brettonwoodsproject.org The World Bank: in the vanguard of an infrastructure boom BY NANCY ALEXANDER In just over a decade, China has become a global leader in development finance. China has established a number of bilateral and multilateral funds across the world, in addition to two policy banks, the China Development Bank (CDB) and the Export Import Bank of China (C-EXIM). China has also led efforts to establish new multilateral development banks (MDBs), the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB), that promise to provide significant financing capabilities into the regime as well. These banks and funds have the potential to provide an enormous increase in the availability of development finance for a world economy in desperate need of public finance for long-run economic development that is environmentally sustainable and socially inclusive. What is more, they have the potential to provide an alternative to the Western-dominated system that has struggled to fill the glaring gaps in development finance, particularly in infrastructure, and to maintain legitimacy among many borrowing countries and segments of civil society. The globalisation of China’s policy banks Two of China’s policy banks, the CDB and the C-EXIM, already hold more assets than the combined sum of the assets of the Western-backed MDBs. Table 1 shows that the C-EXIM and the CDB have over $1.8 trillion in assets, whereas the Western-backed banks hold just over $700 billion. That said, the CDBs’ international holdings are just 30 per cent of total assets, putting the two banks’ international assets at around $0.5 trillion. These banks provide concessional and non- concessional (in the case of the C- EXIM) finance in virtually every corner of the world. Founded in 1994, the CDB is perhaps the largest development institution in the world and fueled the Chinese growth miracle on the mainland. As part of China’s broader ‘go out’ strategy, the CDB has been making loans to foreign governments since the early 2000s. In some countries in Latin America and Africa the CDB is often the largest single source of development bank finance. The CDB raises capital by issuing bonds with This briefing examines the trajectory of China’s evolving leadership in international development finance. It looks at the impact of China’s massive increase in development finance for developing countries, arguing that it provides a useful alternative to Western-dominated institutions. It notes that it is too soon to tell if Chinese finance will support socially and environmentally sustainable projects and that concerns remain about transparency, accountability and the environmental and social safeguards used by Chinese institutions. Rohini Kamal is a research fellow at Boston University’s Global Economic Governance Initiative and a doctoral student in economics at the University of Massachusetts, Amherst. APRIL 2016 China goes global with development banks BY ROHINI KAMAL AND KEVIN P. GALLAGHER Kevin P. Gallagher is professor of Global Development Policy at Boston University’s Frederick S. Pardee School of Global Studies, where he co-directs the Global Economic Governance Initiative and the Global Development Policy Program.
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brettonwoodsproject.org
The World Bank: in the vanguardof an infrastructure boomBY NANCY ALEXANDER
In just over a decade, China hasbecome a global leader indevelopment finance. China hasestablished a number of bilateral andmultilateral funds across the world, inaddition to two policy banks, the ChinaDevelopment Bank (CDB) and theExport Import Bank of China (C-EXIM).China has also led efforts to establishnew multilateral development banks(MDBs), the New Development Bank(NDB) and the Asian InfrastructureInvestment Bank (AIIB), that promiseto provide significant financingcapabilities into the regime as well.
These banks and funds have thepotential to provide an enormousincrease in the availability ofdevelopment finance for a worldeconomy in desperate need of publicfinance for long-run economicdevelopment that is environmentallysustainable and socially inclusive.What is more, they have the potentialto provide an alternative to theWestern-dominated system that hasstruggled to fill the glaring gaps indevelopment finance, particularly ininfrastructure, and to maintainlegitimacy among many borrowingcountries and segments of civil society.
The globalisation of China’s policybanks
Two of China’s policy banks, the CDBand the C-EXIM, already hold moreassets than the combined sum of theassets of the Western-backed MDBs.Table 1 shows that the C-EXIM andthe CDB have over $1.8 trillion inassets, whereas the Western-backedbanks hold just over $700 billion. Thatsaid, the CDBs’ international holdingsare just 30 per cent of total assets,putting the two banks’ internationalassets at around $0.5 trillion. Thesebanks provide concessional and non-concessional (in the case of the C-EXIM) finance in virtually every cornerof the world.
Founded in 1994, the CDB is perhapsthe largest development institution inthe world and fueled the Chinesegrowth miracle on the mainland. Aspart of China’s broader ‘go out’strategy, the CDB has been makingloans to foreign governments since theearly 2000s. In some countries in LatinAmerica and Africa the CDB is oftenthe largest single source ofdevelopment bank finance. The CDBraises capital by issuing bonds with
This briefing examines the trajectory of China’s evolvingleadership in international development finance. It looks atthe impact of China’s massive increase in developmentfinance for developing countries, arguing that it provides auseful alternative to Western-dominated institutions. It notesthat it is too soon to tell if Chinese finance will supportsocially and environmentally sustainable projects and thatconcerns remain about transparency, accountability and theenvironmental and social safeguards used by Chineseinstitutions.
