks to restructure the short-term debt owed by South Korea. This last move reduced risk aversion dramatically. During the global financial crisis and the Covid-19 pandemic, the Federal Reserve acted as ILOLR.11 It conducted exceptional open market operations, both in terms of the amounts offered and the maturity of the securities. It also expanded its lending facilities and broadened the range of counterparties and eligible collateral. Next, it established dollar liquidity and foreign currency swap lines with the central banks of major industrialized and emerging countries. Lastly, it cut the funds rate to a range of 0% to 0.25%. The U.S. accommodative monetary policy implemented between 2007 and 2021 eased access to capital markets and supported governments that borrowed in USD. 2.4 U.S. influence on the IMF The status quo in the IFA has also been underpinned by the capacity of the United States to maintain its hegemony on Bretton Woods institutions. The most striking case is that of IMF governance. For decades, the United States has managed to keep its veto at the IMF (i.e., more than 15% of vote shares; see Hallaert, 2020; Shaffer and Waibel, 2015; Gu and Tong, 2022) while reforming the institution when necessary. For example, a general allocation of Special Drawing Rights equivalent to $650 billion was approved in August 2021 to boost global liquidity and fight the recessionary effects of the pandemic. The Biden administration was concerned that developing countries might turn to Chinese banks to meet their borrowing needs.12 This strategy has reinforced the status of the IMF and complemented the ILOLR role played by the Federal Reserve. Last but not least, a close examination of IMF loans with very soft conditionality13 reveals that these are granted to U.S allies that implemented orthodox policies in recent decades (e.g., Colombia, Mexico, Morocco, and Poland).14 Thus the United States continues to exert a major influence on IMF policy. 2.5 U.S. financial and economic sanctions An important yet overlooked dimension of the IFA involves U.S. economic sanctions against “delinquent” foreign governments. As of August 5th, 2022, the Office of Foreign Assets Control of the U.S. Department of the Treasury administered and enforced 38 sanctions programs. The most recent and most spectacular program, established in February 2022, has targeted Russia after its army invaded Ukraine. Numerous sanctions are directly related to the IFA.15 U.S. financial institutions were required to close many banks’ accounts of Russian nationals and reject any future transactions while the U.S. Treasury froze their assets. Russian banks were also 5 removed from SWIFT, the Western financial messaging system. The Central Bank of the Russian Federation was prevented from using its international reserves in many Western jurisdictions, including the United States. Lastly, the Treasury blocked Moscow from paying USbondholders, which led to the historic default of Russia in June 2022. The sanctions against Russia have shown that Washington can exclude a country from the international financial system and destroy its credit position. This “financial hyperpower” has been increasingly questioned and constitutes a key incentive for emerging economies to de-dollarize the global financial system (see Liu and Papa, 2022). Section 3. The ‘South-South’ dynamics driven by China The PRC did not actively challenge the U.S.-led IFA until the global financial crisis. It used complementary tactics to contest the U.S. hegemony and promote an alternative world economic order, in line with some form of “financial nationalism” (Helleiner and Wang, 2019). Chinese authorities refrained from joining several informal Western organizations to preserve their freedom of action and champion South-South cooperation. They also launched last-resort policy tools to support non-industrialized countries and built independent global payment infrastructures for international transactions. In addition, China established new development banks to promote its investments abroad and launched its own global financial infrastructures. 3.1 China as part of the ‘Global South’ Although it has been the second largest economic power in terms of GDP and a net capital exporter for a few years, China has repeatedly rejected the constraints that a classification as “developed country” would have entailed. For example, as the PRC does not participate in the Arrangement on Officially Supported Export Credits,16 it is not compelled to impose restrictions on the financing terms and conditions when providing official export credits. Next, China’s persistent claim of its “developing member” status at the WTO aims to take advantage of the special and differential treatment provisions granted by the institution (see Gmeiner’s chapter in this volume).17 Particularly controversial is the PRC’s decision to remain outside the Paris Club, despite its status as a top official creditor.18 It seems that China has remained reluctant to submit to several key principles of the club, such as information sharing, conditionality, and the comparable treatment of public debts. In fact, China’s policy reflects a mix of ideological and pragmatic positioning. China is eager to preserve its image of “emerging country” to increase its geopolitical clout among the South. In the meantime, it systemically tries to be a rule-maker to maximize its economic and financial gains. This stance is consistent with the initiatives launched for a decade to break the perceived U.S. stranglehold on the IFA. 3.2 New facilities to provide liquidity to emerging and developing countries 6 China has promoted two significant international facilities that partly compete with the institutions and arrangements established by the present IFA: (i) bilateral and multilateral swap agreements and (ii) the so-called BRICS Contingent Reserve Arrangement (CRA). The Chiang Mai Initiative (CMI) was launched in 2000 by the Association of Southeast Asian Nations (ASEAN), 19 plus