Examining World Bank Lending to China: Graduation or Modulation?

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Examining World Bank Lending to China: Graduation or Modulation?

Scott Moris and Gailyn Portelance from the Center of Global Development

U.S. President Donald Trump announced on Wednesday that he will nominate David Malpass to be the next president of the World Bank. However, Malpass’ record as a critic of the bank — and particularly of its relationship with China — has some staffers and development experts worried. Many have interpreted Malpass’ nomination as a signal that the White House might enlist the World Bank in this economic and geopolitical struggle which is part of Trump’s agenda.

Malpass, who is currently under secretary of the treasury for international affairs, has repeatedly criticized World Bank lending to China and China’s role as a development actor in general. Speaking at the Council on Foreign Relations in 2017, he stated that: “the World Bank’s biggest borrower is China. Well, China has plenty of resources. And it doesn’t make sense to have money borrowed in the U.S., using the U.S. government guarantee, going into lending in China for a country that’s got other resources and access to capital markets.” (cf. Igoe 2019)

In this context, CICA looked at actual fact and figures on World Bank Lending to China based on a report of Scott Maoris and Gailyn Portelance from the Center for Global Development. Indeed, in recent decades, the non-borrowing members of the World Bank Group (the United States in particular) have tended to press for clearer standards and a meaningful way to end country eligibility based on measures of economic progress, relying heavily on growth in per capita income within the borrowing country. The borrowing member countries, particularly countries like China that have seen the most economic progress, have tended to resist firm rules and automatic triggers, seeking to maintain access to the bank’s preferential lending rates and technical support.

It turns out that most World Bank lending to China aligns with the bank’s existing policy on how it lends to wealthier countries — but some lending doesn’t, according to a new report from the Center for Global Development.

“As we assessed the whole portfolio, big buckets made sense, but there were gaps — projects not supporting western China or to low-income provinces.”

— Scott Morris, one of the report’s authors and senior fellow and director, US Development Policy Initiative

The report, released in January 2019, examines how lending to China fits into the bank’s framework for engaging with graduation eligible countries, which was adopted as part of the capital increase process last year.

Under the World Bank’s 2018 capital agreement, borrowing countries are expected to gradually reduce their portfolios once a base income threshold—the Graduation Discussion Income (GDI)—is reached. However, the agreement also affirms the case for ongoing lending to these countries in order to trigger external value creation beyond the borrowing country’s borders (global public goods, or GPGs) and to enhance capacity building within the borrowing country, which can mean a focus on sub-regions where poverty remains high and capacity weak.

Since the fiscal year 2016, IBRD has made more than $7.8 billion in commitments to China, making China one of the bank’s largest borrowers, according to the report. It is not the bank’s wealthiest borrower, but it is above the graduation discussion income threshold of $6,895 per capita and the continued levels of bank lending to the country, that has in its own right become a large lender to other countries, has raised some concerns.

While IBRD lending could potentially go to lower-income countries than China, and there is a limit on how much lending it can do in a year, it has to make decisions based on the credit quality of its portfolio. Investments in China are strong and there is no guarantee that IBRD could find enough credit-worthy investments to replace what it is lending to China, the authors say, adding that stopping to lend to China would make IBRD financially vulnerable, particularly if it happened quickly.

There have also been questions about why China, which can get financing elsewhere on similar terms and is a big donor itself, would turn to the World Bank. China is likely motivated by the services, technical expertise, and policy dialogue that comes with the loans, Morris said, adding that the report is meant to inform the policy debate about China and graduation from World Bank lending. Indeed, China continues to borrow under thematic constraints. But there are some areas that don’t seem to fit the standards of lending to higher income borrowers according to the 2018 capital agreement.

The most recent Country Partnership Strategy (CPS) articulates an overall objective to focus on the less-developed western and inland provinces (“move west”) and on environmental objectives, particularly aligning with China’s Air Pollution Prevention and Control Action.

The analysis found that about 83 percent of the lending by volume in the deals went to non-coastal provinces, but only 58 percent of the lending went to provinces below the graduation discussion income threshold.

“If IBRD lending were designed to be strictly focused on the poorer provinces as a path toward graduation, then actual lending appears to have fallen well short,” the report states.

About 44% of the lending to China is related to global public goods — particularly climate mitigation. Capacity building projects only account for just 5% of the overall portfolio.

Over half of the remaining bank portfolio in China is neither GPG-related nor explicitly capacity-building. A large portion of these projects are in the transportation sector—and lack a clear sustainability related focus.

“As we assessed the whole portfolio, big buckets made sense, but there were gaps — projects not supporting western China or low-income provinces. A tighter country strategy would not allow [those] investments to get through,” the authors say.

All in all, China’s borrowing from the bank reveals a program of engagement that is broadly consistent with the 2018 principles, although significant areas of bank engagement do not appear to fall within the parameters of these principles. This picture suggests that in China’s case, shareholder discussions within the World Bank should be less about graduation and more about modulation.

The 2018 agreement points to the fact that further discussions should help to ensure that projects do align with the 2018 capital agreement. The report suggests that the World Bank would be better off by labeling projects and establishing a clear framework for evaluating loans to ensure that they fit with the bank’s policy objectives. Country programs should seek greater discipline in lending practices such that nontrivial volumes of lending do not fall outside of agreed parameters for engagement.

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