Is the World Bank lending too much to China?

by on October 15, 2017 at 12:29 am in Current Affairs, Economics, Political Science | Permalink

The Trump administration is demanding the World Bank allocate less capital toward Chinese projects:

“The bottom line here is right now we’ve got too high a percentage of the World Bank’s balance sheet that’s going to countries and to projects that already have ample borrowing capacity,” a senior Treasury official told Reuters, which noted that China is the IBRD’s biggest recipient of development loans, totaling $2.4 billion.

As I understand it, the World Bank makes money on these loans and there is a cross-subsidy of other Bank activities, most of all aid.  A World Bank that stopped such loans would be poorer and less skilled, and over time could devolve into one of the poorer, less effective poverty-fighting parts of the United Nations, without much of a political power base at that.

Yet China has several trillion dollars worth of reserves.  They seem to like, and be willing to pay for, World Bank infrastructure expertise when bundled with the loans.  Given the overall Chinese record in this area, it is hard to argue they don’t know how to build up an infrastructure.  So why do they borrow then?  I think of the Chinese leadership as like a university president who doesn’t want to spend down the endowment to boost immediate consumption.

It is bad if/when the current equilibrium goes away.  Yet it also is unlikely that the United States will continue to underwrite the building up of its major geopolitical rival.  We (in essence) guarantee some loans to them so they in turn can make loans to us, also guaranteed by us.  That’s a lot of guaranteeing.  In return we receive an out-sized role running and staffing the World Bank, which you can think of as a “soft power” endowment of sorts.  In return the Chinese can hold onto a larger foreign currency endowment and receive some expertise.

That American lead WB role is worth less over time as multilateral capital flows continue to decline relative to private sector flows, and as more emerging economies require less aid.  Furthermore China has set up its own development bank for Asia, namely the AIIB.  More generally, we seem less interested in helping the Chinese maintain the size of their endowment, and perhaps they are not so favorably inclined toward our soft power endowment either.  On top of that, receiving the infrastructure expertise continues to decline in value for the Chinese, as they develop more and more of their own expertise.  At this point, they should be telling us how to build infrastructure.

And so the arrangement is likely to unravel.  I don’t approve of Trump pulling the plug on this one, but more realistically that was the underlying trend in any case.

The biggest losers probably are the aid-receiving poorest African countries who currently free-ride upon the Bank’s indirectly American-guaranteed, China-funded staffing, higher expertise, and higher prestige.

China and America probably lose too, as each country will find it harder to maintain its chosen kind of endowment.  And the pretense of cooperation will fade, which has good and bad effects but mostly bad.

1 Massimo October 15, 2017 at 12:55 am

About 5 or 10 years ago, when China sent its first satellite in orbit, or something else about space, The Economist made a cover that said: “Congratulations, now stop asking for help”. As far as I know, that was the last great cover of TE. BTW, I say this with a lot of jealously, because I came to age reading The Economist, and I can’t come to grips that is now a rag promoting collectivism. The journal founded by Cobden, for Christ sake! The paper where Herbert Spencer was the deputy editor… now in the hands of some politically correct woman by the name of Zannoe-badmington. Sic transit gloria mundi, memento mori. Fk u, badminton, we will forever respect the grave of British classical-liberalism.

2 Ray Lopez October 15, 2017 at 3:58 am

Thanks for that primer on the Economist. I used to subscribe to the print version back in the days, now I just download the pirated version. Their captions used to be funny–racist funny–and they would give tutorials like on the “J-curve effect” in trade deficits, which never seemed to work in practice, or like how DeBeers would soon go bankrupt according to free market principles (also didn’t happen).

Bonus trivia: Walter Bagehot, a 19th century editor of TE, was actually anti-central bank despite giving his famous maxim about cb lending. Source: G. Selgin’s excellent latest book on free banking.

3 Harun October 15, 2017 at 12:30 pm

+1

4 prior_test3 October 15, 2017 at 3:00 am

‘At this point, they should be telling us how to build infrastructure.’

