Abstract
In an increasingly interconnected global economy, sovereign credit risk has become a vital factor influencing financial stability and macroeconomic resilience. How sovereign risk propagates across sectors and countries constitutes an important research question. This research examines the dynamics of sovereign credit risk among Belt and Road Initiative (BRI) countries using credit default swap (CDS) data from 2010 to 2021. Through three empirical studies, this work addresses the main drivers of sovereign risk, focusing on sustainable development, economic integration, and geopolitical influences in shaping risk transmission and financial resilience.The first study investigates the impact of environmental, social, and governance (ESG) factors on sovereign credit risk connectedness. It reveals that BRI countries with stronger environmental performance exhibit lower risk exposure to other nations within the interconnected sovereign CDS network. Bilateral trade and foreign direct investment (FDI) are also identified as key channels through which risk is transmitted, with geographical distance emerging as a dominant explanatory factor in shaping sovereign risk spillovers within the context of BRI. These findings emphasize the significance of ESG strategies not only for sustainable development but also for enhancing the resilience of financial systems to external shocks. Policymakers are encouraged to value the ESG factors in policy design to manage debt vulnerability better and facilitate long-term financial stability.
The second study employs a time-varying-network-model to investigate the causal impact of joining the BRI on the risk transmission between China and BRI member countries. This study finds increased risk spillovers from China to BRI countries post-BRI-membership, with foreign direct investment and Chinese exports identified as key channels. These findings underscore the need for effective policy measures to manage sovereign risk and balance the economic benefits and financial vulnerabilities associated with BRI participation. This study contributes to the growing literature on the economic and financial effects of the BRI by providing empirical evidence of sovereign credit risk dynamics within the network. It emphasizes the importance of sovereign risk networks as a critical metric for assessing economic interconnectedness and exposure to risks among BRI countries as they deepen their cooperation with China.
The third study explores the impact of geopolitical tensions, the U.S.-China trade war, on the sovereign risk dynamics within the BRI network. The study reveals a system-wide trend of decentralization in sovereign risk connectedness among BRI countries. However, this decentralization is disrupted when geopolitical competition between China and the United States intensifies. The increased economic conflicts between these two major nodes in the network lead to more significant risk spillovers between China and BRI countries. This feedback loop illustrates how geopolitical conflicts can exacerbate sovereign risk transmission, creating a two-way risk contagion channel that reshapes the financial risk network structure. The main results imply that greater financial integration may also increase the risk of adverse contagion in the event of a large negative shock. This paper highlights the growing importance of geopolitical risk management in ensuring financial stability, particularly for economies heavily concentrated on major trade and investment partners.
| Date of Award | 15 Jul 2025 |
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| Original language | English |
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| Supervisor | Chaoyan Wang (Supervisor), Jingong Huang (Supervisor) & Meryem Duygun (Supervisor) |