Jin-Yong Cai: An activist at the IFC

Elliot Wilson
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The new head of the International Finance Corporation, Jin-Yong Cai, tells Euromoney about the need for the World Bank’s private-sector arm to take more risks and be more activist in developing policy ideas in such areas as infrastructure development and poverty reduction.

These are interesting times on Washington’s H Street, home to the IMF and the World Bank.

Neither institution has ever been particularly loved. The World Bank, thanks to its fallible leader, Vietnam War architect Robert McNamara, threw gobbets of cash at third-world countries in the 1970s. The result: economy-hobbling debts, finally written off in the last decade. The IMF is charged variously with being asleep at the switch during the 1997 Asian financial crisis and bungling the recent Greek and Cypriot bailouts.

It’s hard to see why people seek to run such institutions, but they do. Both Bretton Woods multilaterals are currently overseen by capable but diverging characters who easily fit one of the two classic moulds. First, the career bureaucrat, represented by Jim Yong Kim, Barack Obama’s choice as World Bank Group president. Second, the glamorous/intellectually dominant politician, embodied by Europe’s choice as IMF chief, Christine Lagarde.

Jin-Yong Cai, head of the International Finance Corporation
Then there’s Jin-Yong Cai, who doesn’t appear to fit into either category. Appointed last October as the chief executive and executive vice-president of the International Finance Corporation, the World Bank’s private-sector arm, Cai knows what it’s like to be both wealthy (unlike some of his predecessors) and very poor (unlike all of them).

Meeting with Euromoney at the InterContinental Hotel on London’s Hyde Park on a breezy summer’s day, Cai, a Chinese national, is refreshingly open, honest and engaging about his early years, a time of crushing poverty and gnawing hunger. An impoverished Beijing, disoriented from Mao’s mad years, was still regaining its balance when Cai won entrance to the prestigious Peking University in the early 1980s. “I remember the canteen,” he says, shaking his head and visibly wincing. The end of his sentence drifts away into thoughts of glutinous rice, stringy vegetables and mystery meat. (Many of Cai’s sentences go unfinished: he rarely completes one thought without clambering onto the back of another.)

Such visceral memories from a human being’s early development seldom fail to colour later experiences. Many individuals from that era wanted, more than anything, to get as far away as possible; to seek money, fame and glory far from dour, throttling Beijing. Many later returned, to serve a rising power that had regained its composure and, increasingly, its global clout.

So it is with Cai, just 16 years of age when Mao died in 1976. He worked hard in college, joining the World Bank as a graduate trainee in 1982. Three years later, he moved to an institution still revered by mainland financial graduates, Goldman Sachs, before rejoining the World Bank, then accepting a senior position at Beijing investment bank CICC. In the early 2000s, he was rehired by Goldman as the CEO of Beijing-based investment firm Goldman Sachs Gao Hua.

All of this bodes well for the IFC. Viewed from any angle, Cai’s appointment last year by his boss, Jim Kim, was a judicious one. More than ever, multilaterals and particularly the IFC, a body devoted to private-sector development and slashing poverty, need to think outside the box in order to tackle the challenges facing the developing world.

In this context, risk is everything. There was a sense under Cai’s predecessor, the wooden Swede Lars Thunell, that the IFC was treading water. Cai talks lucidly about how he sees the institution’s role: as an “orchestra conductor or an idea provider” rather than just a finance provider – helping boost infrastructure, introduce private-sector competition and cut poverty in the world’s needier places.

Of course this requires action over talk – multilaterals, sinks of huge collective intelligence, are famously better at the latter than the former – and Cai is clearly determined to look back on his years at the helm of the IFC with relish not remorse. There is regret, notably when he talks of the “transformational types of transactions” that in the past and for the usual reasons (bureaucratic rigidity, risk aversion) stymied any attempts to adopt a more assertive role on projects.

He warms to his theme, noting that the IFC is “much more afraid of risks” than it should be. “We have tended to shy away from controversies. I’m not saying we are looking for controversies, but when there are differing views on issues, we should be able to actively engage in those conversations.”