You mean by removing NIMBY as a concern when building something like this? – https://en.wikipedia.org/wiki/Three_Gorges_Dam

And I thought libertarians cared about property rights, which the Chinese apparently do not consider a concern in the least – ‘Another 100,000 people may be moved from the area around China’s massive Three Gorges Dam because of landslides and bank collapses, state media say.

They quote a government official as saying that the number of geological disasters had increased dramatically since the dam on the Yangtze River reached its maximum level in 2010.

About 1.4m people have already been relocated from the area.

——————————-

Some 100,000 people may be moved from the area in the next three to five years, Liu Yuan, an inspector at China’s ministry of land resources, told China National Radio.

Mr Liu said the authorities would try to stabilise 355 locations around the dam where rockfalls and landslides had already happened.’ http://www.bbc.co.uk/news/world-asia-china-17754256

5 Ray Lopez October 15, 2017 at 4:00 am

Oh stop. The Three Gorges Dam is gorgeous and has defied critics.

I can’t figure out this sentence by TC: “And so the arrangement is unlikely to unravel” – when he seems to argue the arrangement will unravel.

6 prior_test3 October 15, 2017 at 4:52 am

There is no criticism of the dam. It is merely that one would expect a libertarian to object to how the Chinese build their infrastructure, which is without the slightest concern for personal property rights, and not recommend that the U.S. adopt Chinese methods. It would be easy to build a high speed maglev line between DC and NYC if one could just use such Chinese methods, after all.

7 Anonymous October 15, 2017 at 9:46 am

The thumbnail could have been quicker, but sure. Libertarianism and rapid government projects(*) are at odds because obviously.

Imagine a freeway widening project where every adjoining property owner has veto power. All wanting to be the $10M holdout.

* – really any public or private Mega project on built land

8 So Much For Subtlety October 15, 2017 at 4:23 am

As I understand it, the World Bank makes money on these loans and there is a cross-subsidy of other Bank activities, most of all aid.

If the Chinese want the cash it is because it is cheaper than what they could get on the open market. That is, it is an implicit subsidy. Why bother? The Chinese can afford a massive military build up, they can afford to build their own dams.

The biggest losers probably are the aid-receiving poorest African countries who currently free-ride upon the Bank’s indirectly American-guaranteed, China-funded staffing, higher expertise, and higher prestige.

On the contrary Africans will benefit. Their governments will not get free Western tax payer cash. Which means if they want to build something they will have to ask the market. Which will impose more discipline. No more copies of Saint Peters in the jungle. No more Congolese nuclear weapons program.

China and America probably lose too, as each country will find it harder to maintain its chosen kind of endowment. And the pretense of cooperation will fade, which has good and bad effects but mostly bad.

Fewer jobs for upper middle class Western twits who like to play at aid work? Tough, so tough. The Chinese do not pretend to cooperate so it is only a certain type of Western liberal who will be disillusioned. Which is probably good for them.

So it is, as the Chinese might say, a win-win-win situation.

9 Harun October 15, 2017 at 12:32 pm

Think of the Range Rover and Toyota Land Cruiser dealers!

And of the guys who sell white car paint!

10 Paul October 15, 2017 at 4:46 am

2.4 billion? Is that a joke? With the amount of trade, QE, the suze of the Chinese economy, how can a “bank” of that tiny size have any effect?

Still though, I suppose the WB sucks up ever excess policy dweebs, twirps and fusbudgets thst other wise would be screwing up domestically moreso than their ‘stakeholding ‘ brethren. So, it may be worth sending our planning Freados out of the country

11 prior_test3 October 15, 2017 at 4:53 am

No, this is just another example of the sort of numbers game that Dean Baker is constantly decrying when it comes to reporting.

12 Anonymous October 15, 2017 at 9:52 am

Good catch.

13 Mark Thorson October 15, 2017 at 1:39 pm

That’s what I thought as soon as I saw the figure. $2.4B? Bill Gates could cover that from his checking account. It’s almost nothing. No reason for anybody to get upset about this, unless their purpose is to get upset.

14 Todd K October 15, 2017 at 6:44 am

“Yet it also is unlikely that the United States will continue to underwrite the building up of its major geopolitical rival”

Maybe China isn’t America’s major geopolitical rival after all. Does Tyler think it is wrong for American companies to invest in China as well?

