Client and Competitor: China and International Financial Institutions

*Shalmali Guttal, Focus on the Global South, May 2007

Introduction

International Financial Institutions (IFIs) are international institutions that provide financing to governments and private companies for social and human development, physical infrastructure projects, trade, investment, establishing new businesses, services delivery, etc. Many IFIs are private corporations such as Citicorp, Merrill Lynch, ICICI and Ing Vysa. Some are government run institutions that operate trans-nationally such as Export Credit Agencies (ECAs) and export-import (ex-im) banks. IFIs are often viewed as the main ‘agents’ of economic globalization in developing countries since they facilitate one of the most important pre-requisites for globalisation, i.e., capital.

The Peoples’ Republic of China (China) is a member of several IFIs. I will focus this presentation on China’s relationship with a particular sub-group of IFIs called Multilateral Development Banks (MDBs) and among them, three institutions: the World Bank (WB), the International Monetary Fund (IMF) and the Asian Development Bank (ADB).

MDBs were set up by governments to provide loans, grants and technical support to developing countries for the purposes of national development and poverty reduction. They include the WB, the ADB, the Inter-American Development Bank (IADB), the African Development Bank (AfDB), and the European Bank for Reconstruction and Development (EBRD). The IMF is not technically an MDB, but it is a multilateral financial institution that lends to developing countries when they face balance of payments problems.

The WB and the IMF are currently the most powerful of these institutions and global in their reach. Along with the World Trade Organisation (WTO), they form the three pillars of the “Bretton Woods system.” The WB and IMF were established at the same time, have joint governing Boards and always work in tandem with each other. The IMF determines macro level financial and economic policy frameworks for borrowing countries and is supposed to act as the global financial “watchdog” and lender of last resort. If countries are hit by severe financial crises and have no capital reserves left repay their creditors, the IMF is expected to provide emergency funds to get the country’s economy back on its feet. The WB on the other hand generally focuses on national and global development policies, programmes and projects and is extremely influential in national policy environments. It has also established itself as the premier knowledge institution in the fields of economic and social development, the environment and governance. The ADB, AfDB, IADB and EBRD are regional MDBs with mandates and objectives similar to those of the WB. In the Asia-Pacific region, the ADB has started to expand its stature in terms of project and development finance and policy influence, and is increasingly in competition with the WB.

MDB and IMF financing is done through grants and loans at concessional or near market interest rates, depending on the size of the borrowing country’s economy. All financing comes with policy conditions that require borrowing/recipient governments to adopt economic strategies for rapid economic growth, privatisation, deregulation, liberalisation and market driven approaches to development.

MDBs and the IMF are different from other IFIs in that they are constituted by governments and are supra-national public institutions. Each member government pays into the institutions a fixed amount of money called “subscribed capital” which determines the number of shares it holds in the institution, which in turn determines its voting power. The more shares a country has, the greater its voting power. MDB and IMF members include rich, poor, developed and developing countries. Not all MDB and IMF members are borrowers from these institutions. While some (such as the US, UK, Japan and Australia) have more or less permanent profiles as ‘donor members,’ others (such as China, India and the Philippines) are former borrowers from the IMF and continue to borrow from MDBs.

A country’s regional location is not a barrier for membership in an MDB. For example, the United States (US) and United Kingdom (UK) are members of the ADB and China is a member of the AfDB. Some members are developing countries with large economies that borrow from MDBs and at the same time also provide development aid to developing countries with smaller economies (such as China and India). Another important feature of the MDBs and IMF is that they are beyond the reach of national and international laws. Their founding charters provide them with full impunity against national and international legal proceedings and liability. It is easier to take a government to court than to take an MDB or the IMF to court.

Although MDBs were set up ostensibly to mobilise development finance, significant portions of their operations are directed towards boosting the private sector. Both the WB and the ADB have specialised institutions and departments to provide financing, investment advice and commercial and political risk guarantees to private companies and corporations investing in in developing countries.

China in the IMF, World Bank and ADB

Membership in the MDBs and IMF are opportunities for countries to wield influence on regional and global finance, economy, development and politics. How much influence a country can actually exert over the world economy and even within these institutions is of course based on its economic strength and potential. China has used its membership in the IMF and the MDBs extremely strategically to build itself up as an economic powerhouse, as well as position itself as political entity to reckon with.

