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2017-03-28 11:29:59
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As America retreats, China advances
THE IMF systematically impoverishes foreigners , and the World Bank s advice
has negative value to its best clients . These harsh words were voiced not by
lefty critics of the Washington Consensus, but by two men (David Malpass and
Adam Lerrick, respectively) whom Donald Trump has picked to lead his Treasury s
dealings with the rest of the world, including the international financial
institutions (IFIs), such as the World Bank and IMF, and the G20 group of
leading economies.
Their future boss, Steven Mnuchin, America s treasury secretary, is not much
more reassuring to the global financial establishment. At his first G20
meeting, in Baden-Baden in Germany on March 17th-18th (pictured), he vetoed a
long-standing pledge to resist all forms of protectionism . It had often been
breached. But hypocrisy is the tribute vice pays to virtue.
To veterans of international economic affairs, this combative stance is
baffling. America s government now seems to disdain a set of institutions it
nurtured into life institutions that are more commonly criticised for following
America s will too closely. The United States is just handing the leadership
over to China of the multilateral system, Jeffrey Sachs of Columbia University
told Bloomberg this week.
But if there is a vacancy, is China qualified or even interested in the job? In
January President Xi Jinping seemed to audition for the role in a speech
praising globalisation at the World Economic Forum in Davos, Switzerland. As
evidence of its capabilities, China can also point to a hefty portfolio of
chequebook diplomacy. The China Development Bank, one of its policy lenders,
already has a bigger book of overseas assets than the World Bank. Another
institution, the Export-Import Bank of China, is not far behind. In addition,
the country s central bank has extended currency-swap lines to over 30
countries, including many that America s Federal Reserve would not touch.
What about its willingness? Most of China s economic diplomacy to date has been
bilateral, allowing it to win loyalty, reward friends and secure contracts for
its companies. Over 60 countries will, for example, supposedly benefit from Mr
Xi s nostalgic vision of a revived Silk Road (the Silk Road Economic Belt and
21st Century Maritime Silk Road , mercifully shortened to One Belt, One Road ,
or OBOR).
As for multilateral efforts, China s most eye-catching initiatives have worked
around the existing system, not through it. It set up two multilateral lenders
of its own, the New Development Bank (known as the BRICS bank, based in
Shanghai, with financial contributions from Brazil, Russia, India and South
Africa as well as itself), and the Asian Infrastructure Investment Bank (AIIB),
in Beijing, which just increased its membership to 70, including every G7
country except Japan and America.
So it might seem that China has little interest in filling any gaps America
might leave in the old multilateral system. But that would ignore another, less
heralded trend. Overshadowed by its bilateral boondoggles and multilateral
innovations, China s relationship with the incumbent IFIs has been warming. It
has become more compliant with G20 commitments, according to the G20 Research
Group at the University of Toronto (see chart). Its currency is now more fairly
valued and its current-account surplus has narrowed, removing a bone of
contention with the IMF.
The IMF s decision in 2015 to include the yuan as one of five reserve
currencies in its Special Drawing Rights basket has also helped to rebut the
notion that the fund is an arm of an American policy of containment. Moreover,
since China s ham-fisted devaluation earlier that year, it has often sought the
IMF s advice on managing the transition to a more flexible yuan and
communicating its policy to the markets.
China is similarly happy to learn what it can from the World Bank, which has
advised it on everything from managing the debt of its provinces to cleaning
the air in its cities. The bank s suggestions are not always taken. But at
least China seems to value its advice non-negatively.
China s relationship with these institutions is also becoming more generous. It
is now the 11th-biggest donor to the International Development Association
(IDA), the arm of the World Bank that helps the world s poorest countries. The
China Development Bank has co-financed several World Bank projects in Africa.
Last autumn, when the IMF was looking for money to help Egypt, it phoned China,
which agreed to extend a currency-swap line worth 18bn yuan ($2.6bn). The call
took only five minutes and China s generosity embarrassed the G7 into stumping
up some money in addition. China had been similarly helpful to the IMF bail-out
of Ukraine a year earlier.
The World Bank and the IMF are imperfect vehicles for China s economic
diplomacy. The bank s capital constraints might inhibit a big expansion in its
lending and China s voting power and financial stake in the IMF will rise only
if America permits. It took Congress six years to approve the last reform and
it is hard to imagine the next round, due in 2019, winning much support from Mr
Trump. But by adding extra dollops of financing to favoured bank and fund
programmes, China can nonetheless steer the multilateral system indirectly, by
adding its weight where it sees fit.
In the long term, if China becomes the world s leading economy, it is
conceivable it will become the biggest financial contributor to the bank and
the fund. At that point, according to their articles of agreement, their
headquarters would have to decamp to China. All the more reason for the World
Bank to help Beijing clean its air.