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House Committee on Financial Services Subcommittee on National Security, Illicit Finance, and International Financial Institutions International Financial Institutions in an Era of Great Power Competition

House Committee on Financial Services Subcommittee on National Security, Illicit Finance, and International Financial Institutions

International Financial Institutions in an Era of Great Power Competition

Thursday, May 25, 2023

Topline

  • The hearing largely focused on China, the World Bank, and the IMF.
  • Members of both parties expressed concern about China’s investment in developing countries.

Witnesses

  • Jesse M. Schreger, Associate Professor of Business, Columbia Business School
  • Mark Rosen, Partner, Advection Growth Capita and former Acting Executive Director, International Monetary Fund (IMF)
  • Daniel F. Runde, Senior Vice President, Center for Strategic & International Studies (CSIS)
  • Rich Powell, Chief Executive Officer, ClearPath & ClearPath Action
  • Daouda Sembene, Distinguished Nonresident Fellow, CGD and CEO, AfriCatalyst

Opening Statements

Subcommittee Chairman Blaine Luetkemeyer (R-Mo.)

In his opening statement, Luetkemeyer said that central banks have recently shifted from a prolonged period of lax monetary policy to aggressive monetary tightening. He said that 60% of low-income countries now face debt distress. Luetkemeyer added that many people are questioning whether international financial institutions fulfill the role they were initially designed to. He noted that the World Bank continues to loan China $1 billion annually and added that China is the largest beneficiary of the World Bank’s spending. Finally, he said that while the Biden Administration is focused on green initiatives, China and Russia are capitalizing on other nations’ needs for energy.

Subcommittee Ranking Member Joyce Beatty (D-Ohio)

In her opening statement, Beatty said that international financial institutions (IFIs) are now in an era of great power competition. She added that these institutions have been instrumental in helping developing countries respond to the pandemic and other crises. Beatty noted that China and Russia want to supplant U.S. leadership within IFIs, even though China has been pushing many developing countries into unsustainable debt. Beatty said that while Democrats are trying to fix the issue, Republicans are pushing the U.S. towards defaulting on its debt for the first time ever. Finally, she said that the damage this would cause to the U.S. economy would deliver a decisive victory to China.

Full Committee Ranking Member Maxine Waters (D-Calif.)

In her brief statement, Waters emphasized the importance of not cutting back on any spending that would help us deal with the global economic threat of China.

Witness Statements

Mr. Jesse M. Schreger, Associate Professor of Business, Columbia Business School

In his opening statement, Schreger said that solving sovereign debt crises is complex because of the lack of seniority structures and bankruptcy that corporate defaults have. He said that major emerging markets largely borrow from private investors in their own local currency. Schreger added that China is the largest bilateral creditor in the world, noting that loans from China are usually in foreign currencies, most often in U.S. dollars. He also said that some loans from China require borrowers to keep cash in offshore accounts as collateral, causing other creditors to worry that China will be treated as the senior creditor in default before formal debt restructuring negotiations begin. Finally, he said that tax havens and other offshore financial structures make it more difficult to know who owns what in the global economy.

Mr. Mark Rosen, Partner, Advection Growth Capita and former Acting Executive Director, International Monetary Fund (IMF)

In his opening statement, Rosen said that the IMF is a last resort lender to countries in economic distress. He urged the committee to press the IMF to stick to its main functions and refrain from getting involved with development or climate change lending and policies. He noted that the biggest challenge the IMF faces today is China, who irresponsibly lends to emerging markets, causing these countries economic issues. Rosen added that China refuses to join the Paris Club, which the U.S. is a part of, and responsibly provides debt relief to these countries. He also said that the U.S. is the largest shareholder in IMF, which provides some veto powers. He added that China wants a larger share, but the U.S. should not allow it because of their irresponsibility. Finally, he once again emphasized the importance of the IMF sticking to its core functions.

