Feb 16th 2018

China Cannot Have it Both Ways

by Daniel Wagner

Daniel Wagner is CEO of Country Risk Solutions, a Connecticut-based cross-border risk advisory firm and author of the book Managing Country Risk. CRS provides a range of services related to the management of cross-border risk. He is also Senior Advisor with Gnarus Advisors.

At last year’s opening ceremony of the Chinese Communist Party’s Nineteenth Congress, President Xi Jinping proclaimed his belief that China was on the precipice of becoming a great global power. He declared that China was no longer a poor country. Indeed, having lifted the vast majority of its citizens out of poverty, China has now amassed a staggering amount of foreign exchange and become the world’s second largest economy. So, why do Chinese leaders continue to play the “poor cousin,” acting as if China were a poor country by failing to step up to the plate and do what a leading economy should be doing—increasing the amount of aid it provides to poor countries, committing more soldiers to multilateral peace efforts, and taking a more active role in global diplomacy?

Photo: Xi Jinping in Mexico (Wikimedia Commons).

China’s emerging status as a great power raises a whole host of questions that Xi and the Chinese Communist Party must eventually address. By virtue of its global economic ranking, China should be a lender to (not a borrower of) precious development resources. That the Multilateral Development Banks (MDBs) continue to lend to China makes absolutely no sense since China has more than sufficient financial resources to take care of its own needs. The continuation of loans and other development assistance to Beijing takes much needed funding away from genuinely poor countries that truly need the money.

China is the largest recipient of loans from both the Asian Development Bank (ADB) and World Bank. Since 1986, the ADB has approved $33 billion in sovereign loans and $3.4 billion for private sector operations (excluding B Loans) to China—or approximately 16% of the Bank’s total loan, grant and technical assistance portfolio. The Bank approved an additional $2.1 billion in 2016. This would be a high percentage for any single country in an institution with 67 national members. Cumulative lending to China from the World Bank totaled $54 billion as of 2014, and the Bank lent another $2.5 billion to Beijing in 2017. The Bank’s total cumulative lending portfolio since it began operations in 1944 is $681 billion, meaning that China has accounted for approximately 12% of the total, in an institution with 189 member countries.

According to the World Bank, China lifted more than 500 million people out of extreme poverty as its poverty rate fell from 88 percent in 1981 to 6.5 percent in 2012. Any legitimate argument in favor of lending based on need from MDBs disappeared many years ago. Yet the World Bank’s former country director for China, Yukon Huang, last year defended the Bank’s continued lending to Beijing, arguing that provincial and local governments need the loans because structural impediments prevent domestic banks from providing sufficient credit to finance public projects. In other words, he maintained that the Chinese government cannot seem to manage its banking sector sufficiently to get credit where it is needed in the Chinese economy. If every country in the world were to make such an argument, many developed countries would line up with their hands stretched out just as China is doing.

There is another reason why the practice continues, however: The MDBs need China to continue to absorb billions of dollars of loans, grants, and technical assistance each year because many of the smaller and poorer countries do not have the capacity to absorb such funds. Without China, lending amounts would decline, which would call into question how these banks operate. That is a subject few in the management of these institutions are inclined to tackle seriously, even though doing so is long overdue. The Trump administration was reluctant to endorse the recently requested capital increase at the World Bank, with Treasury Secretary Steven Mnuchin argued that “more capital is not the solution when existing capital is not allocated effectively.”

For Beijing to continue to receive development assistance given the strength and prominence of its economy makes even less sense given that it has taken specific action to take a more substantial role lending to developing countries through the Chinese-led Asian Infrastructure Investment Bank (AIIB) and its participation as a founding member of the BRICS Development Bank. Beijing is believed to have formed the AIIB to counter the absence of a more pronounced leadership role in other MDBs, as well as to help pick up the slack in infrastructure investment lending in Asia. Why does it not recognize the incongruity in taking a leadership role in infrastructure-related lending while still accepting development assistance on a grand scale from the MDBs it is now competing with?

This discrepancy underscores China’s chosen role as both a developed country seeking to claim its rightful place among the world’s leading nations and a developing nation that will continue to require more resources from other nations in order to become fully developed. China can rightly be accused of wanting to have its cake and eat it, too. It wants to have the benefits of receiving the multilateral development assistance normally afforded to developing countries while at the same time wanting to be able to flex its muscles in international fiscal and monetary affairs on its own terms.

China has exhibited a similar dual role in global politics, pulling its weight at the UN and other international organizations and forming meaningful alliances with a plethora of countries. But it has done so largely by playing by its own set of rules, at times forging relationships with unsavory regimes and exhibiting little concern for human rights along the way. In a sense, China has had the best of both worlds, being at once a backroom dealmaker while at the same time being a friend to countries that have few if any allies such as North Korea and Venezuela.

China cannot have it both ways indefinitely. Beijing would be well advised to decide to fully embrace its “destiny” as a global superpower while discarding its poor-cousin image, because it cannot be all things to all countries. China is naturally capable of getting to its desired finish line any way it desires to do so, but it would ultimately be far preferable if it were to become the global power that it strives to be as a member of the community of nations that demonstrates that it acknowledges and plays by internationally accepted rules.

Xi obviously wants to craft a bold and definitive path into the future for China. It is the right time, and he is the right man to do it given that Xi has fully consolidated his power and is the strongest leader China has seen since Mao. Five years from now, China will likely be the world’s largest economy. However, it remains to be seen whether Xi can transform China into a country that recognizes the longer-term benefits of playing on the same field by the same rules most of the world’s other nations do.

 

Daniel Wagner is the CEO of Country Risk Solutions and author of the new book Virtual Terror. 

 


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