China, Japan, and South Korea. This bilateral currency swap arrangement (CSA) was designed to address potential short-term liquidity difficulties in the aftermath of the Asian crisis. In 2010, the CMI Multilateralization (CMIM) succeeded the CMI: with current resources of $240 billion, this multilateral CSA is more ambitious: it aims to prevent balance-of-payments disturbances. Since the early 2010s, the People’s Bank of China (PBOC) has also signed a growing number of bilateral swap lines with counterparts on five continents. In December 2020, China was involved in 31 bilateral CSAs amounting to the equivalent of $567 billion (Perks et al., 2021).20 The development of these swap agreements has contributed to boost cross-border trade and internationalize the renminbi (Song and Xia, 2020). The BRICS CRA was established in 2014 in reaction to the persistent underrepresentation of the BRICS (especially China) at the IMF. Contrary to the rules in force at the Washington-based institution, none of the five parties has a veto power. The committed resources of the CRA, which total $100 billion, 21 are split into two portions. The “de-linked portion”, equal to 30% of the maximum access for each party, is available with limited conditionality. In contrast, the remaining 70% is contingent on an agreement with the IMF. This dichotomic scheme suggests that the BRICS CRA remains embedded in the present IFA. However, in the medium-long term, this emergency reserve fund could become a credible alternative to the IMF (see Würdemann, 2018). The BRICS CRA and the currency swap agreements involving the PBOC have so far complemented rather than competed with the US-led IFA. The ability of the PRC to create an alternative IFA fundamentally depends on its willingness to act as ILOLR, as Washington has done since the early 1980s. 3.3 The New Development Bank and the Asian Infrastructure Investment Bank The New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB), established in 2014, to counter the influence of the Asian Development Bank and the World Bank, respectively, two institutions perceived be spearheaded by Japan and by Western countries.22 They also support the BRI, launched in 2013 by Chinese leader Xi Jinping. It created a hub-and-spoke network but one that is difficult to assess due to its fluidity and lack of transparency (Wang, 2019a; Lorenzo, 2021; Dreher et al., 2022). The examination of the governance, the objectives, and the lending policy of the NDB and the AIIB shows that these two entities have challenge the IFA on the margins.23 In 2020, the AIIB was composed of 83 members. Most industrialized countries have joined the bank, with Japan and the United States as exceptions. The PRC has a veto power, which mirrors the U.S. position in the Bretton Woods institutions. The founding members of the NDB are the BRICS: they have equal shareholding power and none of them has a veto. 7 During 2016–2020, 68% and 75% of the projects approved by the AIIB and the NDB, respectively, were sovereign loans. Around 52% of the AIIB projects and 75% of the NDB projects involved energy, water, transport infrastructures, and urban developments (AIIB, 2021a; NDB, 2021). The two institutions insist that there is no policy conditionality attached to their loans, contrary to the procedures applicable at the IMF, the World Bank, and multilateral development banks (Stephen and Skidmore, 2019; NDB, 2019). However, there may still be conditionality attached to lending along the Belt and Road in practice, and such lending may also create other types of dependency of borrowing countries. Neither the AIIB nor the NDB activities have contributed thus far to dedollarize the world economy: in December 2020, 96% of total financial assets of the AIIB and 73% of the loans granted by the NDB were denominated in the U.S. currency (AIIB, 2021b; NDB, 2021). The lessons is that the AIIB is not designed to upset the IFA but is part of a broader strategy to selectively reshape international economic institutions in China’s favor (Wang, 2020). The numerous partnerships formed with the World Bank tend to support this view. The NDB may embody an alternative model soon, provided the BRICS manage to increase their lending facilities and use mostly local currencies (Wang, 2019b). 3.4 China’s bank card network and international payment system A remarkable evolution observed since the 2010s has been China’s capacity to bypass U.S. global financial infrastructures. Two successful ventures deserve examination: UnionPay and CrossBorder Interbank Payment System (CIPS). Launched in 2002, UnionPay is a Chinese financial services corporation headquartered in Shanghai and approved by the PBOC. It has become a major supplier of bank payment cards – ahead of Visa and MasterCard – and reports a high acceptance rate, ranging from 70% in Europe and North America to 90% in the Asia Pacific.24 CIPS was established in 2015 as an alternative to SWIFT. Although CIPS conducts only $50 billion worth of volume daily, compared to $400 billion for SWIFT, 25 the growth of its coverage has been impressive (+900% between October 2015 and December 2020).26 UnionPay and CIPS promote broader international use of the renminbi. One may expect that this trend will continue in the coming years. As China is the top economic partner of many U.S.sanctioned countries (e.g., Russia, Iran, Venezuela, North Korea, and Cuba), 27 those countries could complete the de-dollarization of their trade and financial system in the next decade. 3.5 The limits of challenging the U.S.