Risk, for Cai, means being unafraid of taking on the biggest projects. He points many times to Africa, a continent likely to present some of the greatest challenges over the next few decades. Conflict is waning as wealth and prospects rise, at least in sub-Saharan Africa, but corruption remains endemic, and the need to create private-sector jobs, as Africa’s population continues climbing past 1 billion, is paramount.

Infrastructure, as it so often is in the developing world, is the key to regional development. Cai recently visited Malawi and Mozambique, two potential big energy producers lacking a coherent transport superstructure, with Jim Kim and UN secretary-general Ban Ki-moon, and he points to the glaring need to get the region connected.

“Africa’s biggest future problem is power supply,” Cai believes. To underline his point, he highlights a vast future project set to anger environmentalists as much as it will please regional governments, investors and businesses.

This is the damming of the Congo, the world’s deepest river, and its third largest by volume of water discharged. The Congo draws in water from tributaries from Rwanda to Angola. Damming it will create a big new source of non-carbon energy that, while likely highly controversial, will power the whole region.

Little wonder Cai, who hails from a country that dammed the Yangtze and loves projects that tame nature, sees this as the sort of risk-heavy project he’s keen to promote. “We all know energy is needed,” he says. “We should not shy away from using our capabilities to develop these types of projects. If we can make this project work, it would make a huge contribution to the African economy, supplying power [without exacerbating] climate change.”

The IFC faces a further series of challenges in the years ahead, each big enough to make your head spin. First, the glaring need to fund and develop sources of private capital. Nearly seven decades on from the creation of the Bretton Woods institutions, the private sector remains a virtual afterthought across the developing world. “Look at the countries in which we operate,” Cai says. “In most of these countries, there really is no private sector, so it needs to be created.” Nor is this problem receding. China has long preferred to channel bank funding to state industries, as have governments from central Asia to Indochina.

The IFC seeks to support the private sector in such places in two ways: by investing directly in projects, and via one of four funds housed within its own internal Asset Management Company (AMC). Total annual investments by the IFC doubled in the five years to end-2012, according to the World Bank’s latest full-year report, to $20.4 billion, spread across 103 countries. More than $2.7 billion was channelled into sub-Saharan African deals in 2012, double the level five years ago. Projects in Latin America and the Caribbean gobbled up $3.7 billion, followed by Europe and central Asia ($2.9 billion), and the Middle East and North Africa ($2.2 billion).

That the IFC is wealthier than ever, and thus more able to lend, is largely thanks to a lot of top-level financial wrangling with donor governments, chiefly the US, Japan and western European countries. It’s easy to forget that, as with his predecessors, Cai’s job requires him simultaneously to be a CEO, project manager, diplomat and international arm-twister.

The multilateral has also benefited by seeking new sources of capital: nearly a quarter of the total capital vested in 2012 came from ‘other investors’, notably syndicated loans and the in-house AMC. The IFC has also started channelling more of its annual income into projects, explaining the sharp fall in 2012 income before grants, to $1.66 billion, from $2.2 billion the previous year.

There are reasons for this greater largesse. A crushingly populated planet desperately needs jobs, and they tend to be created in the private sector. But altruism – the need for the IFC to do its job for moral reasons – isn’t the only theme playing out here. Multilaterals are also ramping up funding and lending in reaction, at least in part, to a rising sense of grievance within the developing world: a feeling that Bretton Woods institutions don’t pay enough attention to their problems.

This frustration might appear faintly ludicrous. After all, most of the IFC’s investment budget is already channelled into needy projects in the developing world. The World Bank’s long-stated aim has been to channel lending to developing countries to cut poverty and strengthen institutional capabilities.

Yes, these institutions could do more – they could force executives, already benefiting from generous tax-free packages, to live in the emerging markets they serve, rather than in such cities as Washington, London or Hong Kong. But that aside, it’s hard to think what else multilaterals can do to prove themselves to the developing world.

