Monthly Archives: March 2012

An Odd Legal Dispute Takes A Bizzare Turn

The strange case of Shyamsunder Agrawal and Deepak Raheja, the two Indian businessman who have caused a rumpus between Beijing and New Delhi, has taken another odd turn. We wrote about the confused details in January, and have become none the clearer about the truth since, but in short, the two were facing some rough local justice in Yiwu, the electronics components trading town, in connection with some unpaid bills before Indian consulate staff intervened to have them removed to Shanghai, where the case could be sorted out in the courts.

The two have since had their passports returned but are barred from leaving the country until the outstanding debt of $1.6 million is cleared. (They claim it is their employer, who has reportedly absconded to his native Yemen, who is responsible.) The Indian diplomatic service has said it can no longer afford to pay for the hotel. Indian press reports say the pair have been thrown out on the street and have gone on hunger strike, demanding to be repatriated. One report says they have threatened suicide if their demand is not met within a week. Chinese officials are insisting they can’t leave the country until the debt is cleared one way or another, as the Shanghai court has ordered though it has yet to make its final ruling.

There may be no greater import to this case than it shows how the civil legal system, for all its recent improvement, remains ill-equipped to handle a case as messy as this. It also throws a light on the realities of conducting commerce in China, especially away from the bright lights of the big international cities and sharp suits of the lawyers and their contracts. This Bystander would wager, with low knowledge but high confidence, that there wasn’t much paperwork around the original transactions. What has been produced in court, the pair say, they signed later and under duress.

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How Sino-Centric Is The World Wide Web?

As Mark Zuckerberg, the founder of Facebook, wanders around Shanghai, he will no doubt reflect, and not for the first time, on the fact that China accounts for barely 500,000 of his highly successful social network’s 400-plus million users around the world. He might also like to consider this: by 2016 China will have more internet users, at nearly 800 million, than the U.S., the U.K., France, Germany, India and Japan — combined.

That forecast comes from The Connected World, a Boston Consulting Group report published at the time of the annual Davos shindig in January. If more than a quarter of the 3 billion people in the world the report reckons will be online by 2016 are in China, compared to a tenth in the U.S., should we be thinking of China as being at the center of the Internet and the global digital economy rather than the U.S.?

It may be misguided to think of anything as distributed as the Internet as having a center. Yet sheer weight of population is fast swelling the China node, and challenging the notion that China, by its own volition, can be a web world of its own.

The first e-mail sent from China contained the message, “Across the Great Wall, we can reach every corner of the world” — even if the opposite hasn’t proved particularly to be the case. Yet more and more of that world is increasingly inside the Great Wall. With a population of 1.3 billion and an internet penetration rate of 38.3% at the end of last year, there is plenty of scope for grow the ranks of netizens. In raw number of internet users, China passed the U.S. in 2008, though fewer than one in four Chinese was online then compared to almost three out of four Americans. Between 2007 and 2010 China added more Internet users than exist in the U.S. It now has 513 million netizens. The U.S. has 245 million. If China now had America’s current online penetration level (78.3%), it would already have more than 1 billion internet users.

China, like other emerging economies, is also riding a second underlying trend, a world going digitally mobile. It doesn’t have to put a PC on every desk to get its citizens online, just put a smartphone in their hand. Two-third’s of China’s online population accesses the Internet via mobile phone. This year, for the first time, more smartphones will be bought in China than in any other country. China can leapfrog the desktop just as some emerging economies skipped the landline in telephony.

It can also go straight to the social Web. Tencent’s QQ messaging service is what set the company on the road to becoming China’s largest Internet company by market capitalization. Its Weibo (microblogging) service is easing ahead of rival Sina’s (they have more than 500 million users between them). Its Weixin mobile app took barely 400 days to acquire 100 million users. Social networking is a substitute for having no siblings to talk to at home, we are told. Well perhaps. More likely, weak IP protection and weak competition from TV has driven heavy use of the Internet in China for entertainment, particularly online music and videos, and the conversations that follow that. Tencent has adeptly cashed in on that with online games and entertainment. Consumers expect to pay for mobile phone services. They have grown used to them being free on a PC, to the detriment of any business in a country that was an early adopter of desktop computing.