-led IFA For a few years, Chinese authorities have had to endure the status quo on specific issues, either because it has been in their own interest to do so or because they refrained from challenging U.S. leadership. Consider the PRC’s strategy regarding its holdings of U.S. Treasury securities. Between December 2017 and May 2022, the percentage of China in all foreign holdings in federal debt declined from 19.1% ($1,185 billion) to 13.2% ($981 billion).28 Although China will continue to diversify its 8 foreign exchange reserves, there are few comparable alternative risk-free investments (He et al., 2016; Bernanke et al., 2020). Moreover, since the United States is China’s largest customer, a massive selloff of T-Bonds and T-Bills could destabilize the two economies and lead Washington to retaliate by implementing new protectionist measures. In addition, such a move could signal a hardening geopolitical stance and increase the risk of a direct conflict between the two superpowers. For the moment, it seems that China is neither able nor eager to change the international reserve system. Turn now to what has been the most spectacular setback suffered by China in the international financial field: namely, its failure to develop a credible international credit rating system. In the aftermath of the subprime crisis of 2007–2008, Chinese policy makers were critical of Moody’s and S&P. Dagong – a rating firm headquartered in Beijing – made a breakthrough in the sovereign rating area (Bush, 2021). Dagong’s credit opinions diverged from those of its U.S. competitors in the sense that emerging economies obtained much higher ratings whereas developed economies were rated lower (Gaillard, 2011). In fact, Dagong ratings, like those of other Chinese credit rating agencies, are too politicized and lack objectivity, which has prevented them from obtaining a regulatory license in the United States. Chinese authorities were so concerned by Chinese domestic credit rating agencies that they allowed S&P to rate domestic Chinese bonds in 2019. 29 This decision – unprecedented for a foreign firm – evidenced the low credibility of Chinese credit rating firms on their own domestic market. Section 4. Sovereign lending and debt restructuring practices: The Chinese way Documentation of China’s capital exports is opaque. China does not report on official lending and does not provide comprehensive standardized data on overseas debt stocks and flows. Credit rating agencies do not monitor sovereign borrowing from official lenders. Commercial providers such as Bloomberg and Dealogic do not track China’s official overseas loans. The PBOC does not publish its sovereign bond purchases or the composition of its portfolio. China is not subject to standard disclosure requirements of the Paris Club, the OECD Creditor Reporting System, and the OECD Export Credit Group. China reports to the BIS, but the coverage is incomplete. As a result, the data and information used here come from a small set of research works. Although they may not match perfectly, they provide a good overview of the activities of Chinese creditors. 4.1 The features of Chinese lending practices China’s economic growth and enormous trade surpluses since the late 1990s have led to the accumulation of massive foreign exchange reserves available for use as a foreign policy tool (Horn et al., 2021; Dreher et al., 2022). Such global imbalances are not a new feature of the global economy but have raised tensions in the increasingly conflictual China-U.S. relationship (Frieden, 2009; Eichengreen, 2015; Shaffer and Waibel, 2016). Today, China is the world’s largest creditor, far outstripping the combined Paris Club members. Over the last decade, non-Paris club members 9 such as the PRC have become more important. In 2016, non-Paris Club debt accounted for 13% of low-income countries’ public debt (Essl et al., 2019, p. 6). Besides, of $45 billion in scheduled sovereign debt interest payments due in 2020, $6.2 billion was owed to Paris Club members and $11.4 billion to China.30 Chinese debt contracts are built on harder terms, including confidentiality clauses, collateral arrangements, cancellation, acceleration, and stabilization clauses. Chinese creditors have signed over 2000 loan agreements with developing countries since the early 2000s. Although these loan agreements are subject to far-reaching confidentiality clauses, Gelpern et al. (2021) obtained a sample of 100 contracts, based on which they found indications that Chinese entities use standardized contracts varying by lender. China’s state-owned entities blend commercial and official lending terms and introduce novel ones to maximize commercial leverage over the sovereign borrower and secure repayment priority over other creditors. Around 30% of the contracts include a special bank account that effectively serves as security for debt repayment, an approach uncommon in sovereign lending since the early twentieth century.31 The consequence may be that a substantial share of debtor countries’ revenues is under the secret effective control of a single creditor, resulting in countries having a servicing capacity less than, and a risk of debt distress greater than, those assessed by conventional measures based on publicly available sources (Gelpern et al., 2021, pp. 4–6). Loan agreements used by China Eximbank and China Development Bank (CDB) all include versions of a cross-default clause, standard in commercial debt but uncommon in the context of bilateral or multilateral official lending. Certain loan agreements also allow cross-default to be triggered by actions adverse to the interests of “a PRC entity” (Gelpern et al., 2021, p. 7). Although Chinese domestic debates have often criticized IMF and World Bank conditionality in lending, Chinese lending shows forms of conditionality itself (Mattlin and Nojonen, 2015; Chesterman, 2016). Chinese-style conditionality comes in four varieties: First is political conditionality, including “basic diplomatic and political preconditions prior to receiving any funding”, in respect of the diplomatic isolation of Taiwan. The second is embedded conditionality, including “project-related demands regarding, for example, the use of Chinese-sourced contractors, sub-contractors, technology, equipment suppliers, management and training, as well as a Chinese workforce,” whereby “making aid conditional on the purchase of donor country products and technologies is one of the main economic