China’s Central Bank is Becoming the Developing World’s “Payday Lender”

In our recent op-ed for Barron’s, we argued that China’s central-bank currency swap lines have become a hidden lifeline for poor, heavily indebted nations. It is also a costly one, with rates well in excess of those charged on Fed swaps or IMF and World Bank loans. 

Our CFR Central Bank Currency Swaps Tracker shows that the People’s Bank of China (PBoC) has signed an estimated 40 swap-line agreements since 2009, giving its partner central banks access to some $600 billion worth of Chinese currency (RMB). Last year’s total amount outstanding hit a new high of almost $33 billion. 

Though PBoC swap lines are marketed as a means to facilitate trade settlement in RMB, more than three-quarters of its partners have drawn on them to address individual solvency problems—those related to balance of payments and sovereign debt. Permanent Fed swap lines, in contrast, have been issued to only a handful of the world’s richest countries in order to meet short-term liquidity needs during times of global financial stress—such as during the 2007-2008 financial crisis and 2022 Covid-19 pandemic. 

Fed and PBoC swap-line usage differs not only in purpose but also in effective maturity. As shown in the left-hand figure, the amount drawn on Fed swap lines peaks during global-liquidity squeezes, while the amount outstanding remains low due to rapid unwinding of the transactions. Many PBoC swap-line partners, in contrast, roll over their debt each year, prolonging loan maturities and keeping the amount outstanding high—and typically rising. This can be seen clearly in the right-hand figure. Most notably, heavily indebted Pakistan and Mongolia have been rolling over their RMB swaps continuously for over a decade. 

PBoC swap lines complicate debt monitoring, as the agreements often have ambiguous usage restrictions that confound the determination of reserve adequacy. Further, the World Bank does not require countries to report swap-line loans with maturities of less than a year, producing inconsistencies in measures of foreign reserves and debt obligations. With the growing use of these costly and opaque “payday loans,” the IMF and World Bank—the developing world’s biggest creditors—need to demand far greater transparency from Beijing.