Chinese banks and their EMDE borrowers: have their relationships changed in times of geoeconomic fragmentation?

Summary

Focus

Although Chinese banks stand out as the top cross-border lender to most emerging market and developing economies (EMDEs), their global expansion has recently slowed. We use their outstanding amounts and market shares in up to 85 EMDEs over the 2017 to 2022 period to explore the role of bilateral economic ties, borrower risk variables and foreign policies. For bilateral economic ties, we study trade, foreign direct investment (FDI) and portfolio flows between China and its borrower countries. We use debt burden measures and perceived corruption as borrower risk variables. With respect to foreign policies, we analyse both China-specific policies such as the Belt and Road Initiative and borrower-specific policies, some of which reflect geoeconomic fragmentation trends.

Contribution

Our contributions are threefold. First, by exploring both outstanding amounts and market shares, we provide a novel analysis of the evolution of Chinese banks' cross-border lending that focuses on not only Chinese banks but also their lending relative to that of other reporting countries' banks. Second, we expand the type of borrower country characteristics included in the typical panel analyses of cross-border lending to examine borrowers' risk perceptions. Third, we shed light on the relationship between Chinese banks' global business and Chinese policy initiatives, such as the Belt and Road Initiative or central bank swap lines, as well as the potential role of geoeconomic fragmentation trends.

Findings

Against the backdrop of a generally slower expansion following the Covid-19 pandemic, three findings emerge from our analysis. First, correlation patterns have shifted from cross-border lending and trade to lending and FDI. Second, Chinese banks exhibit different levels of risk tolerance relative to other countries' banks, as borrower country risk variables are positively correlated with Chinese banks' market shares but not with their amounts of cross-border lending. Third, China's Belt and Road Initiative reinforces the shifting correlation from trade to FDI, while borrowers that could benefit from geoeconomic fragmentation do not display stronger FDI-lending relationships.

Abstract

While Chinese banks have become the top cross-border lender to EMDEs, their expansion has slowed recently, both in terms of volume and market share. Also, the strong correlation of China's bilateral trade and its banks' cross-border lending has weakened, while during 2020- 22 lending became more positively correlated with FDI. In our paper, we analyse these patterns and we explore the role of borrower risk variables and foreign policies. Our findings show that, although the shifting correlation from trade to FDI is a general EMDE phenomenon, China's Belt and Road Initiative reinforces it. By contrast, borrowers that potentially benefit from geoeconomic fragmentation do not display stronger FDI-lending relationships. We also find that Chinese banks exhibit different levels of risk tolerance relative to other bank nationalities as borrower country risk variables are positively correlated with Chinese banks' market shares, but not with their amounts of cross-border lending.

JEL Classification: F34, F36, F65, G21

Keywords: cross-border lending, chinese banks, trade, FDI, borrower indebtedness, pandemic, sanctions, geoeconomic fragmentation