aims of foreign aid.” The third is cross-conditionality, making conditions established by other creditors de facto conditions for loan disbursements by a new creditor.32 The fourth is emergent conditionality, describing the structural effects a history of funding and investment might create in the future, for example with Chinese-built infrastructure creating technological, financial, managerial, and educational dependencies of a host country on China (Mattlin and Nojonen, 2015). Lastly, it is noteworthy that Chinese interests abroad are considered interdependent and ‘solidary’ by the PRC. China has low involvement, for its size as a lender, in “vertical funds” combining private and public investment from multiple countries for sector-specific global development goals in areas including agriculture, climate, education, health, and regional and national reconstruction (Morris et al., 2021, pp. 28–31). Stand-alone and “100% made in China” projects are prioritized. 10 4.2 The features of Chinese debt restructuring practices China is not member of the Paris Club: this poses major challenges for at least some restructurings, given the size of China’s loans. Concretely, close to three quarters of the debt contracts reviewed by Gelpern et al. (2021) contain so-called “No Paris Club” clauses, expressly compelling the borrower to exclude Chinese debts from restructuring in the Paris Club of official bilateral creditors and from comparable debt treatment. These clauses predate and are in tension with the PRC’s commitments under the G20 Common Framework for Debt Treatments beyond the World Bank’s Debt Service Suspension Initiative (DSSI) announced in November 2020, in particular the commitment of G20 governments to coordinate debt relief terms for eligible countries (Gelpern et al., 2021, pp. 6–7). Turn to CDB, the world’s largest national development bank and China’s largest institution for overseas investment. In 2019, CDB had total assets of $2.4 trillion. It typically lends at rates above those of the World Bank, although sometimes below in cases of political interest. Depending on context, CDB can act as both an official and a commercial creditor. CDB has the status of a development finance institution to support China’s national initiatives and prioritize political objectives over profits. Unlike China Eximbank, CDB does not offer officially subsidized loans. Moreover, the Chinese government insists that CDB is not an official bilateral lender but instead a commercial bank under the DSSI. In development circles, CDB is seen as lacking international experience and credit risk management expertise, with less international staff than the PBOC (Rudyak and Chen, 2021, pp. 5–6). Contrary to China Eximbank, CDB loan restructurings do not require a government-to-government agreement. Decisions are made within the bank and remain rather decentralized, partly because CDB has several regional branches. Debt renegotiations involving CDB most frequently lead to rescheduling. This outcome is less favorable than that observed for China Eximbank’s and China International Development Cooperation Agency’s restructured loans, which are likely to include not only maturity extension but also haircuts. In a few cases, the latter agency may concede writeoffs (Rudyak and Chen, 2021, pp. 13–17). According to Beers et al.’s (2022) database, at least 25 sovereign borrowers were in default on China’s bilateral official loans in 2021. 33 Angola, the Republic of the Congo, Pakistan, and Venezuela accounted for 87% of total defaulted debt to Chinese official creditors.34 In general, the capacity of a distressed country to obtain a significant debt restructuring from China is contingent on several factors: the availability of alternative financing sources, a leadership change in the borrowing country, and tight bilateral relations between the borrower and China (Kratz et al., 2019). Horn et al. (2021) consider that the geopolitical objectives of the Chinese government influence Chinese official lending. They also estimate that about 50% of China’s lending may be “hidden.” Despite significant Chinese lending to crisis countries such as Iran, Venezuela and Zimbabwe over the past 15 years, China has not reported bank claims towards these countries to the BIS. Whereas other official creditors often lend to developing countries on concessionary terms with long maturities and at below-market rates, China often lends at market terms (with risk premia), with 11 shorter maturities, and with collateral clauses that secure repayment through commodity export proceedings (e.g., oil and wheat), giving China a seniority among other creditors. In these regards, China’s lending shows parallels with British, French, and German foreign lending in the 19th century, likewise market-based, partially collateralized by commodity income, and closely tied to political and commercial interests. Section 5. The underrated weakness of the IFA: The growing debt of developing countries At least two (nonexclusive) scenarios can be envisaged in respect of the future path of debt in developing countries. The first is a possible “debt trap” caused by debt overhang. The second involves the risk of debtor and creditor moral hazard. The short- and medium-term scenario is contingent on the future of the DSSI and the Common Framework. 5.1 Debt overhang Aggressive lending practices by China have already drawn attention in cases of financially distressed states, such as Zambia and Sri Lanka, which have borrowed significantly from Chinese lenders, thus suggesting that the PRC is engaging in “debt trap diplomacy”. This term was coined in 2017 by Brahma Chellaney, a professor of strategic studies at the New Delhi-based Center for Policy Research. He mentioned the China-Sri Lanka “debt for equity” deal for the port of Hambantota to popularize the notion that China engages in predatory lending. 