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Borrowing in the Shadow of China

March 3, 2022

Kuala Lumpur Research Seminar Series

  • Emerging economies' debt to China is large, non-marketable, and opaque. We study the impact that such borrowing from China{which is almost completely official debt-has on the equilibrium quantities and prices for marketable sovereign debt. We do so by using a standard sovereign debt model with long-term debt augmented with subsidized Chinese loans that are subject to rollover risk. We find that following a positive inflow from China our model economy chooses to re-balance its debt portfolio by deleveraging from market debt. In the process it pays lower spreads and faces less volatile consumption. On the other hand, when facing a capital outflow vis-a-vis China, the economy taps international debt markets, levers up on defaultable debt, and ends up paying higher and more volatile spreads in equilibrium. These model predictions are consistent with our panel-data evidence from emerging and low-income economies. Finally, we use the model to discuss the welfare gains from having access to Chinese loans and find that they are positive but smaller when default risk is material.

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  • Illenin O. Kondo is a Senior Research Economist at the Federal Reserve Bank of Minneapolis. Prior to joining the Minneapolis Fed, he was an Assistant Professor of Economics at the University of Notre Dame. He also served as a Senior Economist at the Federal Reserve Board of Governors. His research focuses on quantitative macroeconomic models of sovereign debt crises, trade-induced labor reallocation, and the optimal design of infrastructure networks. He holds a Ph.D. in Economics from the University of Minnesota, a master’s in Electrical and Computer Engineering degrees from Georgia Tech, and a Diplôme d’Ingénieur from Supélec in France.


  • WHEN (KUALA LUMPUR TIME): Thursday, March 3, 2022: 9:00-10:00am
  • WHEN (ET/Washington, D.C. TIME): Wednesday, March 2, 2022: 8:00–9:00pm