Rohini Kamal is a researchfellow at BostonUniversity’s GlobalEconomic GovernanceInitiative and a doctoralstudent in economics atthe University ofMassachusetts, Amherst.
APRIL 2016
China goes global with development banks
BY ROHINI KAMAL AND KEVIN P. GALLAGHER
Kevin P. Gallagher isprofessor of GlobalDevelopment Policy atBoston University’sFrederick S. Pardee Schoolof Global Studies, wherehe co-directs the GlobalEconomic GovernanceInitiative and the GlobalDevelopment PolicyProgram.
terms of up to 30 years toinstitutional investors in bothrenminbi and other currencies. It isthe second-largest bond issuer inChina, after the Ministry of Finance,and its bonds enjoy a credit ratingequivalent to government bonds.The Chinese state has full ownershipof the Bank and implicitlyguarantees its debt, enabling theCDB to provide lower interest ratesand longer-term loans than otherChinese banks. The CDB is alsoChina’s largest foreign currencylender, drawing directly on China’svast foreign currency reserves.
Along with the CDB, C-EXIM plays animportant role in supporting thestate’s foreign trade and economicdevelopment in the global arena. C-EXIM provides financing for trade inhigh–technology products andequipment; offshore constructioncontracts, overseas investment
projects; and provides internationalguarantees. Furthermore, C-EXIM ismandated to promote China’s long-term access to strategicallyimportant natural resources throughvarious instruments, such as exportcredits, direct lending and creditguarantees.
China-backed global developmentfunds
China has also pioneered a host ofbilateral and regional developmentfunds. These funds add upwards of$100 billion in development financeprovided by the Chinese in recentyears. Table 2 exhibits the majorfunds that we were able to confirm.
A major portion of these Chineseinvestments is in Asia, with thelargest being the $40 billion SilkRoad Fund established in 2014 withinvestment from state institutions
including the C-EXIM and CDB. Thefund is open to investors from othercountries as well and has provisionsto expand maritime connectivitybetween China and the rest of Asia(Central, South and Southeast Asia,and the Middle East), and beyondAsia to include North and NortheastAfrica and Europe. Over the lastdecade China has further created amassive platform of public andprivate investments in Africa and inthe Latin America and the Caribbean(LAC) region. The largestinvestments in both regions are ininfrastructure. The largest initiativeto date in the LAC region is the $20billion CELAC-China InvestmentFund announced early last year.
In the larger arena China seeks tostrengthen South-South relationsand contribute to globaldevelopment. To this end, Chinaannounced the creation of the $3.1
China goes global with development banks
0 200 400 600 800 1000 1200 1400 1600
Export-Import Bank of China (C-EXIM)
China Development Bank (CDB)
European Bank for Reconstruction andDevelopment (EBRD)
Inter-American Development Bank (IADB)
African Development Bank (AfDB)
Asian Development Bank (ADB)
World Bank (WB)
Table 1: China-backed and Western-backed development banks (total assets $ Billion)
Source: Gallagher, Kevin P., Gregory Chinn, and Rohini Kamal (2016 forthcoming),, Boston University, Global Economic Governance Initiative
3
billion South-South ClimateCooperation Fund in a China-USjoint presidential statement onclimate change in September 2015,to be used to finance initiatives indeveloping countries worldwide tocombat climate change. China alsopledged $2 billion for the creation ofa South-South Cooperation Fundaimed at assisting developingcountries in implementing their post-2015 development agenda, asannounced last year at the UNSustainable Development Summit atthe UN headquarters in New York.Plans to create an Academy ofSouth-South Cooperation and
Development were also announced,with the aim to facilitate studies andexchanges by developing countrieson theories and practices ofdevelopment suited to theirrespective national conditions.
New multilaterals
With much fanfare, China helpedspawn two global developmentbanks, the NDB and the AIIB. TheNDB was launched in July 2015 byBrazil, Russia, India, China and SouthAfrica - collectively known as theBRICS countries. The NDB willprovide financing to developing
countries to help financedevelopment projects, at leastinitially in infrastructure and with afocus on renewable energy. EachBRICS member is expected to put anequal share into establishing thestartup capital of $50 billion with agoal of reaching $100 billion. Underthe current set-up membership maynot just be limited to BRICS nations.Future members could includecountries in other emerging marketsblocs. Each member country willsend its finance minister or centralbank chair to the NDB’srepresentative board. The Bank is setup in a way that no country will haveveto power over voting decisions, inpointed contrast to the veto powerthe US enjoys over World Bank (andIMF) decision-making.
