Why is China still borrowing billions from the World Bank?

To outsiders, China often appears to be a world unto itself. Within China, the sentiment is not all that different.

As one Chinese observer put it on Twitter: “Do outsiders know that between first and fourth tier cities, China is actually a collective composed of first world, second world and third world countries? You don’t need to leave China to visit a foreign country.”

China’s journey from one of the world’s poorest to among its wealthiest in the space of a few decades is an unparalleled if unevenly distributed development story. Though the economy may be slowing now – spelling uncertainty for global growth – it grew tenfold between 2000 and 2017.

These startling statistics raise an uncomfortable question: why is China, the world’s second largest economy and provider of billions development capital to other nations, still borrowing money on a large scale from the World Bank?

There is ambiguity in current bank policy about where the strict cut-off is for country lending, particularly in highly unequal countries like China. However new research by the Center for Global Development (CGD) suggests that one third of World Bank financed projects in China were allocated to wealthy provinces “with no clear justification for World Bank lending”.

China technically passed the World Bank’s ‘graduation’ income per capita level in 2016. However, the country has received more than $7.8bn in World Bank loans since.

At the same time China has set itself the goal of financing more than $1tn in infrastructure projects linking it to markets across Asia and Europe under the Belt and Road Initiative.

If that threshold is reached, China will have put seven times more money into Belt and Road than the US put into the Marshall Plan to rebuild Europe after the Second World War, in today’s dollar terms.

“The fact that China is one of the World Bank’s largest borrowers at the same time that it lends billions of dollars to developing countries under Belt and Road has become a political thorn in the side of the bank and has raised the ire of countries like the US,” says Scott Morris, senior fellow at CGD and the study’s lead author.

“Borrowing on this scale certainly deserves scrutiny. But a fair-minded appraisal suggests that we shouldn’t be too quick to shut China off at the bank.”

According to researchers, 38% of China’s World Bank borrowing went towards climate change and air pollution mitigation measures. China is the world’s worst polluter and still has a population of 45 million who live below the poverty line.

New borrower eligibility guidelines agreed in a deal struck in 2018 among the bank’s shareholders acknowledge the need for a ‘graduation scheme’ to determine who qualifies for assistance.

The US and some European shareholders are particularly keen to ensure the cut-off is clearer. The bargain was struck as part of negotiations to expand the bank’s capital base by $13bn.

Current policies measure eligibility by a country’s capacity to support long-term development rather than using a strict income threshold cut-off. That means, however, that “there is significant ambiguity surrounding what bank programs in graduation-eligible countries should look like”, according to researchers at CGD.

With the surprise resignation of President Jim Yong Kim on 7 January, the election of the multilateral’s next leader is expected to be fraught. Under a gentleman’s agreement that is coming under increasing scrutiny for excluding emerging markets, the US – the bank’s largest shareholder – gets to pick the World Bank president.

The administration of US president Donald Trump has deep reservations about the value of multilateral institutions including the World Bank Group, is sceptical of climate change and views China through a competitive lens.

“Our study makes clear that whoever the next World Bank president might be that she or he will need to grapple with how much and under what terms to continue lending to China,” says Mr Morris. “It’s equally clear that any US candidate who doesn’t embrace the kind of climate finance that the bank is doing in China will be a very hard sell for the rest of the world.” 

The World Bank was established in 1944 to provide capital for infrastructure and other development projects in poor and developing countries.