There is a big difference between MDB members such as the Lao PDR and Cambodia on one hand, and the US and Japan on the other. The Lao PDR and Cambodia are low income developing countries, heavily indebted to MDBs and almost completely dependent on foreign aid for meeting social and economic development goals. They do not have enough votes to be able to influence decision making within MDBs about institutional policies and directions. The US and Japan on the other hand, are developed donor countries and along with other wealthy members, they are instrumental in shaping the policies and overall directions of these institutions.

China however, straddles both ends of the above spectrum. China is a developing country, but with an economy larger and more dynamic than some developed countries. China has a high domestic savings rate-in 2006, it saved approximately half its GDP, about US$ 1.1 trillion— and a growing trade surplus.

China’s quota in the IMF is US $ 8,090.10 million of Special Drawing Rights (SDRs). China’s percentage of votes in the IMF is 3.67 — the highest among developing countries, and sixth highest among all IMF members (countries with more votes than China are the US, UK, Germany, France and Japan). China is not a current borrower of the IMF and has no outstanding payments or loans to the IMF. At about US$ 900 billion, China’s foreign exchange reserves are much larger than the IMF’s lending capabilities. If China were to experience a financial crisis similar to the 1997 East Asian crisis, the IMF will not have the reserves required to bail it out. 

China is a Borrower…

China is both, a borrower from the WB and ADB, as well as one of the largest contributors of subscription capital to these institutions. The size of its economy, its geography, internal diversity, and its embrace of capitalism make it one of the most important clients of the WB and ADB.

China has 45,049 votes in the WB, which is 2.78 % of the total number of votes. Total WB lending to China from 1981-2007 amounts to US $ 41,911.51 million (i.e. Almost US$ 42 billion) for 281 projects. Of this, IBRD loans amounted to US$ 31,964.809 million (almost US$ 32 billion) and IDA assistance to US$ 9,946.71 million (almost $ 10 billion). In the fiscal year 2005-2006 alone, the WB lent China about US$1.45 billion for 11 projects.

China is fifth largest country portfolio of the International Finance Corporation (IFC) and one of the IFC’s fastest growing client countries. The IFC is a specialised agency of the WB Group that provides finance, investment advice and technical support to private companies investing in developing countries. From its first investment in 1985 up till June 30, 2006, the IFC has invested in 115 projects in China for which it has mobilised US$2.86 billion–US$2.24 billion from its own account, and US$ 930 million from other participating banks. In FY06, IFC committed $639 million to 24 projects in China.

In the ADB, China has the largest percentage of votes (5.442%) among what are called “Developing Member Countries” (DMCs) followed closely by India (5.352 %). DMCs are ADB members who borrow from the institution, as opposed to members such as Japan, the US, Australia, UK and Turkey. China gets ‘sovereign,’ ‘sub-sovereign’ and ‘non-sovereign’ loans and technical assistance (TA) from the ADB. Non-sovereign loans and TAs go to private sector actors and public sector enterprises without government guarantees.

China has received $17.95 billion loans in total assistance since joining the ADB in 1986. In cumulative terms, it is the ADB’s second largest borrower and the second largest client for private sector financing. In 2006, China was the ADB’s largest loan recipient and received $1.6 billion, or 21%, of the $7.4 billion in loans that the ADB extended in 2006. China also received the largest share of ADB’s non-sovereign loans and TAs in 2006-21 % of US$ 2.6 billion.

…As Well as Donor and Investor

At the same time, China is also a bilateral donor to numerous developing countries with smaller economies. As Chinese aid and investment become news items in Africa, China is also establishing itself as an economic powerhouse in its more immediate neighborhood–Southeast Asia. China is one of the most influential donors and investors in the Mekong region and Chinese capital, technology and labour are increasingly visible in transportation, energy, mining, agribusiness, plantations, telecommunication, tourism and recreation projects, especially in .Burma, Lao PDR and Cambodia. Chinese aid has moved further afield as well, to better off countries such as the Philippines and newly formed nations such as Timor Leste. And finally, China has spurred bilateral and regional trade with numerous Asian countries-including members of Association of Southeast Asian Nations (ASEAN)–by offered preferential tariff schemes (including zero tariffs) under “Early Harvest Programmes.”