15 Rafael R October 15, 2017 at 5:25 pm

Why Americans like to insist that China is a rival? China is a much larger country than the US, at 4.3 times it’s population, it’s not a rival or a peer, it’s much larger as a country. And China is still a developing country not a developed country and so still has a large fraction of it’s population living under 10 dollars a day. When China finishes it’s process of development it will be a much larger economy than the US and hence will not be a rival like Germany is not a rival of the US. And now it is not a rival because it’s still much less developed than the US.

16 Heedless October 15, 2017 at 10:23 pm

If China finishes it’s process of development…

China has a long way to go even to catch up to Greece, never mind Western Europe or the US, and we have seen countries stall out at every rung of the ladder between there and here.

17 Todd K October 15, 2017 at 10:37 pm

China’s GDP per capita is $16,000 growing at over 6% and Greece is at $26,000 growing…not much. China’s standard of living can easily pass that of Greece by 2025.

18 rayward October 15, 2017 at 7:01 am

William (Bill) Lombardy has died. Chess is not my thing, but it does seem that the grand masters have interesting if unusual lives. That he spent his final time on this earth destitute is a shame and in all likelihood was foreordained. https://www.nytimes.com/2017/10/14/obituaries/william-lombardy-dead-chess-grandmaster.html

As for WB loans to China, are these loans related to the One Belt One Road initiative? If so, the loans aren’t really to China but to the neighboring countries in which China is constructing HSR; it’s similar to that wall Mexico will pay for, although the One Belt One Road initiative is intended to reach out to neighbors while the wall is intended to keep the neighbors out.

19 A clockwork orange October 15, 2017 at 3:34 pm

Rayward did not wait until he had actually recognized the mules to be a pair which until a week ago at least had belonged to Will Varner: he merely changed the tense of the possessing verb: Not had belonged, he though. – the hamlet

20 Tom G October 15, 2017 at 7:19 am

“And so the arrangement is unlikely to unravel.” <> … is likely to unravel.
In fact, IS unraveling. And should — China gets US/World Bank money, and uses it to capitalize the Asian Bank (with more money than WB? maybe), so it has more soft power.
That’s dumb, dmub, dubm, dumb.
But Tyler is so anti-Trump and willing to criticize him, like all elites (Dem, Rep, Libertarian), there’s no comment on the article also noting what Trump wants on Iran, that:
“Congress gets tougher with Iran, which nearly everyone in the administration acknowledges is complying with the agreement.”

I flatly don’t believe that most in the Trump admin say is allowing inspections at all their facilities, which is required by the agreement. Tho most might want Trump to certify compliance, despite not-full compliance, that’s quite different.

Sorry Tyler, your bubble-criticism is too strong against Trump relative to how weak it’s been against the elite Foreign Policy overpaid elites and the many messes they’ve made worse in the last 8 years.

Waiting until China decides to NOT repay the WB loans, which then starts the loans to lose money, is kind of like the FP elite strategy for N. Korea — wait until after they get nukes (check) and Long range missiles (soon) and nuke Los Angeles. ONLY after that, start using military force.

The way to avoid US war in N. Korea? Actually pressure China to stop cheating on its support for crazy Kim, and continue to increase pressure on China until China pressures Kim, or his military coup successor, to stop being so crazy.

This is another step of small, but real pressure on China. And if China decides now, to stop re-paying its loans, that’s clear proof the WB should have stopped loans to China sooner.

21 anon October 15, 2017 at 10:21 am

Odds of war in Korea are much less than 50:50, and so one priority is not to increase odds for the sake of reducing them.

22 Art Deco October 15, 2017 at 7:24 am

China’s a middle-income country with ample resources, public and private, for capital investment. World Bank lending therein should be $0.

The World Bank should be working in Tropical and Southern Africa, in the dozen or so most impecunious countries in Latin America and the Caribbean, in Burma and Indo-China, in India and adjacent places, in Central Asia, in the poorer Arab countries, in the Balkans, in the Ukraine (but especially Africa).