China has also walled off its domestic market to censor and protect domestic industries. There are only two major economies where Facebook isn’t the leader in social networking and Google in search. One is Russia. The other is China, where Renren leads in social, and Baidu in search. Google’s problems in China are too well documented to need rehearsing here, but it is worth noting that Zuckerberg’s 500,000 Facebook users in China constitute a 0.0004% local market share. It has 50% in the U.S.

China’s Internet companies have been in the happy position of being fast followers of the leading global companies, able to learn from them without facing undue competition from them and all the while riding a fast growing economy playing catch-up in Internet use. It seems inevitable that there will be foreign pressure to open up China’s Internet market, just as there has been to open up other sectors of the economy. Domestic Internet companies are starting to position themselves for that eventuality. The recently announced proposed merger of the online video sites Youku and Tudou is sector consolidation to that end.

% of online population whose first language is English or ChineseEach country will fashion the Internet in its own image to a certain extent. Whether the Internet more globally is Anglo- or Sino-centric is determined not only by users but also by usage and content. More than half the content on the Internet is still in English. That is despite the fact that the share of all Internet users who count English as their first language is shrinking (the blue line in the chart to the left). In 2000, it was almost two in five. As of March last year, the latest available figures, it is, at 27%, barely one in four. Over the same period the share of native Chinese speakers (the green line in the chart) has risen to 24%, or almost one in four, from 9% or one in eleven. Native Chinese language speakers are the second largest group online after English speakers. (Japanese, Spanish and German round out the top five languages online, accounting for a dominating 68%).

Where Chinese’s sway falters is that English is the dominant second language and language of business. Even if the official push to promote China’s culture increases the volume of Chinese language cultural and entertainment material online, the international audience for it will be relatively limited. A tonal language like Chinese is ill-suited to the battering it gets when spoken by non-native speakers. English has proved far more robust. It has even spawned a variant, Globish, for just that purpose.

A shift in geographic center towards the emerging economies is not the only change shaping the Internet. Bits and bytes now follow the Brics, as trade once followed the flag, perhaps. Reflecting the shift from nation states to a global economy bestrode by mulitnationals, it is also forming around digital ecosystems that have companies at their center, such as Google, Facebook and Apple in the U.S., Tencent and Baidu in China and Yandex in Russia. They are shaping an Internet economy that cuts across old national boundaries. BCG forecasts the Internet economy will be worth $4.2 trillion in the 20 richest nations by 2016. By that time, IBM has forecast, 1 trillion devices, from phones to fridges and control systems will be connected to it. BCG says the Internet economy will account for 8% of G-20 nations’ GDP, up from 4.1% in 2010. That would be like adding another Italy or Brazil to the G-20 (we are a sucker for such analogies; and, yes, we know GDP figures are probably not adept at capturing Internet economic activity).

Yet China’s Internet giants have a long way to become the corporate hubs of global digital ecosystems. The commercial growth to come domestically may act as a deterrent to them becoming so. In 2010, the search engine market was worth $1.75 billion and is forecast to reach $14.5 billion by 2015. But over the same period, e-commerce is forecast to expand from $75 billion to $315 billion, at which point it would pass the value of e-commerce in the U.S., estimated to grow from $180 billon to $304 billion in 2010-2015.

China’s sheer size makes national bricks and mortar retailing difficult. E-commerce is further boosted by cheap shipping and high rates of urban broadband penetration, already on a par with America’s at 68%. However, as BCG says, broadband infrastructure alone isn’t enough to push a country to the forefront of the Internet economy. Also needed are “a favorable regulatory environment, strong payment systems, consumer protection for e-commerce transactions, and a willingness on the part of governments, business and consumers to go online”.

Forecasts about the Internet in China should always carry a large caveat not only about the commercial environment, but also about the political uncertainties surrounding them. China censors its social networks internally and the wider web externally with its Golden Shield, more familiarly known as Great Firewall. Leaders brought up in the era of state-run broadcasters and newspapers have very different hopes, fears and aspirations for the Internet than the generation that is growing up with it. China’s digital natives have just as much scope to use it to change society and commerce as their equivalents elsewhere. The question is the degree to which they will be constrained from doing so. What is certain is that the rising tides of the global web, like those of the global economy, are shifting in their direction.

