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China economy

Higher loan rates for China as World Bank gets US$13 billion capital injection

Deal raises China’s stake in the World Bank’s main concessional lending arm, the International Bank for Reconstruction and Development

PUBLISHED : Sunday, 22 April, 2018, 1:32pm
UPDATED : Sunday, 22 April, 2018, 9:50pm

The World Bank’s shareholders on Saturday endorsed a US$13 billion paid-in capital increase that will boost China’s shareholding but bring lending reforms that will raise borrowing costs for higher-middle-income countries, including China.

The multilateral lender said the plan would allow it to lift the group’s overall lending to nearly US$80 billion in fiscal 2019 from about US$59 billion last year and to an average of about US$100 billion annually through 2030.

“We have more than doubled the capacity of the World Bank Group,” the institution’s president, Jim Yong Kim, said during the International Monetary Fund and World Bank spring meetings in Washington.

“It’s a huge vote of confidence, but the expectations are enormous.”

The hard-fought capital increase, initially resisted by the Trump administration, will add US$7.5 billion paid-in capital for the World Bank’s main concessional lending arm, the International Bank for Reconstruction and Development.

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Its commercial-terms lender, the International Finance Corp, will get US$5.5 billion paid-in capital, and the IBRD also will get a US$52.6 billion increase in callable capital.

The bank agreed to change the IBRD’s lending rules to charge higher rates for developing countries with higher incomes, to discourage them from excessive borrowing.

The IBRD previously had charged similar rates for all borrowers, and US Treasury officials had complained that it was lending too much to China and other bigger emerging markets.

US Treasury Secretary Steven Mnuchin said earlier on Saturday that he supported the capital increase because of the reforms that it included. The last World Bank capital increase came in 2010.

The current hike came with cost controls and salary restrictions that would hold World Bank compensation to “a little below average” for the financial sector, Kim said.

He added that there was nothing specific in the agreement that targeted a China lending reduction, but he said lending to China was expected to gradually decline.

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In 2015, China founded the Asian Infrastructure Investment Bank, and lends heavily to developing countries through its government export banks.

The agreement will lift China’s shareholding in the IBRD to 6.01 per cent from 4.68 per cent, while the US share will dip slightly to 16.77 per cent from 16.89 per cent. Washington will still keep its veto power over IBRD and IFC decisions.

Kim said the increase was expected to become fully effective by the time the World Bank’s new financial year started on July 1. Countries will have up to eight years to pay for the capital increase.

The US contribution is subject to approval by Congress.