Twice already, Malpass has taken direct aim at the bank’s relationship with Beijing when testifying in front of Congress in his current role as undersecretary of the Treasury for international affairs. Running the bank will give him the ability to implement the reforms to the international lending institution that the Trump administration has been seeking. Malpass, 62, worked in the administrations of both Ronald Reagan and George H.W. Bush.
One of those reforms will be to reduce or eliminate World Bank lending to China. When Malpass testified before a House subcommittee on monetary policy in late 2017, he stated that China was the biggest borrower from the bank’s lending arm, having been granted $2.4 billion in new financing that year for a total exposure of $13.3 billion. The loans violated the bank’s mandate of lending to countries that are both poor and unable to borrow in the international market, two conditions that hardly describe China.
The loss of a couple of billion dollars per year in aid isn’t a lot of money for the People’s Republic. But it would be meaningful to strip China’s designation by international institutions as an emerging market. It is that very dubious reprieve that gives China special treatment not just at the World Bank but also at the World Trade Organization.
Also of great concern to the Chinese is Malpass’s demand for more transparency when China lends to other countries.
China is lending billions, by some estimates a trillion dollars, to developing countries as part of its “Belt and Road Initiative.” Late last year, Malpass said the loans leave fragile countries with “excessive debt and low-quality projects.”
He isn’t alone in his criticism. Around the world, there are growing concerns about China’s “debt-trap diplomacy.” Exhibit 1: Sri Lanka handing over the control of a port after being unable to pay back the loans they took on from China to build the port. Some critics believe that was China’s intent all along. Closer to home are partially built Chinese projects dotting Venezuela, such as an abandoned, rusting bullet-train project.
Why should the United States care if a developing country accepts a murky loan with bad terms from China? Because countries that get in financial trouble due to these nontransparent Chinese loans will likely turn to institutions such as the International Monetary Fund for relief. The IMF’s biggest funding source is the U.S. taxpayer.
For this chain of events, look no further than Pakistan, which is negotiating a financial bailout from the IMF after gorging on Chinese loans for infrastructure projects of low economic value. Malpass testified that the very basics of those Belt and Road loans, such as interest rates and terms of maturity, are unknown. Also on the list of U.S. concerns: China does not adhere to legally binding international standards regarding bribery of foreign public officials in international business transactions.
As Secretary of State Mike Pompeo told me in an interview back in July, “There’s no rationale for IMF tax dollars and associated with that, American dollars, that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself.”
Since the bank’s outgoing president, Jim Yong Kim, announced he was stepping down on Feb. 1, there had been talk that President Trump, reportedly at the urging of his daughter Ivanka, might name former Pepsi chief executive Indra Nooyi to lead the bank. But with the naming of Malpass, it is clear the administration sees the World Bank as part of its broader campaign against China as a strategic competitor and abuser of international institutions.