Chinese aid comes in the form of cash and equipment grants, extremely low interest loans and unilateral debt relief. Much of it goes towards complicated physical infrastructure projects in difficult terrains such as remote rural roads, bridges over deep and fast flowing rivers, and deep sea ports. What makes Chinese aid particularly attractive to recipient countries is the fact that it comes unencumbered by the kinds of policy conditions demanded by the MDBs and northern donors for policy and governance reforms. Equally important, Chinese aid does not come with packages of expensive consultants that are commonplace in most northern development aid and MDB loan projects. Chinese ‘experts’ and consultants are not associated with the lavish lifestyles associated with their counterparts from northern aid agencies

In early 2006, China offered Cambodia US$ 600 million in loans with no strings attached for bridges, a hydro power plant and a fiber optics network to connect Cambodia’s telecommunications with that of Vietnam and Thailand. In contrast, later in the year Cambodia’s traditional donors and creditors collectively pledged US$ 700 laden with policy conditions, several related to checking corruption. Also in 2006, China offered the Philippines a package of US$ 2 billion in loans from its Export-Import Bank over the next three years, over-shadowing the US$ 200 million offered by the WB and ADB and the US$ 1 billion loan that was being negotiated with Japan.

China is criticised by northern donors and creditors for being secretive about its aid intentions and for its apparent unwillingness to coordinate aid activities through fora managed by the WB. It is true that Chinese announcements of aid, trade and investment packages often surprise even the governments to whom they are offered. And it would indeed be naive to assume that China’s donor ambitions are fueled purely by altruism or that there are really “no strings” attached to its generous offers. But for recipient countries, China presents both, an alternative source of development finance as well as a possible escape route from the never-ending cycle of policy conditions attached to more traditional bilateral and multilateral aid. Equally important, China’s aid and investment behavior is forcing MDBs and northern donors to be less high-handed with its poorer clients.

China is also a large contributor to projects sponsored by the ADB. In 2005, it contributed $30 million to the Asian Development Fund, and established the $20 million PRC Regional Cooperation and Poverty Reduction Fund-the first developing country to set up such a fund with an international development agency. By virtue of size and geographic spread, China is part of the ADB’s subregional programmes–the Greater Mekong Subregional Economic Strategy (GMS) and Central Asia Regional Economic Cooperation (CAREC)–in which it is viewed as a formidable investor. It is also getting involved in the South Asia Sub-regional Economic Cooperation (SASEC) by pledging investment towards transportation and energy infrastructure. 

Selective about Borrowings and Technical Assistance

China can afford to be and is selective about what it borrows money for and the nature of TA and ‘policy advice’ it takes from the MDBs. China goes to the MDBs for loans and TAs to enhance value addition to its agricultural, industrial, technological and finance sector capacities. It would not be far fetched to argue China uses MDB financing and TA to shore up its position as a global donor and investor.

Since 1999, China does not get concessional loans from IDA is only eligible for loans at near market terms from the IBRD. China’s portfolio is one of the largest in the WB and the Bank considers China to be one of its best-performing members in terms of project implementation. Sectors for which China currently accepts IBRD financing include transportation (inner provinces to coast), urban development (urban transport, water and sanitation), rural development, energy, and human development.

Sectors for which China has taken ADB loans include: agriculture and natural resources, energy, finance, industry and trade, transport and communications, water supply, sanitation, and waste management.

China is strategic about how it uses MDB financing. China is a very large country with tremendous geographic, cultural and demographic diversity, and economic and social disparities among its regions. While some of its regions are wealthy, it also has pockets of intense poverty. As China transforms itself into a global economic powerhouse, it needs to fill infrastructure, human, social and institutional development gaps, for which it uses the financing and TA from the MDBs. 

At the same time, China has built up an impressive manufacturing base over the past two decades by compelling Transnational Corporations (Tn Cs) who came to China seeking cheap labour costs to locate most of their production processes in the country rather than simply outsourcing a selected few production processes. Local governments within the country have also invested heavily to build up capacity in local industries which, combined with continuing foreign investments, have helped China to beef up its export-oriented growth strategy.

The paradoxical result is that even as China borrows from the MDBs to build new physical infrastructure in sectors such as transportation, water and urban development, and step up quality in sectors such as agriculture, energy and human development, it has a surplus of capital which it uses for bilateral aid and investment in poorer countries. Much of China’s foreign investment is in natural resources, oil and minerals (for example copper, cobalt, gold, and uranium) to feed its own rapidly growing economy. China’s growth figures and potential make it a more, rather than less attractive client for the MDBs and despite their economic clout, MDBs are willing to bend their lending policies to suit China’s development model in contrast to their less well off clients, who are compelled to accept the development strategies demanded by MDBs and northern donors.

