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China’s Central Bank is Becoming the Developing World’s “Payday Lender”

by Benn Steil and Elisabeth Harding October 22, 2024

With the developing world’s growing use of costly and opaque “payday loans” from China’s central bank, the IMF and World Bank need to demand far greater transparency from Beijing. 

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Monetary Policy
Bullard Has Fed History on His Side in Rate-Hike Debate with Yellen
St. Louis Fed President James Bullard has moved decisively and vocally from the dove to hawk camp over the past year, and is now predicting a rate hike in the first quarter of next year – in contrast to Fed Chair Janet Yellen, who still does not appear to see one coming before the middle of the year.  The economy, Bullard said, was “way ahead of schedule for labor-market improvement.” But it’s not just the unemployment picture that’s changed dramatically over the past half-year; the inflation picture has as well. Today’s Geo-Graphic updates one we did in March, comparing the level of unemployment and inflation today with the levels they were at at the start of previous rate-hiking cycles going back to 1994.  In March, unemployment was at the top of this range, but inflation was well below where it was in ’94, ’97, ’99, and ’04.  The picture is very different today, with the Fed’s preferred measure of inflation, PCE, having risen to 1.6% from 1% back in February.  All other major measures are also well up.  Moreover, three of these measures are now above where they were when the Fed started tightening in ’99.  The Fed funds rate, however, is way below where it was at the beginning of previous rate-tightening cycles.  This suggests that Bullard is right to be asking whether the Fed is at risk of “get[ting] behind the curve” if it doesn’t adjust its tightening timetable. Federal Reserve: Economic Projections of Fed Board Members and Fed Bank Presidents FiveThirtyEight: Inflation Isn’t Rising Yet, But The Fed is Watching Closely Economist: A Tight Spot for America's Recovery Financial Times: US Recovery Rouses Inflation Concerns   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
Blog Post by Benn Steil and Dinah Walker August 18, 2014 Geo-Graphics
China
Is the BRICS Contingent Reserve Arrangement a Substitute for the IMF?
Russian President Vladimir Putin has hailed the new BRICS contingent reserve arrangement (CRA) as a substitute for the IMF, saying that it “creates the foundation for an effective protection of our national economies from a crisis in financial markets." But does it? Under the terms of the arrangement, China can, without being on an IMF program, borrow up to $6.2 billion; Brazil, Russia, and India $5.4 billion; and South Africa $3 billion.  But this is chicken feed compared to Russia and Brazil’s crisis-borrowing from the IMF over the past twenty years, as we show in the top figure above.  The IMF approved lending to Russia of $38 billion (SDR 24.786 billion) in the 1990s.  In 2002 alone, the IMF approved a 15-month stand-by credit arrangement of about $30 billion for Brazil.  Net private financial flows to emerging markets today are roughly 10 times what they were in 2002, meaning that the size of the loans necessary to address balance of payments financing problems would be even larger now. The BRICS countries know this, which is why they maintain such vast pools of foreign exchange reserves, as we show in the bottom figure. The notion that $5.4 billion from the BRICS CRA would make a difference to Russia in a genuine financial crisis is ridiculous.  Putin’s statement is clearly political hyperbole, which is why Russia currently holds over $400 billion in reserves. Time: The BRICS Don’t Like the Dollar-Dominated World Economy, but They’re Stuck With It Financial Times: The BRICS Bank Is a Glimpse of the Future People's Bank of China: Treaty for the Establishment of a BRICS Contingent Reserve Arrangement IMF: The IMF and Russia in the 1990s   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
Blog Post by Benn Steil and Dinah Walker August 6, 2014 Geo-Graphics
China
Is the BRICS Bank More "Democratic" Than the World Bank?
The launch of the new BRICS development bank “reflects the disparity and democratic deficiency in the global governance and is trying to restart, to rethink that,” according to Nobel economist Joseph Stiglitz.  But is the BRICS bank really more “democratic” than the World Bank, whose governance legitimacy its founders are challenging? As the Geo-Graphic above shows, the voting share of the World Bank’s founding members has fallen over the years from 100% to 49.7%.  This means that its 37 founders currently have less voting power than the five BRICS bank founders will ever have within their new institution.  That’s because the BRICS bank articles of agreement do not allow the founders’ voting share to fall below 55% - ever, no matter what the bank’s future membership looks like. This is like saying that immigrants can have the vote, but only until they become 45% of the population – then they cap out. Where’s the democracy in that? Geo-Graphics: Hurling BRICS at the World Bank and the $ RT: How the West Created BRICS New Development Bank Wall Street Journal: Five Things to Know About the New BRICS Bank International Bank for Reconstruction and Development: Subscriptions and Voting Power of Member Countries   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
Blog Post by Benn Steil and Dinah Walker July 23, 2014 Geo-Graphics
  • China
    Hurling BRICS at the World Bank and the $
    Brazil, Russia, India, China, and South Africa (the “BRICS”) made a splash last week with the official launch of their new development bank.  The backers made no secret of their intention to challenge the way things are done in the established international financial and monetary architecture. The irony is that India and China are the biggest beneficiaries of the current development bank architecture. They are the World Bank’s largest borrowers.  And Brazil is number 9.  As shown in the graphic above, these three nations have $66bn in World Bank loans outstanding, 32% more than the new BRICS bank’s entire initial subscribed capital of $50bn.  So it would appear that for the foreseeable future the World Bank will remain a considerably more important source of development financing for the BRICS than their own development bank. At the bank’s launch, Russian president Vladimir Putin took a shot at the prevailing global monetary architecture, contrasting it with the BRICS’ vision.  “The international monetary system … depends a lot on the U.S. dollar, or, to be precise, on the monetary and financial policy of the U.S. authorities. The BRICS countries want to change this.” However, the entire paid-in capital stock of the new BRICS bank will be in U.S. dollars.  Just 10 percent of the World Bank’s paid-in capital was contributed in U.S. dollars; the rest was contributed in member countries’ national currencies. So whose currency regime is more dependent on the dollar? Sixth BRICS Summit: Fortaleza Declaration Macro and Markets: BRICS and Mortals The Economist: An Acronym with Capital International Bank for Reconstruction and Development: Information Statement   Follow Benn on Twitter: @BennSteil Follow Geo-Graphics on Twitter: @CFR_GeoGraphics Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”
    Blog Post by Benn Steil and Dinah Walker July 21, 2014 Geo-Graphics