(Bloomberg) -- The World Bank will scale back loans to China. No matter, China wins anyway.
That’s because China will boost its shareholding in the Washington-based lender, under a capital increase approved by bank members late last month. The U.S. and Japan will each see their stakes trimmed a tad, though they will remain the two biggest voting shares.
The World Bank was created by wealthy countries in 1944, to rebuild a war-shattered world and to reduce global poverty by lending to developing nations. China was once the sort of economy that benefited from World Bank programs; now it is becoming the sort of economy that underwrites them.
Cutting back lending to China was key to getting U.S. support for increasing the World Bank’s capital, a move the organization had long sought. How the logjam was resolved says a lot about how China’s role in the international economic system is evolving.
Beijing doesn’t really need World Bank loans at this point. And besides, it’s leading the Asian Infrastructure Investment Bank, a separate development lender often portrayed as part of a challenge to the post-1945 U.S.-led global economic order. The World Bank and its sibling, the International Monetary Fund, are iconic pieces of that U.S.-led order. While China builds one institution, its influence over the “old guard” institution expands regardless.
China isn’t necessarily out to build a rival system, per se, but sometimes it seems more like an investor diversifying its portfolio, a point Evan Feigenbaum at the Paulson Institute makes broadly in a recent essay. Its increased sway at the World Bank is only the latest coup.
How did China score this goal? Because the U.S. has all but vacated the field.
The World Bank had been pressing to replenish its coffers for a while, but that would be possible only if its largest shareholder, the U.S., went along. Whenever the issue of more money for the IMF or the World Bank arises, it’s a tough sell in domestic politics, more so in the “America First” age of President Donald Trump. The U.S. resisted paying, and wanted changes at the bank — questioning among other things why the World Bank was still lending so much to China.
Among the compromises thrashed out to get the Treasury Department on board was an agreement that the bank would focus more on lending to “low-middle-income countries.” China is classified as an “upper-middle-income” nation. So while China stands to get less aid, because of the terms of the capital increase, its stake in the bank’s main fund rises to 5.7 percent from 4.5 percent. Doesn’t sound like much, but it’s moving up on Japan, which slips to 6.8 percent from 6.9 percent. The U.S. will retain the greatest sway at 15.9 percent.
Not that China’s borrowing relationship with the World Bank ends abruptly. Change will come “gradually,” World Bank President Jim Yong Kim told reporters on April 21. That’s probably good enough for everyone, China included, to declare victory and move on. The bank had certainly been pressing hard for the capital increase, as had American allies like the U.K., arguing the lender needed the firepower to finance projects in developing countries. The unspoken threat is: If the World Bank doesn’t fill that need, Beijing’s Asian Infrastructure Investment Bank will.
China doesn’t get a huge amount more from its slightly larger World Bank stake, but it’s the signaling that may be more important. China is comfortable enough to be one of the bigger players — though clearly not the biggest — in an existing U.S.-designed institution, while building its own version of that system to accomplish some of the same goals.
As borrower or lender, China appears to be a winner either way.
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