35 The term has attained great popularity, generating nearly two million search hits on Google by 2018 as well as criticism that it has become a “meme” (Brautigam, 2020). In the case of Sri Lanka, although Chinese investment as part of the Belt and Road Initiative postdates Sri Lanka’s reliance on debt to fund internal conflicts with Tamil groups, Chinese BRI investment has allowed China to build, then obtain majority shareholdings in and a 99-year lease over, the port of Hambantota. In the case of Zambia, U.S. National Security Advisor John Bolton alleged in 2018 that China was making “strategic use of debt to hold states in Africa captive to Beijing’s wishes and demands”, including purported plans to take over Zambia’s national power company and airport. In response to Bolton’s comments, Zambia lodged an official protest with Washington, emphasizing in a press conference that Zambia did not use state assets or state enterprises as collateral for its loans with China (Brautigam, 2022, p. 1357). The theory of ‘debt trap diplomacy’ has also been expressed as a theory of ‘institutional eclipse’, with China acting as an ILOLR, providing a bilateral alternative outside of the current IFA. In this view, China offers debtor states emergency lending on more favorable terms – or in any event with reduced or more attractive conditionality – than the IMF in exchange for economic and diplomatic advantages: “Lending to countries across the developing world has assisted China’s efforts to export construction services, import natural resources, and secure important votes in international fora, such as Cambodia’s decision to block the Association of Southeast Asian Nations (ASEAN) 12 from issuing a joint statement rejecting China’s territorial claims in the South China Sea” (Sundquist, 2022). Other authors express skepticism over the scope of any political or diplomatic ambitions behind Chinese lending. Brautigam argues that evidence remains “weak for the ‘debt trap diplomacy’ hypothesis, which asserts that China deliberately indebts countries for the purpose of acquiring leverage and strategic assets.” She finds that, in the case of Zambia, China has exerted at most limited political pressure (and generated domestic political resistance) in spite of a large volume of lending. She also identifies potentially positive elements in the Chinese development philosophy, for example the critique by Li Ruogu, the former president of Eximbank, that the IMF Debt Sustainability Analysis framework fails to consider what debt is used for. China’s BRI debt sustainability framework, announced in 2019, differs in its willingness to lend notwithstanding a high risk of debt distress in case of growth-oriented projects. Brautigam suggests that Chinese lenders may be “supporting Zambia’s strategic vision, lending for projects with high growth potential” (Brautigam, 2022, pp. 1350–1351). Regardless of whether borrowing from Chinese lenders entails an intentional loss of sovereignty in favour of China, it is uncontroversial that Chinese lenders routinely impose stricter and more expensive terms than peer official lenders, potentially leading to increased poverty in debtor states. Chinese banks structure their loans to give them discretion to trigger cancellation or default remedies, increasing economic pressure on debtors and the incentives to repay. Another negative assessment draws on theories of debt dilution, according to which Chinese lending strategies intentionally exacerbate cooperation problems between creditors. In the absence of a sovereign insolvency mechanism, lenders seek de facto seniority, for example by agreeing contractual terms that are difficult to restructure in a crisis. The stricter terms of newer loans will facilitate fresh lending but dilute the seniority of existing debt, resulting in a “bad” debt structure that is extremely hard to restructure. Gelpern et al. (2021) note that this interpretation gels with the Chinese loan agreements reviewed, including the “No Paris Club” and special account (cash collateral) clauses, which are contractual terms effecting greater seniority and repayment advantages. As stated above, Chinese creditors provide debt relief predominantly through debt reprofiling, rather than face value debt reductions generally accepted by the Paris Club and private creditors, even in case of exogenous shocks such as the COVID-19 pandemic. Lengthy renegotiations resulting at best in maturity extensions without interest or principal reductions can contribute to worsening debt overhang that is unresolved, hampers growth and sustains poverty for years or even decades. 5.2 Debtor and creditor moral hazard The rivalry between the United States and China may encourage debtor moral hazard akin to what was observed in the second half of the 1970s, with debtors shopping for loans and exacerbating competition between lenders. For example, the Export–Import Bank of the United States (U.S. Eximbank) and China Eximbank may compete to provide lending for projects and states of questionable creditworthiness to pursue geopolitical aims. Darbellay and Gaillard (2022, pp. 69– 13 71) give the example of U.S. Eximbank’s approval of a $5 billion loan to Mozambique in 2019, the largest direct loan in its history, despite S&P rating Mozambique in “selective default” when the loan was approved. U.S. Eximbank emphasized its interest in the integrated liquefied natural gas project being carried out by U.S. companies, rather than by Chinese and Russian companies in the event of financing from those countries. Creditor moral hazard has materialized among Western systemic banks since the 1980s (see Flores Zendejas and Gaillard, 2022) but it can arise within the institutional framework of Chinese lending as well. Erie (2021, p. 107) notes that, because state-owned enterprises “rely on the Party State for insurance and on the PRC government as an arbitrator in their disputes with the host government, they tend to take excessive risks.” This problem arises with institutions in other countries, such as the U.S. Eximbank, but it “is more pronounced in state capitalism given the muted