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Fear Of China Holds Back Brics

    Brazil's President Dilma Rousseff, Russian President Dmitry Medvedev, India's Prime Minister Manmohan Singh, Chinese President Hu Jintao and South Africa's President Jacob Zuma (L to R) pose for group photos in New Delhi, capital of India, on March 29, 2012.

Five Apart

All that the Brics nations — Brazil, Russia, India, China and South Africa — really have in common is that they aren’t quite yet developed economies while calling them developing nations no longer does them justice. They have repeatedly found it difficult to make common cause. Witness their inability to come up with an agreed candidate for the presidency of the World Bank, or the managing directorship of the International Monetary Fund last year, come to that. On big issues like climate change, where the quintet could assert global leadership, they have been even more divided.

All the old divisions were on view at their summit in New Delhi this week, as was one of the main underlying causes of them. While the five nations agreed to study the feasibility of creating a Brics multilateral agency to fund infrastructure and core sector projects — a sort of mash-up of the World Bank, the regional development banks and the IMF, but their own — and to make it a tad easier to settle bilateral trade between Brics nations in local currencies, both decisions fell short of the progress in institution building that had been hoped for ahead of the meeting.

The reason is that Brazil, Russia, India and South Africa are all rivals of China in various ways. Each has their economic and geopolitical interests that don’t necessarily align with those of the others. All are competing for investment and trade, not just with each other but with developed and developing countries. All are seeking a sphere of influence and a place at the global high table. China’s is the common shadow they see falling over their efforts. Hence the wary progress in Delhi, beyond the easy sweeping joint statements of concern at global imbalances and criticisms of loose monetary policy in developed economics. Brazil, Russia, India and South Africa fear the clout that China would have in a Brics Bank and a growing trading block, however informal, in which the yuan would be trending towards being its single currency to the exclusion of the dollar. So none is rushing to bring any of that any closer. As long as those sorts of fears persist, the Brics, as a group, will have little influence on world affairs, regardless of the members’ individual economic clout.

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Bringing Wenzhou’s Black Lenders Out Of The Shadows

Wenzhou is a case study in the deep fault lines underlying China’s financial system. While big state-owned enterprises could get credit easily and cheaply, even in the face of the official squeeze on bank lending to cool inflation, small and medium sized company owners and entrepreneurs had to turn to the underground banking system where interest rates can top 60%. In Wenzhou, it is estimated that lending through the shadow banks, also known as black banks and which run from unregulated lending pools to loan sharks, amounts to $78 billion a year — accounting for a fifth of the lending in the city. Some 90% of its households supply the capital in an attempt to get a higher yield on their savings than is available from official banks.

Yet the city, which prides itself on its entrepreneurial flair, has also seen a rash of suicides and absconsions by heavily indebted borrowers unable to meet their crushing interest payments, especially as the economy slowed and speculative real estate and stock market investments, into which much of the borrowed money had been directed, fell in value. Around 100 business owners from the city disappeared or declared bankruptcy. Though only a few firms have collapsed, the interconnectedness of small businesses causes cash-flow reverberations up and down supplier and customer chains. One in five of Wenzhou’s  360,000 small and medium-sized enterprises reportedly stopped operating last year due to cash shortages.

So serious has the credit crunch and the risk of a bad-debt implosion become in Wenzhou that, a police crackdown on borrowers having failed to deter the lending, the State Council has now approved a pilot project to bring this shadow system into the light. Some lenders will be allowed to convert to rural banks or micro-finance companies, big state-owned banks will be directed to make more credit available in the city (as they already have been), and new savings and investment vehicles, including offshore ones, will be opened up to city residents and small and medium-sized enterprises. These vehicles will offer potentially better returns than bank savings accounts. (With the persistence of inflation over the past 18 months, real interest rates have been negative.)

The proposals are also intended as a test of expanded financing channels for small and medium-sized businesses, as well as an attempt to drain the property and stock markets of speculative capital that authorities would prefer used to keep growth and employment going in the real economy. What is not yet clear is whether these new  institutions will experiment with market-set interest rates, as the original set of proposals put forward by the city government last November had called for. That may still be a reform too far.

Nationally, the underground banking system was officially said last year to have $470 billion in outstanding loans, though unofficial estimates are half as much again. Fitch, a U.S. ratings agency, has estimated that every other yuan now lent in China comes through a shadow bank. That is a scary share for an unregulated sector surrounded by still inflated asset bubbles. It is fault line that runs deep and far beyond Wenzhou.