A Preferred Client

MDBs need their large developing country clients such as China, India, Indonesia and Brazil because this is where their own bread and butter comes from. China repays its loans on time and although selective about the projects it borrows for, it borrows in large quantities and ensures that projects are generally implemented on schedule without messy delays caused by popular protests, parliamentary or congressional inquiries, or compliance with domestic social and environmental safeguard measures.

WB and ADB documents reveal that they definitely consider China to be an extremely important client. The ADB’s 2007-2008 lending pipeline to China totals about $3 billion; 85% of the lending projects are likely to be located in the poorer central and western provinces. TA for the same 2-year period will focus more sharply on high-priority, policy-related and knowledge-based products.

China is also a favoured client for carbon trade and associated projects. The ADB has given China a grant of US$ 600,000 to set up a fund to help the country benefit from the potential multi-billion dollar revenues from the Clean Development Mechanism (CDM). The ADB estimate that China can generate “certified emission reductions” (CERs) credits of between 150 to 225 million tons of carbon dioxide equivalent per year, which translate to a potential annual revenue stream of up to $2.25 billion. The Chinese Government is expected to use this grant to establish a specialized facility–the CDM Fund–which will collect levies on the revenues generated by various CDM projects through CER credits. The CDM Fund will be used to support domestic climate change related activities.

The ADB is clearly willing to make adjustments to its own strategy and policies to accommodate China: “The country’s rapid economic development and its growing importance in the global and regional economy require ADB to keep its operations relevant to PRC’s needs at the strategic level and add value to the country’s future development.” And further, “ADB needs to establish a niche for itself in the PRC’s rapid development process over the next 5-10 years.” The ADB plans to establish this niche by:

a) Increasing its sectoral coverage in agriculture and rural development, energy conservation, environmental protection, urbanization, social development, financial reforms, and regional cooperation. In other words, in whichever direction China expands, the ADB is willing to follow.

b) Reducing “transaction costs” to the client and introducing innovative assistance products-which means that China will be allowed to bend whatever rules needed to keep it borrowing from the ADB; even the minimal social and environmental safeguards proposed by the ADB will not be applicable to China;

c) Expanding private sector operations, particularly in the infrastructure sector, through private-public partnerships-China’s geographic size and diversity, natural resources, population and increasing incomes offer huge revenue opportunities for the private sector which the ADB hopes to attract by getting the Chinese Government to sponsor projects through private-public partnerships.

On its part, the WB has lined up three of its agencies to continue to respond to China’s needs. The IBRD is oriented towards supporting priority projects in China’s Five Year Plan–especially for infrastructure, rural development and natural resource management-by providing loans for physical infrastructure investments, administering loans and grants provided by bilateral donors, and TA in the form of ‘policy advice,’ capacity building and analytical services. The Bank considers “knowledge sharing and transfer” particularly important in its relationship with China, both, in terms of advising the Chinese government on constraints to private investment, social and financial service delivery and economic growth, as well in advocating China’s so called “success stories” in poverty reduction through increased economic growth.

The IFC recognises that the private sector has become a critical component of China’s economy, boosting its economic power domestically as well as abroad. One of the conditions attached to IBRD loans to China is that state owned enterprises be privatised in order to boost efficiency and generate sufficient revenues so as to not be a drain on government expenditure. While a lot of IFC support actually goes to large, often foreign-owned companies, the IFC claims that its support for local small and medium enterprises–which have limited national institutional support-will help to alleviate the negative effects of the so called “transformation” of state owned enterprises.

For the IFC, China presents a wealth of opportunities for enhancing its own institutional profile and increasing its profits. The IFC is particularly interested in China’s efforts to liberalize its financial sector since it offers the Bank new opportunities to support the development of private institutions in the banking and insurance sectors. Its China operations are focused on:

  • Encouraging the development of China’s local private sector, including small and medium sized enterprises.
  • Investing in the financial sector to develop competitive institutions that will meet international corporate governance and operating standards.
  • Supporting the development of china’s western and interior provinces.
  • Promoting private investment in the infrastructure, social services and environmental industries.

Also poised for greater expansion is the Multilateral Investment Guarantee Association (MIGA), which already provides private investors guarantees against “sub-sovereign” (i.e., at provincial, city, county, or district levels) risks, especially in infrastructure and water projects. MIGA is particularly eager to facilitate Foreign Direct Investment (FDI) in China by providing guarantees and TA to support China’s western and northeast regional development strategy and Chinese outward investment.

