As mentioned in our article about the International Monetary Fund’s relationship with China, the Republic of China joined the IMF in 1945 and in the same year, it joined the World Bank. However, things got quite tricky after the Chinese Civil War ended and the People’s Republic of China emerged, for the simple reason that in our case the World Bank considered the “Republic of China” (Taiwan… click HERE for more details on this remarkably complex as well as sensitive topic) the “actual” China… a state of affairs which persisted until 1980.
As of the first half of 1980, the collaboration between the People’s Republic of China and the World Bank was set in motion, with China receiving its very first loan back in 1981. Deng Xiaoping saw the World Bank as an important element that was capable of enabling China to escape poverty, with the World Bank’s role being let’s say binary:
- On the one hand, it provided direct financial assistance to China, with China actually becoming the number one World Bank borrower. For the most part, this financial assistance was provided with the goal of helping China implement modernization policies when it comes to anything from its pension system to its administrative apparatus. To be more precise, a lot of financial assistance was provided with the goal of enabling China to take advantage of technological advancements which enable it to implement much-needed reforms
- On the other hand, the World Bank also acted as a de facto consultant of China and aside from financial assistance, also provided much-needed know-how with respect to topics such as project prioritization, institutional development, policy creation and the list could go on and on
Structurally speaking, it is worth noting that at the beginning of China’s World Bank journey, it was considered a low-income country and as such, dealt with the so-called IDA, or International Development Association, from which it borrowed almost $10 billion up until 1999. As of that point, China was considered a middle-income nation and therefore ended up dealing with the IBRD (the International Bank for Reconstruction and Development), from which it attracted over 4 times more financing compared to the IDA. At this point in time, China is considered a so-called upper-middle-income nation by the World Bank and as such, primarily smaller-scale projects are funded at this point in time given the nature of the World Bank.
Furthermore, as time passed, China became willing to switch from a debtor role to that of a creditor. As a result, it started contributing financially more and more, with its voting power going from 2.77% all the way to 4.42% back in 2010, with it being north of the 5% zone at this point in time. Just like when it comes to the International Monetary Fund situation, China is still not quite yet a dominant force as far as the World Bank is concerned, with it lagging behind the United States (with a voting power north of 15%) and Japan (with a voting power north of 8%). Still, its current situation is superior to that of highly-developed nations such as the United Kingdom, Germany and France.
As time passes, China continues essentially buying its way toward influence with respect to the World Bank, with the exact same principle being valid as far as the IMF is concerned as well as… let’s just say geopolitics in general. From increasing its efforts as a World Bank and IMF creditor to doing the same as a creditor on a “country to country” basis, China is essentially choosing the soft power route to building geopolitical influence.
In some cases, most notably Africa, things are working remarkably well, with China establishing itself as the de facto regional creditor. In other instances such as the Middle East, the equation tends to be trickier but despite the fact that manifestations and results differ, the modus operandi remains intact at its core, with China gaining influence in direct proportionality to its activity as a creditor. From investing in one nation or another directly through projects such as the Belt and Road Initiative to assuming a more and more “in the spotlight” role within the IMF and World Bank, China is proving time and time again that it is willing to play the long-term geopolitical game.
It is worth noting, however, that other forces are also at play which enable China to become increasingly geopolitically influential. For example, the fact that other international players such as the United States and European Union and willing to take their foot off the proverbial pedal, with the US embracing the now-infamous “America First” paradigm (by no longer being as generous as a creditor and, on the contrary, taking significant steps back on the international scene, from withdrawing from the Paris Accords to doing the same as far as the Iranian equation is concerned) and the European Union having more than its far share of internal problems (from the Brexit situation to the increased fragmentation and North-South or if you will creditor nation – debtor nation divide).
It remains to be seen if the current trend will persist, with China accelerating and other economic powers taking their foot off the pedal or if “paradigm shift” situations will eventually occur. At the end of the day, this is an equation which depends not just on economic variables but also on equally unpredictable political ones. As always, the ChinaFund.com team is diligently taking notes and keeping its ear to the ground because, make no mistake: these developments are most definitely relevant to the interests of both our team (in light of the fact that, unlike other players, the ChinaFund.com team actually has a strong “brick and mortar” presence in China, a 13-year+ one at that) and our (potential) clients. As such, we always dig deep and do our due diligence thoroughly, with more information about how we can help our clients do the same being available over at our Consulting page.