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From Sweatshops To Catwalks

Models present fashion creations at the DUNNU Collection Autumn/Winter 2012-2013 show during the ongoing China Fashion Week in Beijing, capital of China, March 26, 2012. (Xinhua/Li Mingfang)
With China fashion week in Beijing in full swing (above), and a recent report that international fashion houses are starting to shifting production out of China, this Bystander thought it worthwhile to republish our piece from last month about the challenges facing China’s textile and apparel industry, and its need to move up market:

 China’s rag trade is the world’s largest. It consumes 45% of the world’s fiber, accounts for a third of world textile exports and now has a huge and fast-growing domestic market for textiles and apparel into which to sell. As best we can guess, the industry has half a trillion dollars in annual sales and employs more than 20 million people. A further 140 million are involved in cotton farming, and millions more in the chemicals industries producing man-made fibers. Our numbers, though based on commerce ministry data, are a guess. Many of the businesses operating in the industry are too small to get counted in the official figures.

One thing we do know is that the textile and garment industry is both privately and foreign owned to an uncommon extent for such a significant Chinese industry. Another is that it faces the challenge of breaking away from its low-cost, high-volume model, like other industries that have thrived in the export-driven phase of China’s growth over the past three decades. The slump in demand in its export markets in the developed world may be temporary, but rising labor costs will be permanent, and the more painful as industry wages are generally lower than in other parts of manufacturing. The high value added parts of its supply chain lie in the hands of others, notably specialist logistics companies.

The rag trade globally has always been a hybrid of  the high-quality fashion market, characterized by modern technology, relatively well-paid workers and designers and a high degree of flexibility, and the low-end, mass production of cheap and standard clothing, such as t-shirts and uniforms by semi-skilled and unskilled, usually female, labour, in which international retailers have the dominant market power. The potentially highest value added part of the business, internationally recognizable fashion brands, are almost completely outside the Chinese industry’s orbit. The country, and Shanghai in particular, does have an emerging cadre of world-class couture designers, some of those work has been making an increasing splash at the biannual Shanghai Fashion Weeks. A collection from Zhang Zhifeng’s Ne Tiger line opened the most recent show, seen above. Yet Shanghai’s best labels are still far from challenging the likes of Louis Vuitton, Chanel, Gucci, Dior and Armani, even inside China where those European labels are the ones that dominate the domestic fashion market.

Every fashion industry cascades down from couture through ready-to-wear to the cheap knock-offs sold on market stalls and needs a textiles industry underpinning it. Redressing China’s textile and garment industry’s structural shortcomings will require a level of innovation beyond anything the domestic textile industry has known. Inevitably, there is a plan. It has been devised by the China Textile Industry Association, a trade body, and officials in Songjiang, one of the satellite towns on the western outskirts of Shanghai and better known for Thames Town, the surreal facsimile of an English home counties market town that has been built there. They plan to build a 2,000 acre industrial zone for the textiles and fashion industries that will be part business park, part R&D center, part fashion expo and shopping mall, and part brand incubator. Two years in the making, a small corner of this project opened a few months back. The full vision will take six or seven years to realise.

The notion of clustering firms, in the hope that the cross-pollination of people, ideas and capital, will foster innovation, is taken from high-tech industries. Fashion Valley, as the zone is being called in an echo of Silicon Valley, will sit alongside Songjiang’s existing industrial zone, already home to biotech, semiconductor and pharma firms.

It will also be close to another essential component of a high-tech industrial cluster, a leading university. Songjiang has several. In particular, the fashion and fabrics-centric Donghua University, whose roots go back to the Shanghai Textile Engineering Institute and which absorbed the textile sections of a number of regional institutions in East China after the Communist Party took power in 1951, maintains a campus in Songjiang. Over the road is the Shanghai University of Engineering Sciences’ new home for its Institute of Clothing Technology, arguably China’s leading fashion design college thanks to its partnership with Paris’s IFA. Neither campus is far from the proposed fashion incubator.

Songjiang is not an illogical spot for such a project. The district has been associated with the textile industry ever since the Mongols replaced rice with cotton as the area’s main crop in the 14th century, leading to spinning and weaving becoming prominent local industries.