role of independent decision-making. Moral hazard has long been a problem in the Chinese domestic economy: governmental guarantees to enterprises against insolvency de-incentivize firms from internalizing risk.” There is a growing risk of massive sovereign defaults and disorganized debt restructurings, as in the 1930s and 1940s (Wynne, 1951). An assessment of this risk is made difficult by the confidentiality clauses and secrecy of Chinese lenders, which in parallel appear to be contributing to tensions between the World Bank and the present IFA, on the one hand, and Chinese lenders, on the other. Chinese entities have already effectively diluted and antagonized the World Bank. A recent World Bank publication urging “transaction-level debt transparency” mentions China only in passing, namely in the context of criticizing Chinese lending in Zambia, but it is difficult to read the publication other than as addressed to China, the global leader for confidential project finance in official lending. The World Bank authors emphasize that debt transparency is a critical basis for debt sustainability and creditworthiness assessments. Significantly, they also mention, without providing specifics, that their paper was “prompted by disclosure-related challenges and friction points that became evident during recent periods of widespread debt distress in developing countries.” In particular, the authors mention instances of “(i) the non-sharing of transaction-related information with IFIs that perform debt sustainability assessments and generate global debt information for stakeholders; (ii) revelations of ‘surprise’ and ‘hidden’ debt; (iii) undisclosed granting of collateral and quasi-collateral that, if disclosed, may impact creditor assessments of borrower liquidity or creditworthiness; and (iv) inter-creditor mistrust and tensions during debt restructurings” (Maslen and Aslan 2022, pp. 9 and 13). This expresses succinctly four key categories of pressure exerted by Chinese lending on the current IFA today. Section 6. Conclusion The IFA has gone through a series of substantial changes since 1944. They include the shift to a floating exchange rates regime in the 1970s, the pervasive role played by the IMF, the Federal Reserve, and the U.S. Treasury since the 1980s, and the establishment of international microprudential and macroprudential rules since the advent of financial globalization in the 1990s. 14 All these changes were spurred by U.S. authorities, who have aimed to fight systemic risk and protect the rights of international creditors. The emergence of China as a major commercial, economic, and financial power has exacerbated its rivalry with the United States and may be undermining the current IFA. The activities of the AIIB and the NDB – two China-based international institutions – do not seem to question fundamentally the present IFA. In contrast, Chinese sovereign lending and debt restructuring practices not only do they create coordination problems between creditors but they also burden developing countries with debt. These two issues should be tackled right now to prevent economic and geopolitical crises. References Asian Infrastructure Investment Bank (2021a) 2020 AIIB Annual Report. Beijing: AIIB. Asian Infrastructure Investment Bank (2021b) Auditor’s Reports and Financial Statements for the Year Ended Dec. 31, 2020. Beijing: AIIB. Bank for International Settlements (1998), 68th Annual Report. Basel: Bank for International Settlements. Beers, D., Jones, E., McDaniels, K. and Quiviger, Z. (2022) “BoC–BoE Sovereign Default Database: What’s New in 2022?,” Bank of England. Bernanke, B. S., Bertaut, C., Pounder DeMarco, L. and Kamin, S. B. (2011) “International Capital Flows and the Returns to Safe Assets in the United States, 2003–2007,” International Finance Discussion Paper No. 1014, Board of Governors of the Federal Reserve System. Block, C. (2022) “Design and Cost of U.S. Responses to the 2007–2009 Financial Crisis and the 2020 Covid-19 Pandemic,” in Flores Zendejas, J., Gaillard, N. and Michalek, R. (Eds) Moral Hazard – A Financial, Legal, and Economic Perspective. Abingdon: Routledge. Boz, E., Casas, C., Georgiadis, G., Gopinath, G., Le Mezo, H., Mehl, A., and Nguyen, T. (2020) “Patterns in Invoicing Currency in Global Trade,” IMF Working Paper WP/20/126. Brautigam, D. (2020) “A Critical Look at Chinese ‘Debt-Trap Diplomacy’: The Rise of a Meme,” Area Development and Policy, Vol. 5, No. 1, pp. 1–14. Brautigam, D. (2022) “China and Zambia: Creating a Sovereign Debt Crisis,” International Affairs, Vol. 98, No. 4, pp. 1347–1365. 15 Bush, C. (2021) “The Rise and Fall of Dagong Global Credit Rating Agency: A Geopolitical Challenge for the Rating Industry,” Journal of Financial Regulation, Vol. 7, No. 2, pp. 319–324. Chesterman, S. (2016) “Asia’s Ambivalence about International Law and Institutions: Past, Present and Futures,” European Journal of International Law, Vol. 27, No. 4, pp. 945–978. Chin, G. and Thakur, R. (2010) “Will China Change the Rules of Global Order?,” The Washington Quarterly, Vol. 33, No. 4, pp. 119–138. Darbellay, A. and Gaillard, N. (2022) “Moral Hazard in the Export Credit Industry,” in Flores Zendejas, J., Gaillard, N. and Michalek, R. (Eds) Moral Hazard – A Financial, Legal, and Economic Perspective. Abingdon: Routledge. Dreher, A., Fuchs, A., Parks, B., Strange, A. and Tierney, M. J. (2022) Banking on Beijing: The Aims and Impacts of China’s Overseas Development Program. Cambridge: Cambridge University Press. Eichengreen, B. (2015) Hall of Mirrors: The Great Depression, the Great Recession, and the Uses and Misuses of History. Oxford: Oxford University Press. Erie, M. S. (2021) “Chinese Law and Development,” Harvard International Law Journal, Vol. 62, No. 1, pp. 51–116. Essl, S., Celik, S. K., Kirby, P., and Proite, A. (2019) “Debt in Low-Income Countries – Evolution, Implications, and Remedies,” World Bank Policy Research Working Paper No. 8794. Financial Stability Forum (2009) Report of the Financial Stability Forum on Addressing Procyclicality in the Financial System. Basel: Financial Stability Forum. Flores Zendejas, J. and Gaillard, N. (2022) “The International Lender of Last Resort between Scylla and Charybdis,” in Flores Zendejas, J., Gaillard, N. and Michalek, R. (Eds) Moral Hazard – A Financial, Legal, and Economic Perspective. Abingdon: Routledge. Frieden, J. A. (2009) “Global Imbalances, National Rebalancing, and the Political Economy of Recovery,” Council on Foreign Relations, Center for Geoeconomic Studies. Gaillard, N. (2011) A Century of Sovereign Ratings. New York: Springer. Gaillard, N. (2016) “Coping with Reliance on Credit Ratings,” Banking & Financial Services Policy Report, Vol. 35, No. 7, pp. 12–21. 