- - Sunday, January 3, 2016


China’s enormous emerging market, and its investment in the infrastructure to support it, is pulling U.S. policy off course. The Communists in Beijing, as they still call themselves, are some of the toughest capitalists anywhere. The latest evidence is at the World Bank.

One of the holy of holies at the bank, created as part of the monetary settlement of World War II, has been its advocacy of free markets. The bank as created was a centralized operation, with delegates from the various countries as stockholders, and the bank guaranteed loans on a government-to-government basis.

Early on the bank established the International Finance Corp (IFC) as its “free enterprise” window. The IFC’s function was to partner in otherwise risky joint investments between foreign lenders and local developing market capitalists in Africa, Asia and Latin America. Its impact was relatively modest over five decades compared to the massive lending of the parent World Bank. Though its operations have been limited through the years, it was nevertheless effective in encouraging private investment and free markets in countries where the old colonial regimes were addicted to corrupt government enterprise.

But now the IFC has strayed from “the Washington consensus” — 10 economic policy prescriptions constituting the standard reform package for countries in crisis, as set down by the Washington-based International Monetary Fund (IMF), the World Bank, and the U.S. Treasury Department. Under the guidance of Jin-Yong Cai, formerly with Goldman Sachs, the IFC made a large number of deals with Chinese-state companies. He is leaving 10 months before the expiration of his turbulent three-year term to return to Asia and private business.

The last straw for his critics has been a $300 million IFC investment in China’s Postal Savings Bank, a negligible sum compared to $2.5 billion the state-owned China Life paid for a 5 per cent stake. This continues a pattern in which the IFC’s dedication to private enterprise has gone cold. Some old hands at the World Bank ask how this investment conforms to the IFC mandate to lend to private companies that could not find affordable capital.

Mr. Cai argues that investment in the Postal Savings Bank will take needed financial services to many of China’s unbanked in the hinterland, far from the large cities. That’s a worthy objective, and he says it will bring a healthy return on the investment as well. That may be true, but it’s one more example of how policy, often led by the U.S. government, has been bending the rules to accommodate China.

This could be a problem if the decline in growth of the Chinese economy continues, as seems likely. The world commodity markets, suffering from the impact of slowing economies in Europe and India as well as in China, have taken a hit already. The miraculous high rates of growth of the last two decades are not likely to return.

There’s crisis already in a number of African and Latin American countries where huge Chinese infrastructure investments were committed, tied to high commodity prices for Chinese goods. Only now we learn how deeply the Chinese have snuggled into relationships with Western institutions. There will be a price to pay for that, and Western policymakers, above all the policymakers in the United States, had better be alert to it.

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