The World Bank will make adjustments to its lending protocols in order to reduce credit extended to China, as one of the conditions for a USD$13 billion capital increase from the United States.
World Bank president Jim Yong King and US Treasury secretary Steven Mnuchin hashed out the deal earlier this week, according to a report from The Financial Times.
The Trump administration raised objections to the World’s Bank’s level of lending to China last year, with one analyst describing the move as “picking a direct fight with Beijing.”
A US Treasury official said to Reuters last October that “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,” given that China is both the biggest borrower from the World Bank as well as the biggest foreign creditor to the US.
China took $2.4 billion in funds from the World Bank’s International Bank for Reconstruction and Development (IBRD) last year, making it the institution’s biggest borrower in 2017.
The amount was equal to 11% of the funds provided by IBRD to global education and health initiatives.
Under the new lending arrangements China will rise to a higher band for which borrowing rates are more costly, while the World Bank will commit to credit extension to poorer countries.
In exchange for this arrangement the US will inject USD$7.5 billion into IBRD, as well as $5.5 billion into the World Bank’s International Finance Corporation.
China has agreed to the new arrangement, under which its voting rights on the World Bank’s board will rise to 5.7% from 4.45%, as compared to the 16% of votes held by the US.
Observers believe that the argument is likely to have a limited effect on the World Bank’s lending to China in the short-term, and that Beijing’s capital costs won’t rise immediately.
“They are not going to get the bank to stop lending to China and countries like China next year,” said Scott Morris, former US Treasury official at the Center for Global Development, to The Financial Times.
US Treasury officials also expressed their hopes that this would be the last capital increase provided to the World Bank after its last injection at the start of the decade, with the international lender agreeing to cap costs and remuneration for staff.
