The International Monetary Fund is meant to be the firefighter of the world economy. Recently, though, it is China that has responded to the ringing of alarms.
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.
It is welcome because it is in everyone’s interest to have China’s vast savings, stashed away for too long in low-yielding American government bonds, diverted to more useful causes. For poor countries that need better roads and ports, Chinese capital could be a godsend.
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.
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.
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