The question, asked a thousand times by economic development planners everywhere, and yet to be convincingly answered, is can innovation be systemized? This Bystander doesn’t doubt local bureaucrats’ natural affinity for expensive, large-scale real estate and infrastructure development. And up to a point, in China, if you build it, they will come. Some are told to; others just know to hear the call. Several local firms are already signed up. Developing creative industries and expanding China’s soft, cultural power are all now national priorities.

No doubt, too, that if China’s textile and apparel industry is to escape being stuck in the low-value end of the business it will have to become vertically integrated. To do that it will need to develop both management skills and quality standards along the value chain, as well as dealing with the sustainability and labor issues surrounding the fashion industry internationally. One point in its favor is that the textile and garment industry is suitable for the sort of incremental and process innovation that Chinese firms are starting to become adept at, rather than needing to search for breakthrough products and technologies. Another is that if the textile industry diversifies into technical textiles, for use in the medical, aerospace, automotive and green-technologies industries, for example, it can ride the development arc of those industries, all of which are being championed as strategic national interests.

Best business practice can always be taught, but industrial clusters tend to emerge despite the best intentions of planners. In the U.K. it took more than three decades of economic planning to develop a high-tech company incubator around Cambridge University, known as Silicon Fen. Yet, over the past couple of years, London’s Silicon Roundabout had emerged organically as the place for web start-ups. Closer to home, as well as a thriving fashion industry, Shanghai has an vibrant modern art scene that has grown up around 50 Moganshan Road to the north east, organically and unplanned.

The challenge for the textile and garment industry is give the creativity of designers and fashion entrepreneurs enough free rein to develop world-class brands and labels while providing them with both the technical advances and the business and production disciplines to compete with the established fashion multinationals. In the world’s fashion capitals it is the design and fashion schools rather than industrial parks that play a crucial part in that, places like London’s Central St. Martin’s, New York’s Parsons and FIT, Paris’s Ecole de la Chambre Syndicale and Esmod, Milan’s Instituto Marangoni and Tokyo’s Bunka Fashion College, all of which would fall into the top 10 of most lists of the world’s top fashion schools. SUES and Donghua, which woldn’t rank in many top 50s, will have to break into those ranks.

China has the potential to reshape the global couture market, as it does all luxury markets, because its domestic market is likely to grow so fast and so far. In white goods, Haier is a harbinger of what is possible. It turned a high-end consumer good, wine-cooler refrigerators, into a much cheaper middle-market product, and grabbed a 60% global market share in the process. Unlike as it seems now, it is perfectly conceivable that Shanghai, perhaps even Songjiang, will one day be spoken of in the same breath by fashionistas as Milan, Paris, New York and London.

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Work To Resume On Myitsone Dam?

This Bystander is getting reports that suggest Myanmar may be gearing up for the resumption of work on the Myitsone Dam, if not immediately then at least once the summer rains are done. Myanmar’s President Thein Sein unexpectedly and unilaterally pulled the plug last September on state-owned China Power Investment Corp.’s hydropower project in Kachin state near the headwaters of the Irrawaddy river. We now are told that in the past two weeks Myanmar government soldiers have been re-evicting 100 local villagers who were originally relocated from the area but since the project’s suspension have returned to reclaim their old homes. Soldiers have also been leveling the remains of the village, according to Kachin activists.

Ethnic Kachins, who have been fighting the Nawpyidaw government for greater autonomy for their state, particularly since a 17-year old truce broke down last June, have been at the forefront of the opposition to the dam. Environmental groups say it will damage the ecology of the Irrawaddy, the country’s main waterway. Some 2,000 villagers were moved out of five villages in 2009 and 2010 so construction could start. Apart from being removed from ancestral homes that will be submerged by the reservoir created to feed the turbines, they complain that they have been resettled on land too barren to farm.

The latest round of clearances followed by a week a call by China Power Investment’s president, Lu Qizhou, to restart work on the dam. President Thein had said it would remain suspended for the duration of his term of office, which runs until 2016. But we here the sounds of backtracking. Reports say a compensation deal has been hacked out and discussions continue to get work restarted. Yet it remains a thorn in the side of relations  between Beijing and its old ally in Naypyidaw, which is now as less steadfast one as it opens more to the outside world. The fighting in Kachin, refugees spilling over the border into Yunnan and drugs- and gun-running are making China’s western reaches more unsettled than Beijing cares for.