Mr. Daniel F. Runde, Senior Vice President, Center for Strategic & International Studies (CSIS)

In his opening statement, Runde said that if the U.S. does not meet the goals of developing countries, they would instead take their business to China and Russia. He urged the U.S. not to disregard its leadership role in international financial institutions. He added that the Inter-American Development Bank (IADB) and European Bank for Reconstruction and Development (EBRD) might require capital increases but only if the EBRD agrees to use all additional monies generated to help finance the rebuilding of Ukraine. He said China is a large part of the emerging market debt problem since they win a lot of World Bank contracts. He noted that China’s Belt and Road Initiative (BRI) is an ambitious project that the U.S. should counter with a positive alternative for developing countries. Runde also said that MDBs should focus on mobilizing private investment and respond to client-driven demands. Finally, he said that the World Bank needs closer alignment with regional banks and suggested that any future capital increases for regional development banks should consider Taiwan joining as an economy.

Mr. Rich Powell, Chief Executive Officer, ClearPath & ClearPath Action

In his opening statement, Powell said that the U.S. has lost global leadership on nuclear projects and that China is building more nuclear infrastructure than anyone else. He added that from 2016 to 2020, China provided more energy financing across the globe than all MDBs combined. He noted that the U.S. needs to improve its energy financing to compete with China. He urged the World Bank and other IFIs to reevaluate their nuclear policies instead of turning down all nuclear projects.

Dr. Daouda Sembene, Distinguished Nonresident Fellow, CGD and CEO, AfriCatalyst

In his opening statement, Sembene said the U.S. should engage with major shareholders of the World Bank, IMF, and other IFIs, including China, to help support and meet demands of the global community. He noted that U.S. policies on IFIs have significant negative impacts on these institutions. He suggested that the U.S. should use its influence to enlist IFIs in implementing U.S.-led infrastructure development initiatives. He added that closing the infrastructure gap is crucial to reducing poverty and increasing the delivery of social services in Africa. He also noted that this could benefit the U.S. economy by allowing them to advance their foreign policy goals, creating opportunities for businesses, and strengthening engagement with the continent. Finally, he urged the U.S. to ensure that MDBs are adequately endowed with resources to perform their duties and meet the demands of developing countries and the international community.

Question & Answer

The World Bank

Luetkemeyer noted that, despite the U.S. being the largest shareholder and contributing member to the World Bank, U.S. businesses have seen a measly 2.4 of overall contract awards, while Chinese companies have been awarded over 92% of all contracts. Schreger commented that the most important part of allocating contracts is giving them to the most efficient producer. He added that he cannot speak to the procurement process that led to selecting China or the U.S., but allocating projects to the most efficient contractors is important for fostering repayment ability and efficiency. Runde said that there has been a move away from low bid towards quality and life cycle cost. He recommended investing in training procurement officials in developing countries to have the concept of quality and life cycle cost as an approach to buying things. He also said that the U.S. also needs to show up in developing countries.

Luetkemeyer asked if the Chinese companies receiving money from the World Bank are real or shell companies. Powell recommended tighter requirements around bids to increase transparency about who is bidding, and if contracts are preferential to heavily subsidized bids. He noted that when the U.S. does compete in bids, it has a great track record of winning.

Rep. French Hill (R-Ark.) asked how to ensure that backlisted firms are not making money through World Bank contract procurement. Runde said the U.S. should encourage the UN to add Chinese firms to its blacklists, encourage the World Bank to revisit its policy about what kind of blacklist it uses, and encourage American businesses to do more and engage with the World Bank.

The U.S. Debt Limit

Beatty asked how a default would affect other countries around the world and the ability of financial institutions to help countries in need. Sembene said that the potential debt default would have dramatic consequences for the U.S. and developing countries. For African countries, he said it might worsen the tightening financial conditions they are currently facing, which would undermine their access to markets and increasing their debt. Beatty asked about the impact of a default on great power competition, particularly on the ability of the US to compete with China. Powell replied that the U.S. should not default, and there needs to be a short and long term strategy to bring spending into a more sustainable alignment.

