Should the World Bank Still Lend to China?

♠ Posted by Emmanuel in , at 4/16/2018 01:17:00 PM
There's an interesting behind-the-scenes discussion going on at the World Bank about the Chinese still receiving loans from the development lender. Not only is a country well on its way to becoming the world's largest economy still borrowing, but it's actually the largest borrower at its International Bank for Reconstruction and Development (IBRD) arm, which charges at market rates plus a relatively small spread. From the Financial Times:
China was the IBRD’s top borrower last year, according to the World Bank, with $2.4bn in funds committed. That was 11 per cent of the IBRD’s lending and more than it committed to education and health programmes worldwide.
Things get a more interesting when politics enter the fray. While the US wants to involve China in the workings of the World Bank, it does not want China to begin rivaling American influence at the development lender at a time when the World Bank requires more funding to become self-sustaining in its lending activities. Hence, Americans have to juggle four hard-to-reconcile objectives:
  • Maintain Chinese interest in participating at the World Bank as a contributor
  • Limit Chinese borrowing at the World Bank as an IBRD borrower
  • Keep American influence at the World Bank despite Trump's "America First" (isolationist) inclinations
  • Encourage lending to truly lower-income countries, not middle-income ones like China
The compromise being worked on to meet these disparate objectives is somewhat elaborate:
The increase in paid-in capital will be split into two with $7.5bn going to the International Bank for Reconstruction and Development, the bank’s main arm, and $5.5bn to the International Finance Corporation, its private sector lender, the official confirmed. The US is set to provide $1.3bn to the IBRD capital increase, the official added, but has not yet decided whether it will inject new capital into the IFC.
As part of the deal China will see its voting power in the IBRD rise from 4.45 per cent to around 5.7 per cent, people familiar with the matter said. The deal is expected to be endorsed in principle by World Bank shareholders at the spring meetings, according to people familiar with the discussions. Final approval is expected before this year’s autumn meetings. 
Then there is the US love-hate relationship with China:
The US has been concerned about the World Bank lending to a rival power that has been sitting on trillions of dollars in foreign currency reserves since Barack Obama was president. But Mr Kim has long argued that lending to a rising China helps to solidify a future for the World Bank and gives it a voice in Chinese economic reforms.

The Trump administration’s push to get the World Bank to stop lending to countries such as China is likely to take time to take effect. Some people familiar with the discussions said Beijing’s cost of capital at the bank would not rise immediately, as the new band for countries in its situation was established. Instead, they said, the interest charged to countries such as India in lower bands could be reduced. 
It's a fine line to thread in dealing with China that the Americans face, divided as they are among themselves to begin with. The Obama-era appointee Kim wants to engage with China, while the Trump administration alternately wants to leave the World Bank alone or limit China's role if it does choose to engage with the development lender. Why a country with historically unprecedented foreign exchange reserves [China] needs to borrow from the World Bank is also puzzling: Maybe it's more for gathering technical assistance-style knowledge than funding per se.