Plus it wants the power. The Myitsone dam was to be the first in a series of seven on the upper Irrawaddy that would eventually supply hydropower to western China. Planning work on the other six has continued and China Power Investment employees have remained on site at Myistone, where, we are told, they have been mining for gold with CPI’s Myanmar partner in the dam project, Asia World, Myanmar’s Mining Enterprise No. 2 and Hka Ka Bo Mining.

Large-scale panning of gold on the Irrawaddy and Chindwin rivers is to be banned when existing one-year mining permits expire later this year. Discharges of mercury and the other highly toxic waste chemicals are polluting the rivers, while the open mining is eroding the top soil. We have no independent confirmation of CPI gold mining, but many gold mines in Kachin state not operated by the military and their friends are operated by Chinese interests. Truckloads of gold-containing earth are seen being driven back to China for processing.

It may be the re-evictions are to prevent interference with the gold-mining operations. One other factor to consider is the weather. Work on the dam would anyway be suspended during the rainy season, from June to October. Many workers from Sinohydro, the sub-contractor building the dam for CPI, were already off-site last year when President Thein made his announcement about suspending the project. Even if work restarted tomorrow, there would be only two months before the rains come. Yet such is the political pressure from Beijing to restart the project, a resumption of work once they cease looks a more than fair bet.

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China Half-Heartedly Falling In Behind Kim To Head World Bank

Kim Yong Jim, U.S. nominee for President of the World Bank, March 2012One way to look at Jim Yong Kim (left), the U.S.’s surprise nominee to be the next president of the World Bank, is that he represents a transition from the leadership of the multilateral development agency being a Washington sinecure to a merit-based selection from developing countries. That is how it seems to be being seen in Beijing. Kim’s nomination “demonstrated that [U.S. President Barack Obama] has begun to take heed of the demands from the developing world for an expanded role within the global institution,” Xinhua said in a commentary.

Kim, though a U.S. citizen, is Korean-born. Currently president of one of American’s elite Ivy League universities, Dartmouth College, he is a health professional with long experience in the developing world, including running the HIV/AIDS department at the World Health Organization. More importantly, he is neither a Washington nor Wall Street retread.

One reason for the post-World War II gentleman’s agreement between the U.S. and Europe that the former would get to put an American in as head the World Bank and the later a European as managing director of the IMF, was that the Bank needed to secure the confidence of Wall Street, then its primary supplier of capital. That world has changed. Washington’s gift of the Bank’s presidency, along with Europe’s of the IMF’s managing directorship, is a 20th century convenience but a 21st century anachronism.

Kim is one of three candidates. Nigeria’s finance minister, Ngozi Okonjo-Iweala, and Colombia’s former finance minister, Jose Antonio Ocampo, are the other two. Such is the voting structure of the Bank that it would take a broad-based European veto to block Kim. Even in the highly unlikely event of that happening, the U.S. could, in turn, veto either of the other two candidates. A new Bank president needs a supermajority of the Bank’s executive directors, 25 representatives of its member nations with voting power weighted in accordance to the capital they subscribe to the Bank.

Beijing has yet to tip its hand publicly. The decision it has to take is whether to get behind what looks to the winning horse, in the expectation that Kim may introduce further reform in the governance of the Bank from which China would be a beneficiary, perhaps the big winner, or to stand by one of the other two candidates in a show of developing-nation solidarity, though that would force it to make a choice between its friends in Africa and those in Latin America. We expect Beijing to go, along with the Europeans, with the first choice. The biggest hint in that direction came earlier this month from central bank governor Zhou Xiaochuan. He said that it wasn’t worth paying much attention to the selection of a new head of the Bank as the job had always gone to an American. Coverage in state media has been correspondingly light and scarcely more interested.

As others have pointed out, the World Bank matters less to China now than China does to the World Bank. It may also matter less to the world than China. The commentator and academic, Martin Jacques, captures the point succinctly: “in 2009 and 2010 the China Development Bank and the China Exim Bank lent more to the developing world than the World Bank”.

It is telling that Beijing didn’t put a candidate of its own forward, nor was one of its own, save perhaps for Zhou, much talked about even as an outside possibility. The prize Beijing has its eye on is the top job at the IMF.

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