Positioning Itself and Calling the Shots

In regional and global MDB platforms, China presents a strong ‘southern’ position, argues for greater south-south cooperation, challenges the hegemony of the industrialised north in providing aid, investment capital and technology, and defends the rights of developing countries to self-determination.

Although, China certainly benefits greatly from the infrastructure it finances (such as roads, ports, bridges, factories and hydro-power plants) by gaining access to raw materials, energy, capital and trade markets, Chinese policy makers argue that China is using its growing wealth to create development opportunities for less well off developing countries and in the long term, is fostering peace, harmony and solidarity among developing countries.This is not to say that China supports information disclosure and public accountability in the MDBs or dialogue between MDBs, host governments and civil society. On the contrary. Chinese representatives in MDBs and other regional/global platforms are notorious for being aloof and unapproachable to civil society and other ‘non-official’ representatives. What China argues for is the sovereign rights of governments to shape their own development strategies and to make decisions about projects and policies regardless of social, environmental and governance implications. It matters little to China that building eight dams on the Lancang river (the upper Mekong) in what it considers its sovereign territory will have negative impacts on critical ecologies and livelihoods in countries located downstream. It will purchase the compliance and cooperation of disgruntled governments by offers of roads, energy projects, and trade and investment preferences.

Along with other large borrowers such as India, Brasil, Indonesia and South Africa, China is shaping the lending and operational policies of many MDBs. Many middle-income clients have expressed unwillingness to borrow from the WB and ADB for large infrastructure projects if they are required to adhere to the environmental and social safeguard policies that come as part of the financing packages. China and India, for example, already have access to project finance from international capital markets and refuse to be subjected to what they consider onerous and intrusive external social and environmental standards for projects that benefit the investors as much as they benefit the host country. Objections have also been raised about the inspection mechanisms of these institutions, which (at least in theory) can be used to halt or delay projects deemed as violating their social, environmental and financial safeguard measures. The response of the WB and ADB has been to pare down their own-already minimal–safeguard measures to keep developing country governments happy and borrowing.

In early 2005, the WB initiated a pilot programme called “country systems” through which the Bank would apply a borrowing country’s own environmental and social safeguard systems to assess the potential impacts of infrastructure and other projects. Although couched in language such as “expanding development impact,” “increasing country ownership,” “building capacity,” “facilitating harmonisation” and “increasing cost effectiveness,” the main impulse behind the programme seems to be to: a) ensure that the Bank continues to have a presence in large infrastructure projects either through direct financing, or through ‘advisory’ services, and; b) transfer responsibility for negative social and environmental impacts onto host governments since it is now their safeguard measures that are to be followed. Environmental activists indicate that the institution may well be on a path of “downward harmonisation” of project standards to ensure that it does not lose its infrastructure borrowing clientèle.

The ADB has taken similar measures with regard to its public information policy, inspection policy and safeguard policy. The newly revised public information policy does not even recognise the ‘public’ as a principle target audience and is tailored to meet the informational needs of the private sector and governments. The unfortunate story of the ADB’s inspection policy bears telling. The very first project that the inspection policy was tested on was the Samut Prakarn Wastewater Management Project (SPWMP) in Thailand. Thai government officials and ADB staff responsible for the project not only rejected the grounds for inspection, but also refused to cooperate with the inspection team. Despite numerous set-backs, the inspection team found grave violations of the ADB’s operational policies and directives and made recommendations accordingly. Senior ADB Management and staff by and large dismissed the findings of the inspection team and refused to acknowledge any wrongdoing on their part. Most unexpected, however, was the response of the ADB’s Executive Directors (EDs) to the inspection report, most of who rejected the report. The strongest and most vociferous rejection came from Mr. Zhao Xiaoyu, the ED for China, who called the SPWMP inspection result skewed, biased and a “lousy course of dish,” invoked the experience of the WB’s inspection of China’s Western Poverty Project as as an example of how MDB staff can be demoralised by externally led investigation efforts. According to Director Xiaoyu, the WB inspection result induced Bank staff to maintain “…big China maps on the wall with little red flags pinned here and there….. The marks stand for regions with ethnic residents and the staff are constantly reminded to keep away from these places.” As a result of the controversy surrounding the SPWMP inspection process and the rejection of the inspection report by the ADB’s most influential borrowers, the ADB’s inspection policy has become so watered down that it may as well cease to exist.