16 Gaillard, N. (2020) Country Risk: The Bane of Foreign Investors. Cham: Springer. Gaillard, N. and Michalek, R. (2022a) “The Institutionalization of Bailouts, 1970–1984,” in Flores Zendejas, J., Gaillard, N. and Michalek, R. (Eds) Moral Hazard – A Financial, Legal, and Economic Perspective. Abingdon: Routledge. Gaillard, N. and Michalek, R. (2022b) “Remarks and Policy Recommendations to Fight Moral Hazard,” in Flores Zendejas, J., Gaillard, N. and Michalek, R. (Eds) Moral Hazard – A Financial, Legal, and Economic Perspective. Abingdon: Routledge. Gaillard, N. and Waibel, M. (2018) “The Icarus Syndrome: How Credit Rating Agencies Lost Their Quasi Immunity,” SMU Law Review, Vol. 71, No. 4, pp. 1077–1116. Gelpern, A., Horn, S., Morris, S., Parks, B. and Trebesch, C. (2021) How China Lends – A Rare Look into 100 Debt Contracts with Foreign Governments. Williamsburg, Kiel, and Washington, DC: AidData at William & Mary, Kiel Institute for the World Economy, Center for Global Development, and Peterson Institute for International Economics. Gu, B. and Liu, T. (2022) “Shareholding Formulas in International Financial Institutions: Learning from the Asian Infrastructure Investment Bank,” Journal of International Economic Law, Vol. 25, No. 4, pp. 643–658. Hallaert, J-J. (2020) “The Tragedy of International Organizations in a World Order in Turmoil,” ECIPE Policy Brief No. 5/2020, European Centre for International Political Economy. He, Z., Krishnamurthy, A. and Milbradt, K. (2016) “What Makes US Government Bonds Safe Assets?,” American Economic Review, Vol. 106, No. 5, pp. 519–523. Helleiner, E. and Wang, H. (2019) “The Richness of Financial Nationalism: The Case of China,” Pacific Affairs, Vol. 92, No. 2, pp. 211–234. Horn, S., Reinhart, C. M. and Trebesch, C. (2021) “China’s Overseas Lending,” Journal of International Economics, Vol. 133, 103539. Jordà, Ò., Schularick, M., Taylor, A. and Ward, F. (2018) “Global Financial Cycles and Risk Premiums,” NBER Working Paper No. 24677. Kalmoe, N. P. and Mason, L. (2022) Radical American Partisanship – Mapping Violent Hostility, Its Causes, and the Consequences for Democracy. Chicago: University of Chicago Press. 17 Kratz, A., Feng, A. and Wright, L. (2019) “New Data on the “Debt Trap” Question,” Rhodium Group, Note, available at https://rhg.com/research/new-data-on-the-debt-trap-question. Liu, Z. and Papa, M. (2022) Can BRICS De-dollarize the Global Financial System? Cambridge: Cambridge University Press. Lorenzo, J. A. P. (2021) “A Path Toward Sustainable Development Along the Belt and Road,” Journal of International Economic Law, Vol. 24, No. 3, pp. 591–608. Maslen, S. and Aslan, C. (2022) “Enhancing Debt Transparency by Strengthening Public Debt Transaction Disclosure Practices,” Equitable Growth, Finance & Institutions Insight, World Bank. Mattlin, M. and Nojonen, M. (2015) “Conditionality and Path Dependence in Chinese Lending,” Journal of Contemporary China, Vol. 24, No. 94, pp. 701–720. Morris, S., Rockafellow, R. and Rose, S. (2021) “Mapping China’s Multilateralism: A Data Survey of China’s Participation in Multilateral Development Institutions and Funds,” Center for Global Development Policy Paper No. 241. New Development Bank (2019) New Development Bank Policy on Sovereign Loans & Loans with Sovereign Guarantee. Shanghai: NDB. New Development Bank (2021) Annual Report 2020. Shanghai: NDB. Nicolas, F. (2014) “La Chine et les institutions économiques multilatérales, entre révisionnisme et ‘statu quo’,” Politique étrangère, Vol. 79, No. 3, pp. 49–61. Perks, M., Rao, Y., Shin, J. and Tokuoka, K. (2021) “Evolution of Bilateral Swap Lines,” IMF Working Paper No. 2021/210. Pistor, K. (2019) The Code of Capital: How the Law Creates Wealth and Inequality. Princeton: Princeton University Press. Rudyak, M. and Chen, Y. (2021) “China’s Lending Landscape and Approach to Debt Relief,” Overseas Development Institute, Emerging Analysis. Shaffer, G. and Gao, H. (2021) “How China Took on the United States and Europe at the WTO,” in Shaffer, G. (Ed) Emerging Powers and the World Trading System: The Past and Future of International Economic Law. Cambridge: Cambridge University Press. 18 Shaffer, G. and Waibel, M. (2015) “The (Mis)Alignment of the Trade and Monetary Legal Orders,” in Halliday, T. C. and Shaffer, G. (Eds) Transnational Legal Orders. Cambridge: Cambridge University Press. Shaffer, G. and Waibel, M. (2016) “The Rise and Fall of Trade and Monetary Legal Orders: From the Interwar Period to Today’s Global Imbalances,” in Mallard, G. and Sgard, J. (Eds) Contractual Knowledge – One Hundred Years of Legal Experimentation in Global Markets. Cambridge: Cambridge University Press. Song, K. and Xia, L. (2020) “Bilateral Swap Agreement and Renminbi Settlement in Cross-Border Trade,” Economic and Political Studies, Vol. 8, No. 3, pp. 355–373. Stephen, M. D. and Skidmore, D. (2019) “The AIIB in the Liberal International Order,” The Chinese Journal of International Politics. Vol. 12, No. 1, pp. 61–91. Sundquist, J. (2022) “Institutional Eclipse: How Chinese Loans Substitute for IMF Assistance,” mimeo, available at https://jamessundquist.github.io/website/docs/Sundquist_JMP.pdf. Wang, H. (2019a) “China’s Approach to the Belt and Road Initiative: Scope, Character and Sustainability,” Journal of