The AIIB was created to supportinfrastructure construction in theAsia-Pacific region. It was proposedby China in 2013 and formallystarted operations in December2015 after the Articles of Agreement(AoA) entered into force withratification from 17 member statesholding 50.1 per cent of the shares.This is in accordance with the AoA,which requires ratification from 10member states holding a totalnumber of 50 per cent of the initialsubscriptions of the authorisedcapital stock. By end of February thisyear, all 57 of the AIIB’s ProspectiveFounding Members (PFMs) hadratified the AoA. The Memorandumof Understanding (MoU) specifiesthat the authorised capital of theAIIB is $100 billion and the initialsubscribed capital is expected to bearound $50 billion. The AIIB’sinvestment capacity could reach$250 billion by the end of 2020 in
Source: Gallagher, Kevin P., Gregory Chinn, and Rohini Kamal (2016forthcoming), , BostonUniversity, Global Economic Governance Initiative
Table 2: Chinese development funds in world economy ($ billion)
accordance with provisions made inits AoA. The AIIB is likely to co-finance projects with the World Bankand Asian Development Bank (ADB),particularly in the first years of itsoperations.
The PFMs include mostdeveloped nations, withnotable exceptionsbeing US, Canada andJapan. China currentlyholds the largest shareof voting rights of theAIIB, just above the one-quarter threshold neededto block any decisionsrequiring a supermajority vote (asuper majority is defined by thearticles to be three-fourths of thevoting power and two-thirds of themembers). This gives China thepower to potentially block decisionsinvolving structure, membership,capital increases, and othersignificant issues laid out in thearticles that require a super majorityof votes, but not decisions related today-to-day operations.
In terms of operational details, theAIIB is expected to be overseen byan unpaid, nonresident board ofdirectors. This set-up aims toaccelerate the speed of the loansapproval process. The AIIB will openbidding for projects to all, unlike theADB, which restricts contracts tomember countries. The procurementpolicy will be “more streamlined” interms of its operational detailsrelative to the other developmentbanks. The Environmental and SocialFramework (ESF) was approved inFebruary 2016, with the possibility
for updates after the first threeyears of operation if needed.
There were concerns raised by civilsociety regarding not only the publicconsultation process of the ESF, but
also its contents, in particularthe reliance on corporate
and country systems;lack of detail on theAIIB’s oversightmechanism; theomission of coal from
its exclusion list; itsadoption of the phased
approach, which allowsplans for impacts on
indigenous groups to be made afterproject approval; and the lack ofrequirement of mandatoryenvironmental or social impactassessments for projects in CategoryB, defined as having limitedenvironmental and social impacts.
Opportunity and challenge
There is no doubt that China hasmassively increased the scale ofdevelopment finance to developingnations across the world. It alsoappears that China-backeddevelopment banks represent adifferent emphasis for developmentpolicy than the Western-backedsystem, with a focus oninfrastructure and structuraltransformation. However, the recordthus far of the CDB and C-EXIM hasraised questions whether Chinesebanks are properly incorporatingsocial and environmental risk intothese activities, and the extent towhich the project cycle is governedin a transparent and accountable
manner. There is also concernregarding the implication of themore streamlined social andenvironment safeguard provisions inChina-led development initiatives onthe ongoing safeguards review at theWorld Bank .
It is too early to tell whether the newmultilateral funds and newmultilateral development banks willsteer such finance towardinfrastructure that is moreenvironmentally sustainable andsocially inclusive. China has madegreen finance a major focus of itsG20 presidency, co-chairing a GreenFinance Study Group that will look to“green” global finance. A developingcountry-led effort to green globaldevelopment finance in a mannerthat is inclusive, accountable wouldbe a welcome addition to the globaldevelopment-banking regime. Suchan outcome is not inevitable,however, and should be the goal ofpolicy-makers and civil society alike.
April 2016
The globalization of Chinesedevelopment finance, Gallagher,Kevin P., Gregory Chinn, and RohiniKamal (2016 forthcoming), BostonUniversity, Global EconomicGovernance Initiative
The Bretton Woods Project is an ActionAid-hostedproject, UK registered charity no. 274467, Englandand Wales charity no. 274467, Scottish charity no.SC045476. This publication is supported by anetwork of UK NGOs, the C.S. Mott Foundation,the William and Flora Hewlett Foundation andThe Rockefeller Brothers Fund.
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