Yet the feeling of injustice has proliferated. Struggling states, crushed by corruption and failing institutions, feel underserved by multilaterals, which in turn often struggle to find acceptable local investment partners. Many nations boasting rising levels of wealth (India and Brazil, for example) complain of a cut in multilateral funding as they approach middle-income status. Critics of this approach say countries need more not less funding and institutional advice at this point to avoid falling into the middle-income trap, where an economy, burdened by rising costs and waning competitiveness, plateaus and stagnates.

Hence the brouhaha surrounding the Brics Development Bank (BDB), an idea seemingly first floated in Ethiopia in early 2012. Much chatter swirls around the bank, which is unlikely to be rolled out before 2015, with $10 billion in start-up capital sourced equally from the Brics nations of Brazil, Russia, India, China and South Africa. Broadly, the bank would seek to channel more capital into rising and middle-income emerging nations, increase the spread and usage of non-G3 currencies, and create a $100 billion contingent reserve arrangement to help member countries counteract future financial shocks.

But isn’t that what multilaterals do? Doesn’t that make the BDB heir apparent to the Bretton Woods babies? And doesn’t the mere suggestion of the need for a new multilateral constitute a rebuke to such institutions as the IMF and the World Bank Group, a way of saying: ‘You’re not doing a very good job. Here, let us give you a hand’?

“I don’t agree with that,” says Cai. “That may be one perspective.” But then his thinking gets as fuzzy as the mooted new multilateral. First he appears to suggest that “one more bank” is unlikely to make a big difference. Then: “If there is one more bank around, one more partner” focused on development, that “could be a good thing”.

Cai is correct when he posits that the “need for development capital is so big, the field is large enough for all of us to play in”. And here his voice rises and strengthens, briefly revealing the Goldman Sachs banker within and, perhaps, the emotions that swirl around this issue. “Look,” he adds, “the world needs so much more capital in emerging markets. If the Brics Bank can somehow mobilize more capital, great; that’s how I see it. At the World Bank Group we invest around $50 billion a year in projects. It sounds a lot, but it’s tiny. India alone needs $1 trillion a year in new financing, and that’s just one country. If somehow [the new bank] can be formed, and can mobilize additional capital, great.”

Cai’s answer is however both reasonable – the emerging world always needs more funding – and incomplete. Senior current and former multilateral officials contacted for this story believe the BDB should be taken seriously. “It’s a direct rebuke to [multilaterals’] perceived parsimony in the emerging world” says a former senior World Bank official. Another says that Bretton Woods institutions “focus too much on low-income countries and too little on middle-income countries, the sort of countries that will fund and benefit from [the BDB]”. Yet another: “There’s not enough lending [to emerging markets] going on, and that’s why the Brics Bank has to be created.”

Nor is the Brics Bank merely a bit of sabre-rattling by China, the dominant member of the Brics group: a way for Beijing to extract more lending and attention from the IMF and the World Bank. For sure, admits a well-connected Beijing official, if China is part of the BDB, “we have a larger proportional voice” in global developmental affairs. He adds: “It’s better to set the question and the agenda” rather than just “receiving money and advice”. Moreover, China’s relationship with the World Bank is complex and nuanced: the group, more than any other institution, has influenced the institutional rebuilding of China post-Mao. China pretends not to care about the World Bank, but when it speaks, Beijing tends to listen.

Yet there is understandable frustration within the emerging world that the institutions set up to help its economies are still largely carved up between north America and western Europe. The world’s largest economy, the US, boasts 22.41% of the IFC’s voting rights. China, the second largest, has just 1.72%. The Brics nations share just 9% of the IMF’s voting rights, less than Germany and the UK combined, and around half the US total.

For sure, the Brics Bank remains an idea, not a done deal. Although likely to be marshalled by a Chinese official (current China Development Bank governor Chen Yuan is a favoured candidate), it will be equally owned by five culturally diverse governments; whether this creates frictions, notably over how to parcel out funding, remains to be seen.

Finally, there is perhaps the biggest issue of them all: China. Cai is only the second non-westerner to head a Bretton Woods multilateral (Pakistan economist Moeen Qureshi oversaw the IFC from 1977 to 1980), but his appointment as only its second full chief executive came as little surprise. Former colleagues and peers shower him with praise. “A very capable and competent person,” says a former colleague at CICC. “A straightforward person, a straight talker... detail-driven...knows his stuff,” adds a Hong Kong-based investment banker who worked on several mainland deals with Cai.

