Washington Presses World Bank To Lend Less To China Faster

IN ONE SENSE, the United States is kicking at an open door when it calls on the World Bank to reduce its lending to China. The Bank’s blueprint for that over the next five years lays out just such a course. Last month, it signed off on a ‘country partnership framework’ for China covering fiscal years 2020-25, which says:

Given that China is now an upper-middle-income country and above the International Bank for Reconstruction and Development (IBRD) “graduation discussion income” (GDI), this Country Partnership Framework for fiscal years 2020-2025 reorients World Bank Group (WBG) engagement to remain strong yet be increasingly selective as lending declines, with a focus on China’s remaining institutional gaps and the country’s contribution to global public goods.

The framework sets out how increasingly selective lending will work:

Future IBRD lending will primarily focus on China’s remaining gaps in policies and institutions for sustainable IBRD graduation. WBG operations will also emphasize at least one of the following four criteria: addressing regional or global public goods, fostering the private sector, supporting critical services in lagging regions, and strategic piloting of approaches to address key development priorities, especially in areas relevant to other developing countries.

IBRD lending will average about $1 billion-1.5 billion a year and gradually decline during the [framework] period. Borrowing during the previous framework (fiscal years 2013-19) averaged 1.8 billion a year with a peak of $2.42 billion in FY 2017.

China was the fourth-largest borrower from the IBRD over the past decade, behind India, Indonesia and Brazil. The loans mainly go to provinces and municipalities, not central government and are intended to support the structural reform needed as China rebalances its economy towards a more sustainable growth model.

The proposed reduction in the Bank’s lending to China was part of a deal struck last year to get the United States to agree a $13 billion increase in the Bank’s capital. In calling for further cutbacks in the Bank’s lending to China this week, US Treasury Secretary Steven Mnuchin said part of that deal was to get annual lending to China below $1 billion.

However, Mnuchin’s remarks come just a few days ahead of the Trump administration’s December 15 deadline for imposing additional tariffs on some $156 billion worth of Chinese imports to the United States. They seem intended to ratchet up the pressure on Beijing to conclude a ‘phase one’ trade agreement and fit the Trump administration’s tactic of ‘all-points pressure’, and its general distaste for multilateral institutions.

At the same time, anti-China sentiment in the US Congress is hardening. Legislation in support of the protestors in Hong Kong became law earlier this month, and this week the House of Representatives passed a bill that would punish Chinese officials for abuse of Muslims and ethnic minorities in Xinjiang. There are moves afoot, led by the Republican Senator from Iowa, Charles Grassley, to block the World Bank from lending to China at all. That is unlikely to go anywhere but captures the mood in Congress, where there is also concern that a $50 million World Bank education loan to China ended up being used to fund the Xinjiang detention camps (though this allegation remains unsubstantiated).

In addition to the IBRD lending, the World Bank runs an investment program for China through its private financing arm, the International Finance Corp. (IFC). That is expected to remain little changed at $800 million-1.2 billion a year. Its focus will be on strengthening environmental sustainability and resilience, deepening inclusion and reducing inequality in lagging regions, and crowding in private investment to create a more competitive market environment.

Overall the framework for the next five years has as one of its three principal objectives:

Advancing market and fiscal reforms, by improving the environment for competition and private sector development; and achieving more efficient and sustainable subnational fiscal management and infrastructure financing.

That last should have the support of Washington when it is not taking political shots. So should the Bank’s intent also to use its lending to contain debt and manage financial risks. But there is much in the framework’s goals that will be inimical to the Trump administration, notably the attempt to address institutional and governance gaps, and an intent to deliver global public goods in areas such as climate change and marine plastics.

The Trump administration may also be unhappy with the fact that its hand-picked head of the Bank, former US Treasury official David Malpass, has not taken a sword to the Bank’s lending to China as it had wished.

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