The Lender of First Resort? Chinese Swap Lines, the IMF and the Changing International Financial Architecture

Since its founding, the International Monetary Fund (IMF) has in theory sought to act as the international “lender of last resort,” providing financing to countries facing balance-of-payments and macrofinancial pressures. 

However, in the 21^st century, the landscape of international rescue lending has shifted. China has become the world’s largest bilateral lender, providing assistance comparable to the IMF and acting as a lender of last resort: providing large balance-of-payments loans and foreign exchange swap lines.

By analyzing each case of the People’s Bank of China (PBOC) swap line usage, a new working paper by Julian Watrous and Stephen Paduano examines the new role of PBOC swap lines within the Global Financial Safety Net (GFSN), focusing on their usage during macroeconomic crises, their potential as alternatives to IMF financing and their role alongside IMF programs.

Key findings: 

• PBOC swap lines have only rarely substituted for IMF financing.
  • In these cases, swap line access may allow for increased policy autonomy and provide helpful short-term liquidity, but it may also delay macroeconomic adjustment in borrowing countries.
• Mostly, PBOC swap lines do not function as an alternative to IMF financing due to key shortcomings related to pricing, duration, currency denomination and available financing amounts.
  • Instead, the authors reveal that PBOC swap lines are used most often ahead of, or alongside, IMF programs.
• Swap lines have been a helpful addition to the GFSN in two main contexts: 1) as bridge loans and 2) as supplementary financing, helping to facilitate and bolster IMF programs.

Ultimately, the authors argue that the better foreign economic practice is to “compete with China” in the sense of scaling up both conventional lending and swap line financing. A welfare-enhancing approach to geoeconomic competition can already be seen in the creation initiatives such as the US Development Finance Corporation, which provides various forms of financing to low- and middle-income partner countries and was framed as an effort to compete with China’s Belt and Road Initiative. They also note that growing financial risks to China’s swap line lending may endanger the network’s future usefulness as the country moves to impose stricter conditions or remove access altogether.