The Dollar

Rep. Andy Barr (R-Ky.) asked about threats to the dollar’s reserve currency status. Schreger said that the dollar provides the global safe asset, and he added that when investors contemplate investing in China and holding Chinese renminbi as reserves, they are not sure whether it will be possible to turn that paper into the goods and services needed.

Rep. Roger Williams (R-Texas) asked what China is doing to undermine the dollar’s dominance as the world’s currency. Schreger replied that China is trying to convince countries around the world that the renminbi is an alternative asset to invoice trade and invest in. He said that on the investment side they have been working hard to allow foreign capital, and on the trade side they are encouraging firms to price their goods in renminbi. 

Chinese Investments Around the World

Rep. Maxine Waters (D-Calif.) noted that China has been making significant investments in the infrastructure of several countries in Africa. Sembene commented that if the U.S. does not meet the needs of developing countries, they will look for alternatives. He said that alternatives are not only provided by China, but also by the private sector, which will result in higher costs associated with commercial borrowing.

Rep. Young Kim (R-Calif.) questioned why the CCP can borrow at subsidized rates as a developing country, but also lend hundreds of billions of dollars to poor countries like a fully developed country. She said that they tap into the IFI system, yet refuse to cooperate with the Paris Club to restructure the debt of poorer countries. She asked what the U.S. can do to ensure the CCP graduates from being able to borrow at subsidized rates. Runde said that China has taken advantage of privileges that go to developing countries, and it will require diplomacy and conversations with Chinese counterparts to stop them from perpetuating these lies.

The International Monetary Fund

Williams asked how the U.S. and IMF could address the pressure from rising interest rates and hold China accountable. Rosen replied that China is basically holding up the business of the IMF by not permitting debt restructurings. He said that the U.S. and its allies need to put pressure on them to agree to debt restructuring. If they refuse to do so, the U.S. needs to look at the IMF’s lending into arrears policy.

Rep. Dan Meuser (R-Penn.) asked how to address problems at the IMF, including their climate priorities. Rosen said that the role of the IMF is to deal with short-term crises, not provide development lending, which is what they have been doing through their climate trust. He said they need to be held accountable.

Kim asked how the U.S. can make the IMF utilize its lending into arrears policy to circumvent debt provided by the CCP. Rosen said they need to review the mechanisms and impose burdens on companies that breach that policy. He said there need to be proper penalties against countries for paying China when they are not supposed to.

Ukraine

Rep. Wiley Nickel (D-N.C.) asked how the U.S. can best support Ukraine. Sembene said the U.S. should empower IFIs by giving them the resources they need to extend support to Ukraine and developing countries.

Inflation

Rep. Barry Loudermilk (R-Ga.) asked how inflation has affected other countries’ borrowing costs. Schreger said that it has mostly affected these costs through the Federal Reserve’s reaction. He explained how countries that borrow in U.S. dollars have bonds priced as a spread to the risk-free rate in dollars, which are U.S. treasuries. As the Fed raises interest rates, countries have to pay the higher U.S. treasury rate and the spread above US borrowing costs. This has led other countries in the world to pay a higher interest rate on U.S. dollars. Loudermilk asked if this could push these countries to another lender. Schreger replied that other countries are reluctant to denominate their debt in renminbi because there is not the same large liquid investor base to purchase the bonds.

The European Bank for Reconstruction and Development

Hill discussed the EBRD’s potential capital request. He asked if they should hold support for a capital increase unless the bank changes its lending parameters. Runde agreed that they should be able to finance gas, big hydro, and nuclear at the EBRD. Powell replied that another idea would be to go around the blockade by Brussels by establishing a trust fund at the bank with other countries interested in pursuing nuclear activities.

 

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.