Few doubt that his Chinese roots, affiliations and contacts hindered his rise to the IFC’s top job. Cai deflects this line of thought, smiling as he does so. “My view is that everything is merit based. My whole career has been in global organizations,” he says. “I would love to hire more Africans, more Japanese actually. If we start to make a statement by hiring someone just because of nationality, we may end up in a very difficult place.”

Yet it surely makes sense to draw the world’s sole emerging market global power closer to the multilateral community. Cai knows China inside and out. He has strong contacts at key regulators and ministries, and within the all-powerful grouping of state-owned enterprises, and his logical career progression, post-IFC, will surely be as a member of China’s political elite.

And there’s a further reason for pulling China closer. It is perhaps the only great power that has risen to prominence despite its determination to suppress the power and vitality of the private sector. China has pulled hundreds of millions of people out of poverty over the past few decades (which pleases the World Bank) even while reinforcing the power and reach of the state (which confuses the World Bank). Doesn’t this contradiction sit uneasily on H Street?

“Granted, in China the state has been getting bigger, particularly in the last decade,” says Cai. “But if you look where jobs are being created in China, it’s still in the private sector. The state sector creates fewer jobs, and each new job is more capital intensive.”

But Beijing, he admits, needs to do more. “China’s private sector could do better if there was more support for private-sector financing and capacity building. We are in a unique position to help there, not only [with] ideas but also through investment.” A key focus will be channelling more capital into underfunded and under-represented small and medium-sized enterprises. Cai says: “China has a lot of banks, and those banks are actually very strong, but one area that they would like to do better is in funding SMEs, a process that creates jobs. This is where we have experience and where we can add value.”

Boosting private-sector development and making capital allocation more efficient will also, he hopes, help the country avoid falling victim to the middle-income trap. China also needs to iron out its egregious societal differences: reducing inequality, boosting wages at the lowest levels, tackling graft, and introducing affordable education and healthcare.

“This is critical [in a country’s development] as you need to ensure that everyone in society feels there’s a chance, there’s a hope,” Cai adds. “I’m not saying that all these issues can be solved by closing the middle income gap or by more inclusivity. But every successful society and government has to focus on both growth and fairness.”

Like many, Cai believes Beijing was firmly pursuing the path of greater private-sector inclusivity before the onset of the financial crisis. Beijing had listed many of its leading state-run banks in Hong Kong and was preparing for many more new financial-sector flotations. Then Lehman Brothers collapsed and China’s vast bureaucracy reverted to type, closing ranks and diverting capital into the public sector. State-owned enterprises expanded in size and power at the expense of the private sector. “The unintended consequence [of the financial crisis] was greater consolidation within the state sector,” Cai notes.

Another side-effect within the financial sector has been the rise of shadow banking and a slew of poorly regulated institutions, from underground banks to trust companies, that channel vast amounts of capital, often at exorbitant rates of interest, into the maw of the private sector.

China’s new leaders, president

Xi Jinping and premier Li Keqiang, are aware of the challenges they face, Cai believes. “They do understand,” he says. “The shadow-banking thing, like all of these trust companies, all of this is a very large problem. There is a strong desire to really look at China’s current capital markets in broadly defined terms. People realize they aren’t efficient, that the equity markets aren’t in good shape, that the bond markets are underdeveloped, and that SME financing really is a major issue. That is why we are actively engaged with Beijing because there’s a strong and clear desire for change.”

So a key multilateral has a fresh face at the helm, one unafraid of tackling the world’s biggest, riskiest and most controversial projects. Raised in poverty, tutored by the World Bank, enriched by Goldman Sachs, Jin-Yong Cai is the first Chinese to head a multilateral, itself a sign of how far and fast Beijing has come. He seems the right man for the job, but big challenges lie ahead for the IFC: boosting the developing world’s private sector, eradicating poverty, and dealing with a potential new member of the Bretton Woods club. Wherever you look, on H Street, in Beijing, and across the developing world, these are interesting times.