China, the IMF, and Sovereign Debt Crises

Abstract

Abstract The rise of China as a major bilateral lender has transformed the financial landscape for developing countries and, consequently, the process of resolving debt crises. We examine how China’s loans impact the response of the International Monetary Fund (IMF) to countries in debt distress. We argue that China’s lending approach and its absence from creditor forums, notably the Paris Club, can complicate the IMF’s efforts in managing debt crises. When China is a major lender, the IMF cannot rely on the Paris Club to coordinate bilateral creditors, and concerns about coordination, free-riding, and borrowers’ outside options can make it more difficult to agree on an IMF program. Therefore, we expect that countries that have borrowed more from China will undergo more protracted negotiations with the IMF in a debt crisis. We test our argument using data on the number of negotiating trips by IMF staff to borrowing countries to prepare IMF loans from 2000 to 2019. We find that countries with higher levels of outstanding debt to China require a greater number of IMF negotiating trips if they are in debt distress at the time. Our findings highlight the impact of Chinese lending on the sovereign debt regime and contribute to debates about China’s engagement with multilateralism.