International Economic Law, Vol. 22, No. 1, pp. 29–55. Wang, H. (2019b) “The New Development Bank and the Asian Infrastructure Investment Bank: China’s Ambiguous Approach to Global Financial Governance,” Development and Change, Vol. 50, No. 1, pp. 221–244. Wang, H. (2020) “Selective Reshaping: China’s Paradigm Shift in International Economic Governance,” Journal of International Economic Law, Vol. 23, No. 3, pp. 583–606. Williamson, J. (1990) “What Washington Means by Policy Reform,” in Williamson, J. (Ed) Latin American Adjustment: How Much Has Happened? Washington, DC: Institute for International Economics. Würdemann, A. I. (2018) “The BRICS Contingent Reserve Arrangement: A Subversive Power Against the IMF’s Conditionality?,” Journal of World Investment & Trade, Vol. 19, No. 3, pp. 570–593. Wynne, W. (1951) State Insolvency and Foreign Bondholders – Volume II. New Haven: Yale University Press. 19 1 Thanks to Benjamin Letzler for research assistance. The U.S.-led IFA is also indirectly threatened by the mounting radical partisanship in U.S. politics (see Kalmoe and Mason, 2022). 3 Authors’ computations based on IMF data. In 2021, the percentage reached 59%. 4 Authors’ computations based on Federal Reserve data, see https://fred.stlouisfed.org/series/DGS10. 5 Authors’ computations based on the United Nations Conference on Trade and Development (UNCTAD) and World Trade Organization (WTO) data. 6 US real interest rates (i.e., the Federal Funds effective rate minus the Consumer Price Index growth rate) fell from 1.9% in the 1990s to 0.1% in the 2000s, and ˗1.1% in the 2010s. Authors’ computations based on Federal Reserve data. 7 Authors’ computations based on Bank for International Settlements (BIS) data. 8 European and U.S. lawmakers withdrew the references to credit ratings in their financial regulations in the early 2010s (Gaillard and Waibel, 2018). Yet the use of alternative credit measurements has proved difficult (Gaillard, 2016). Investors continue to extensively scrutinize credit ratings. 9 The FSF was a forum including international financial institutions (IFIs) and finance ministries and central bankers of the Group of Seven. It was succeeded by the Financial Stability Board (FSB) in 2009. When the FSF report was released, the United States was the country posting the highest number of financial institutions in the world’s 30 largest banks by total assets, see www.gfmag.com. 10 The IMF lent a total of $35 billion to Indonesia, South Korea, and Thailand in 1997 (BIS, 1998, p. 134). 11 See Block (2022) for an overview of how U.S. authorities coped with the two crises. 12 The title of the 2021 IMF Annual Report (“Build Forward Better”) echoes the “Build Back Better” agenda promoted at the time by President Biden. 13 These specific loans include Flexible Credit Lines (FCLs) and Precautionary and Liquidity Lines (PLLs). 14 See the IMF Annual Reports published since 2012. 15 See https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information. 16 This arrangement, set up by the OECD in 1978 to control export subsidies, brings together high-income economies. 17 In the meantime, Chinese authorities invest massively in building trade law capacity to defend their policy (Shaffer and Gao, 2021). 18 In 2017, emerging and developing countries owed $380 billion to China compared to $246 billion owed to the 22 Paris Club members (Horn et al., 2021). 19 The ASEAN is composed of ten countries: Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Viet Nam, Laos, Myanmar, and Cambodia. 20 More than 51% of these bilateral swap lines (in volume) were signed with Hong Kong, South Korea, Singapore, the Eurozone, and the United Kingdom. 21 The top contributing member is Beijing ($41 billion), ahead of New Delhi, Brasilia, and Moscow ($18 billion each), and Pretoria ($5 billion). 22 The Asian Development Bank and the World Bank are commonly perceived as Japan-led and U.S.-led institutions. 23 Skidmore’s chapter in this volume analyzes how the AIIB and the NDB compete with multilateral development banks and challenge the global development finance regime. ent Bank and the World Bank are commonly perceived as Japan-led and U.S.-led institutions. 24 See https://www.unionpayintl.com/en/mediaCenter/newsCenter/companyNews/7374.shtml. 25 See https://asiatimes.com/2022/02/china-can-break-swift-sanctions-but-at-a-high-cost. 26 See https://www.cips.com.cn/cipsen/7050/index.html. 27 Authors’ classification based on https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programsand-country-information and https://oec.world. 28 Authors’ calculations based on U.S. Treasury data, see https://ticdata.treasury.gov. 29 PRNewswire, “S&P Global Ratings receives first-of-its-kind approval to enter China domestic bond market,” 28 January 2019. 30 https://www.imf.org/Publications/fandd/issues/2020/09/debt-relief-for-the-poorest-kevin-watkins. 31 An exception was the U.S. emergency loan to Mexico in 1995, requiring oil revenues to flow through an account at the Federal Reserve Bank of New York. 2 20 32 For example, Chinese creditors suspended billions in funding for Indonesian power projects pending resolution of a small dispute between the Indonesian government and a Chinese lender over a $232 million loan for the purchase of 15 civilian aircraft from a Chinese manufacturer. 33 Nearly two-thirds of these defaulting countries are African (Angola, Burundi, Cameroon, Cape Verde, Central African Republic, Chad, the Republic of the Congo, the Democratic Republic of the Congo, Djibouti, Ethiopia, Gabon, Kenya, Mauritania, Mozambique, Sierra Leone, and Zambia). Others are in Latin America, Asia, and Oceania (Dominica, Maldives, Pakistan, Papua New Guinea, Samoa, Tajikistan, Tonga, Venezuela, and Yemen). 34 Authors’ calculation based on Beers et al.’s (2022) database. 35 B. Chellaney, “China’s Debt-Trap Diplomacy,” Project Syndicate, 23 January 2017, available at https://www.project-syndicate.org/commentary/china-one-belt-one-road-loans-debt-by-brahma-chellaney-2017-01. 21