Daniel Berkowitz (University of Pittsburgh) - United States Financial Sanctions and the Surge of Chinese Lending

BOFIT seminars

BOFIT Seminar - Daniel Berkowitz (University of Pittsburgh) - United States Financial Sanctions and the Surge of Chinese Lending

Co-authors: Yichen Sun (University of Macau), Zehao Wang (University of Macau) and Sili Zhou (University of Macau)

Abstract
The United States has increasingly imposed financial sanctions on foreign economies for activities including trading in weapons of mass destruction, supporting terrorism and drug cartels, and military aggression. We find that during 1990-2023, U.S. financial sanctions were associated with a 33% reduction in lead syndicated loans from non-Chinese lenders in the G7 and major financial centers. However, Chinese mainland and overseas lead lenders offset this credit contraction by approximately 11.30%. We further show that in Hong Kong, non-Chinese and overseas Chinese lead lenders almost equally covered the credit gap in sanctioned economies, indicating that our estimates of the Chinese offset are conservative. Finally, firms that increased their leverage with Chinese lenders during sanction periods exhibited lower operational efficiency, suggesting that Chinese syndicated loans are an inferior substitute.

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