23 A Truth Seeker October 15, 2017 at 8:21 am

Because it would work so well. Has Benin already paid for the peanut plantations the World Bank thought the country would profit from? The World Bank has not the know-how to deal with African problems.

24 Kai Xue October 17, 2017 at 3:28 pm

See the excellent comment below by Lance.

The World Bank advances cheap subsidized loans to poor countries through IDA. China borrows from IBRD at market rates. Considering only US$2.4 billion in exposure, the World Bank doesn’t do much business in China and probably advances one loan a year or maybe once every few years for a project in China. The reason then for going to the World Bank is not to gobble up subsidized resources but likely to gain the World Bank expertise for a particular project that is comes with the lending.

The Trump administration has raised this topic as a controversy not likely for grandstanding since project finance is boring. That this is raised at all is probably due to functionaries within the Trump administration with responsibility in this area being dumb relative to the caliber of people who usually occupy administration posts related to international policy.

25 A Truth Seeker October 15, 2017 at 8:17 am

So China’s mask has finally fallen.

26 Todd K October 15, 2017 at 8:54 am

Yes, it has finally come to this in China.

27 A Truth Seeker October 15, 2017 at 9:30 am

As I have always suspected.

28 Lance October 15, 2017 at 11:35 am

The World Bank Group is composed of 5 different institutions: The IDA, IBRD, MIGA, IFC and ICSID. The latter (ICSID) is for settling of investment dispute, while MIGA mainly provides guarantees and political risk insurance. IFC is essentially like a private financial institution that funds projects across the world at market rates (though it occasionally provides advisory services to developing countries). For instance, it provides trade finance, lines of credit, private equity contributions, project finance loans, etc. Think of it like a mini Wall Street on Pennsylvania Avenue.

Most of what people imagine the World Bank does is covered under IDA. This entails concessional lending to poor/low-income and fragile countries. However, this constitutes a minority of the value of World Bank financing in any given year – no more than 25%. Lending to middle income country govts (e.g. China, South Africa, Brazil, etc.) at market rate is done through IBRD. Yes, this is profitable because it is done at or near market rate. So lending to those countries pay for themselves and even more. IDA is replenished from rich member countries of the World Bank through annual drives because it’s not self financing like IBRD or IFC or MIGA. Without lending to middle-income countries such as China, the World Bank would be a poor and ineffective development institution. Also note that some of what may be considered lending to China may not actually be going to the Chinese government. it could involve some international investors financing a project in China that receives a corporate loan/project finance loan from the IFC or a guarantee from MIGA.

29 Jack October 15, 2017 at 12:14 pm

My experience with the WB is a bloated institution with lots of make work positions, tax free six figures, for favored foreign nationals, who get to live in DC rather than some hideous place. Wonder whether the technical advice is not freely available in the public domain. Whether the trade off of gross inefficiency and lots of money wasted for international cooperation is worth it is hard to know. My feeling is Trump’s point of view on this one is right.

30 Boonton October 15, 2017 at 12:16 pm

Smells to me like the ‘protectionism’ Trump campaigned on was not really an idea or concept but just a mental placeholder to be filled in later by something intelligent.

So Trump pulled out of the TPP and applauded Brexit and made noises about some future world that consisted of the US and other countries making ‘smart’ unilateral trade deals but it’s clear now there’s no there there. He wants to re-negotiate NAFTA but doesn’t seem to have any idea what he thinks would have been a better deal. The idea of a master deal maker working one on one with various prime ministers lasted only a few months until the pathetic transcript of him begging Mexico’s Prime Minister to just not tell anyone Mexico won’t be paying for the wall got leaked.

Without any ideas and without any political capital to actually implement them expect casting about for any minor, probably irrelevant point to make noise about. Which brings us here.

31 Vivian Darkbloom October 15, 2017 at 1:01 pm

“As I understand it, the World Bank makes money on these loans…”

I’d like to see some more details that form the basis for this understanding, in particular, the accounting method used to calculate “profit”.

For a similar discussion, see here:

https://www.forbes.com/sites/beltway/2014/09/10/does-the-export-import-bank-make-or-lose-money/#3b5b51dd1990

32 A clockwork orange October 15, 2017 at 11:39 pm

forearms are tough

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