Why China wants to become the world's banker
Carlos Barria/Reuters
First, it lent Argentina cash to replenish its dwindling foreign-exchange reserves. Next, with the rouble crashing, China offered credit to Russia.
Then Venezuela begged for funds to stave off a default. Strategic interests dictate where China points its financial hose: these countries supply it with oil and food. But if a government anywhere goes bust, it now has an alternative to the IMF.
In the past six months China has also invaded the development patch of the other great Bretton Woods institution, the World Bank. First, China--along with Brazil, Russia, India and South Africa--established the New Development Bank.
Then it unveiled the Asian Infrastructure Investment Bank. Finally it launched the Silk Road Fund, backed by yet another development bank. None has started operating, but China has pledged more than $140 billion to these new institutions.
China's clout should not be exaggerated. The yuan is not yet fully convertible and will not be for several years, which limits its influence. But the country's leaders are clearly marshalling the cash and the strategy to become a banker to the world. This is at once welcome and worrying.
Kim Kyung-Hoon/Reuters
The worries relate to how China may wield its power. The World Bank and the IMF have been criticised for attaching too many conditions to loans. China, by contrast, is undemanding, worryingly so. The $50 billion that Chinese banks have lent to Venezuela since 2007 bought that country's leaders time to wreck the economy, as well as allowing them to continue to thumb their noses at America.
The fear is that, as international use of the yuan grows, China will start to provide pariah states with a means to evade Western financial sanctions, thus subverting the diplomatic order as well as the financial one.
In fact the evidence suggests China's goals are less sinister. It is not seeking to displace established multilateral institutions, but to gain the power befitting an economy of its size. Moreover, its activism is partly a response to America's reprehensible failure to ratify reforms to give big emerging markets greater say at the World Bank and the IMF (see page 69).
America has lobbied allies to steer clear of China's new infrastructure bank. It would be more sensible for the Obama administration to try to integrate China into the existing institutions than to try to thwart its ambitions altogether.
Andy Wong/Pool/Reuters
Andy Wong/Pool/Reuters
The great gall of China
As for its no-strings-attached policy, the country to which China's reckless lending poses the greatest danger is China itself. It has cultivated an image as a champion of the developing world. Financial distress in countries that receive its largesse undermines that.
It is also a waste of national treasure. The original point of getting into development finance was to make better use of its currency reserves, not to fritter them away in corrupt nations. The saving grace for China is that its errors are already evident. It has time to fix things before truly becoming a banker to the world. Hewing closer to the model of the Bretton Woods institutions is the right place to start.
Click here to subscribe to The Economist
- I spent $2,000 for 7 nights in a 179-square-foot room on one of the world's largest cruise ships. Take a look inside my cabin.
- Colon cancer rates are rising in young people. If you have two symptoms you should get a colonoscopy, a GI oncologist says.
- Saudi Arabia wants China to help fund its struggling $500 billion Neom megaproject. Investors may not be too excited.
- Catan adds climate change to the latest edition of the world-famous board game
- Tired of blatant misinformation in the media? This video game can help you and your family fight fake news!
- Tired of blatant misinformation in the media? This video game can help you and your family fight fake news!
- JNK India IPO allotment – How to check allotment, GMP, listing date and more
- Indian Army unveils selfie point at Hombotingla Pass ahead of 25th anniversary of Kargil Vijay Diwas
- JNK India IPO allotment date
- JioCinema New Plans
- Realme Narzo 70 Launched
- Apple Let Loose event
- Elon Musk Apology
- RIL cash flows
- Charlie Munger
- Feedbank IPO allotment
- Tata IPO allotment
- Most generous retirement plans
- Broadcom lays off
- Cibil Score vs Cibil Report
- Birla and Bajaj in top Richest
- Nestle Sept 2023 report
- India Equity Market