The readiness of the MDBs to make adjustments to their lending and governance policies to suit borrowing governments poses important and tricky strategic questions for civil society organisations (CSOs) who are fooled into believing that MDBs are actually development institutions that can be made to stop bad projects by operational directives, safeguard measures, etc.

Conclusion

The above arguments are not intended to valourise China’s dealings with MDBs or its role as an external donor and investor. From a constructive start possibly based on southern solidarity politics several decades ago, China’s current aid and foreign investment practices have begun to dangerously resemble colonialism. And certainly, China’s intentions, tactics and overall strategy should be closely monitored by civil society actors and challenged as needed, much as we would do in the case of any other country with colonial ambitions.

What is interesting in the case of the MDBs, however, is that China exposes them for what they are-bankers and financiers whose first and last priorities are to push loans and financing regardless of the costs, and recoup money and make profits for their shareholders.

China’s relationship with the MDBs defies easy categories. On one hand, China uses MDBs to leverage access to relatively cheap capital and technical support to meet its own growing infrastructure, human and social development, technological and institutional needs; here it is no different from other middle income developing countries. On the other hand, China uses MDBs to expand its economic reach, and access markets and investment opportunities in other developing countries through MDB projects and programmes; and here, it is no different from developed countries. In both cases, China is using MDBs to shore up its economic, financial, political and strategic advantages and potential.

China is too important a country in the world of development finance and financial institutions for civil society to ignore. Rather than look for clear “for” or “against” positions on China, we need to find and create opportunities to engage with this newly emerging economic super-power. Given the Chinese Government’s recalcitrance to engage in dialogue with external civil society actors, this is indeed a daunting task. It is crucial that researchers, academics and representatives from workers and farmers’ unions, indigenous peoples’ organisations and other civil society organisations from outside China build strong collaborative relationships with their Chinese counterparts. In the long term, the voices of caution and conscience that Chinese policy makers are most likely to listen to are those of the Chinese public.

* The author can be reached at s.guttal@focusweb.org

Appendix

China in the World Bank

The World Bank was established in 1944, as the International Bank for Reconstruction and Development (IBRD) primarily to speed up the reconstruction of post World War 2 Europe.. Since then, it has expanded to five specialised agencies which include the IBRD and the International Development Association (IDA). IBRD makes loans to middle income development countries at interest rates slightly less than market rates. IDA makes extremely low interest (concessional) loans and grants to low income developing countries. The name, “World Bank” is now commonly used for the IBRD and IDA. From its initial 38 members in 1944, the it now has 185– almost all the countries in the world.

The United States (US) is the largest single shareholder, with 16.41 percent of the votes, followed by Japan (7.87 percent), Germany (4.49 percent), the United Kingdom (4.31 percent), and France (4.31 percent). The rest of the shares are divided among the other member countries.

China has 45,049 votes in the World Bank, which is 2.78 % of the total number of votes. China’s portfolio is one of the largest in the World Bank and the Bank considers China to be one of its best-performing members in terms of project implementation. Bank projects are evident in every region of the country.

Since 1999, China does not get IDA assistance and is only eligible for IBRD loans; overall, external development assistance in China is reducing.Total Bank lending to China from 1981-2007 is US $ 41,911.51 million (i.e. Almost US$ 42 billion) for 281 projects. Of this, IBRD loans amounted to US$ 31,964.809 million (almost $ 32 billion) and IDA assistance to US$ 9,946.71 million (almost $ 10 billion). In the fiscal year 2005-2006 alone, the Bank lent China about US$1.45 billion for 11 projects.

Sectors to which current Bank financing goes: transportation (inner provinces to coast), urban development (urban transport, water and sanitation), rural development, energy, and human development.

China in the International Finance Corporation (IFC)

The IFC is a specialised agency of the World Bank Group that provides finance, investment advice and technical support to private companies investing in developing countries. The IFC is the fastest growing agency of the World Bank Group and proudly reports that all of its projects, as well as the agency itself, have made notable profits to date.

China is IFC’s fifth largest country portfolio and is one of the IFC’s fastest growing client countries.

From its first investment in 1985 up till June 30, 2006, IFC has invested 115 projects in China for which it has mobilised US$2.86 billion–US$2.24 billion from its own account, and US$930 million from other participating banks. In FY06, IFC committed $639 million in 24 projects in China.

