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The Political Economy of Chinese Debt and IMF Conditionality

Despite a substantial literature on IMF programs, little is known about whether and to what extent Chinese loan exposure shapes IMF program design. Our starting point is that Chinese loans are tied into projects that promise to generate sufficient revenue to repay these loans and entail elite kickback schemes. We expect that governments turn to the IMF for bailout funding when a severe shock erodes the value of the underlying loan collateral requiring to mobilize revenues and implement austerity measures. Anticipating fierce domestic resistance, the IMF becomes the politically most viable option to absorb the domestic political heat while allowing to retain elite kickback schemes. As a result, we expect governments to accept a `whatever-it-takes' number of loan conditions. Using cross-country time series analysis for up to 162 countries between 2000 and 2018, we show that defaults on Chinese debt trigger IMF programs only when a country experiences a severe adverse shock. Countries tapping the IMF also accept a greater number of loan conditions. From a policy perspective, our findings are a call for targeted governance reforms of the global financial safety net that go beyond program safeguards and loan conditions fostering sovereign debt transparency.