China's Overseas Lending in Global Finance Cycle

China’s rising presence in international finance, which has long lagged behind its prominence in international trade, is now reshaping global financial dynamics. Using a large sample of developing countries, this paper documents that countries more reliant on China’s lending are less exposed to the global financial cycle in exchange rates, equity prices, bond yields, and capital flows. These countries were not less exposed before China became a major lender, and trade linkages to China do not explain these results. Since China lends primarily in dollar, the exposure reduction is not through the traditional channel of mitigating currency mismatch. These findings suggest that international lending plays a unique role in insulating developing countries from global shocks, and through this channel U.S. and Chinese policies interact to shape global financial outcomes.