The IFC recognises that the private sector has become a critical component of China’s economy. One of the conditions attached to IBRD finance for China is that state owned enterprises start to be privatised in order to boost efficiency and generate sufficient revenues so as to not be a drain on government expenditure. While a lot of IFC support actually goes to large, often foreign-owned companies, the IFC claims its support for local small and medium enterprises–which have limited institutional support-will help to alleviate the negative effects of the so called “transformation” of state owned enterprises.

IFC operations in China are focused on:

  • Encouraging the development of China’s local private sector, including small and medium sized enterprises.
  • Investing in the financial sector to develop competitive institutions that will meet international corporate governance and operating standards.
  • Supporting the development of china’s western and interior provinces.
  • Promoting private investment in the infrastructure, social services and environmental industries.

The IFC is also interested in China’s efforts to liberalize its financial sector since it offers the IFC new opportunities to support the development of private institutions in the banking and insurance sectors.

China in the IMF

The IMF was formed in 1944 along with the IBRD (World Bank) and has 185 members. China joined the IMF in 1945.

China’s quota in the IMF is US $ 8,090.10 million of Special Drawing Rights (SDRs). China’s percentage of votes in the IMF is 3.67 — the highest among developing countries, and among the first 6 of all IMF members (countries with votes higher than China are the US, UK, Germany, France and Japan).

China is not a current borrower of the IMF and has no outstanding payments or loans to IMF. In fact, China’s foreign exchange reserves are almost twice the IMF’s current lending capabilities. 

China in the ADB

The ADB was founded on December 19, 1966. It has 67 members, 19 of which are not from the Asia-Pacific but from Turkey, Europe, North America and Australia. The ADB member with the largest percentage of votes in the Asia-Pacific region is Japan (12.756%), which ties with the US (also 12.756 %) for voting shares. The ADB raises its funds through bond issues on the world’s capital markets, members’ contributions, retained earnings from lending operations and the repayment of loans. The ADB has ‘sovereign,’ ‘non-sovereign’ and ‘sub-sovereign’ clients. Sovereign clients are national governments; sub-sovereign include local, state, province, etc. government actors, and; non-sovereign includes private sector actors as well as public sector enterprises without government guarantees.

China became a full member of the ADB in March 1986. It is considered a ‘DMC,’ i.e., a Developing Member Country. Among the ADB’s DMCs, China has the largest percentage of votes (5.442%), followed closely by India (5.352 %).

China has received $17.95 billion loans in total assistance since joining the ADB in 1986. In cumulative terms, it is the ADB’s second largest borrower and the second largest client for private sector financing. However in 2006, China was the largest loan recipient and received $1.6 billion, or 21%, of the total loans that ADB extended in 2006.

In 2006, the ADB approved a total $7.4 billion in loans in 2006, reflecting a 28% increase over 2005. By the end of 2006, ADB’s overall support for non-sovereign operations reached $2.6 billion, consisting of $915 million in equity investments, loans of $1.3 billion, and guarantees amounting to $401 million. Non-sovereign financing was largest in the infrastructure sector with a total $1.2 billion, followed by the financial sector with $822 million, investment funds and capital markets with $446 million, and exposure to other sectors at $110 million.

Non-sovereign exposure was largest in the People’s Republic of China with a share of 21% of total non-sovereign exposure, followed by Indonesia with 14%, India with 13%, and Kazakhstan with 9%.

Sectors to which ADB financing has gone: Agriculture and Natural Resources; Energy; Finance; Industry and Trade; Multi-sector; Transport and Communications; Water Supply, Sanitation, and Waste Management.

China is also a large contributor to the ADB. In 2005, it contributed $30 million to the Asian Development Fund, and established the $20 million PRC Regional Cooperation and Poverty Reduction Fund-the first developing country to set up such a fund with an international development agency.

By virtue of size and geographic spread, China is part of the ADB’s subregional programmes: the Greater Mekong Subregional Economic Strategy (GMS) and Central Asia Regional Economic Cooperation (CAREC). It is also getting involved in the South Asia Sub-regional Economic Cooperation (SASEC) by pledging investment towards transportation and energy infrastructure.

China is also favoured client for carbon trade and associated projects. The ADB has given China a grant of US$600,000 to set up a fund to help the country benefit from the potential multi billion dollar revenues from the Clean Development Mechanism (CDM). The ADB estimate that China can generate “certified emission reductions” (CERs) credits of between 150 to 225 million tons of carbon dioxide equivalent per year which translate to a potential annual revenue of up to $2.25 billion. The Chinese Government is expected to use this grant to establish a specialized facility–the CDM Fund–which will collect levies on the revenues generated by various CDM projects through CER credits. The CDM Fund will be used to support domestic climate change related activities.

