US demands World Bank overhaul of lending to China

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The Trump administration is holding out against a capital increase for the World Bank until it overhauls its lending to China and other middle income countries, creating a new source of tension between Washington and Beijing.

Jim Yong Kim, the World Bank’s president, has been pushing for extra financial resources and had hoped that shareholders would agree on at least a timetable for the increase at this week’s annual meetings in Washington.

But the Trump administration has been resisting those plans and this week aired its demands, saying it wanted the World Bank to examine its own balance sheet first and in particular its lending to China, which is presently the bank’s biggest borrower. 

The dispute is another sign of President Donald Trump’s antipathy for the international system and what his critics regard as a US withdrawal from global leadership. The US on Thursday said it was pulling out of Unesco, the UN cultural body. It has also taken a more combative attitude towards the UN more broadly and other international bodies such as Nato and the World Trade Organisation. 

The US has been tussling with China for the last few years over control of international institutions such as the World Bank with Beijing opting to set up alternative bodies, including the Asian Infrastructure Investment Bank. 

Mr Kim on Thursday defended the bank’s lending to China, saying that its engagement there informed the bank’s work across the world. 

“For me the rationale for us working in China is quite clear: Not only are we helping them along the development path but the lessons we learn in China . . . are very helpful to our work in other developing countries,” he told reporters. 

The World Bank, he said, needed a capital increase to respond to growing demand for its loans, acknowledging a decision was now in the hands of its shareholders. “The good news is the US is now very much part of the discussion,” he said. 

A senior US Treasury officials told Reuters this week that the World Bank needed to do “substantial work” on its balance sheet before Washington would entertain the idea of a capital increase for its main lending arm, the International Bank for Reconstruction and Development.

“The bottom line here is right now 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,” the official said.

Mr Kim has been eager to build a relationship with the Trump administration and has been working closely with Ivanka Trump, the president’s daughter and adviser, on establishing a fund for women’s empowerment. That fund is due to be launched on Saturday and has raised some $350m in donations that will allow the World Bank to deploy up to $2bn in capital, Mr Kim said.

But the US objections to World Bank lending policies suggest Mr Kim’s vision for the bank, which has been premised heavily on engaging China, faces more serious headwinds.

Scott Morris, a former US Treasury official now at the Center for Global Development, a think-tank, said the US position amounted to a challenge to the World Bank’s existing strategy, which has been to use lending to China to engage with Beijing and try to offset the impact of new institutions like the AIIB. 

It also amounted to the Trump administration “picking a direct fight with China” over the mission of a major international institution. 

“It’s really setting up some pretty deep divisions going forward,” he said. 

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