ADB documents reveal that they definitely consider China to be an extremely important client. The ADB’s 2007-2008 lending pipeline to China totals about $3 billion; 85% of the lending projects are likely to be located in the poorer central and western provinces. Technical assistance for the same 2-year period will focus more sharply on high-priority, policy-related and knowledge-based products.

The ADB’s assessment of China’s future economic and political potential indicate that it is willing to make adjustments to its strategy and policies to accommodate China: “The country’s rapid economic development and its growing importance in the global and regional economy require ADB to keep its operations relevant to PRC’s needs at the strategic level and add value to the country’s future development.” And further, “ADB needs to establish a niche for itself in the PRC’s rapid development process over the next 5-10 years..”

The ADB’s strategies for establishing this niche are:

a) Increase its sectoral coverage in agriculture and rural development, energy conservation, environmental protection, urbanization, social development, financial reforms, and regional cooperation-in whichever direction China expands, the ADB follows.

b) Reduce “transaction costs” to the client and introduce innovative assistance products-which means that China will be allowed to bend whatever rules needed to keep it borrowing from the ADB; even the minimal social and environmental safeguards proposed by the ADB will not be applicable to China;

c) expand private sector operations, particularly in the infrastructure sector, through private-public partnerships-China’s geographic size and diversity, natural resources, population and increasing incomes offer huge revenue opportunities for the private sector which the ADB hopes to attract by getting the Chinese government to sponsor projects through private-public partnerships.

References: 

 http://money.cnn.com/2006/03/03/news/international/chinasaving_fortune/

 High savings lead to trade surplus . chinanews.cn. 2006-06-16 07:02

See also, http://www.rieti.go.jp/en/china/06122702.html

 The SDR is the unit of account of the IMF; it is a potential claim on the freely usable currencies of IMF members, more information about how IMF quotas and SDRs are calculated is available on the IMF website.

IBRD stands for International Bank for Reconstruction and Development. The IBRD is one of the five institutions of the Wold Bank Group and makes loans at near market interest rates to middle income developing countries.

IDA stands for the International Development Agency and is one of the five institutions of the Wold Bank Group. It provides grants and concessional loans (with low interest rates) to lower income developing countries.

 Other major borrowers from the ADB in recent years include Indonesia, India, Pakistan, and Viet Nam

 Chain-Gang Economics: China, the US, and the Global Economy . Walden Bello. November 1, 2006. 

 By obtaining certified emission reductions (CERs) from projects in developing countries, developed countries can escape cutting down greenhouse gas emissions; CERs are usually generated through by financing so called “sustainable development projects” in developing countries.

 http://www.adb.org/Media/Articles/2006/10594-PRC-CDM-potential/

 See the ADB web page for the PRC (www.adb.org/prc) and follow links.

 Created in 1988, MIGA is the World Bank Group’s newest member. It provided guarantees (political risk insurance) to foreign private investors against the risks of expropriation, transfer restriction, breach of contract, and war and civil disturbance; it also provides TA to host governments on means to attract more Foreign Direct Investment (FDI).

 World bank Click for link

The minutes of the Board meeting in which the ADB Executive Directors discussed the inspection report was leaked to the public. Sections of it can be found in a May 2002 publication by Focus on the Global South: Too Hot to Handle, The Samut Prakarn Wastewater Management Project Inspection Process which can be downloaded from the Focus website (www.focusweb.org). Mr. Zhao Xiaoyu’s remarks can be found on pages 39-42.

 http://go.worldbank.org/UXQ9BZPG50

 The SDR is the unit of account of the IMF; it is a potential claim on the freely usable currencies of IMF members, more information about how IMF quotas and SDRs are calculated is available on the IMF website.

 Other major borrowers from the ADB in recent years include Indonesia, India, Pakistan, and Viet Nam

 By obtaining certified emission reductions (CERs) from projects in developing countries, developed countries can escape cutting down greenhouse gas emissions; CERs are usually generated through by financing so called “sustainable development projects” in developing countries.

 http://www.adb.org/Media/Articles/2006/10594-PRC-CDM-potential/

 See the ADB web page for the PRC (www.adb.org/prc) and follow links.

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