China doesn’t need World Bank’s loans, just as Trump says

“Why is the World Bank loaning money to China?” President Donald Trump tweeted on Dec. 6. “Can this be possible? China has plenty of money, and if they don’t, they create it. STOP!” He did so in response to the World Bank agreeing to continue lending $1 billion to $1.5 billion a year to China through 2025.

The World Bank’s newly approved country partnership framework with China has met significant criticism from U.S. stakeholders, especially those in Washington who recently supported the World Bank’s capital increase. The framework was adopted by the World Bank’s board on Dec. 5, despite objections from U.S. Treasury Secretary Steven Mnuchin and members of Congress. The U.S. should respond by gathering a coalition of shareholders and asking the World Bank board to amend its agreement with China.

I remain an ardent supporter of the World Bank and believe it continues to play a critical role in supporting global development efforts. The World Bank provides critical research, advice and financing for low- and middle-income countries around the world. I have testified to Congress in favor of capital increases for the World Bank and have been a staunch defender of the research the World Bank does, such as its Doing Business Indicators. I was one of the first people to publicly make the case for why the world should support World Bank President David Malpass when he was nominated by the United States. This being said, the World Bank has made a mistake, and President Trump is right to be upset.

The World Bank should stop lending to China and, instead, direct lending to countries that don’t have access to financing.

It may be a surprise to some, but the Trump administration has maintained a good relationship with the World Bank. Some criticize the administration’s foreign policy as damaging multilateralism and supporting isolationism, but this has not been the case in regard to the World Bank or regional multilateral institutions. First, the administration has put forward excellent candidates to lead organizations such as the World Food Program, UNICEF and the World Bank. Second, International Development Association (IDA) contributions to the World Bank (i.e. the arm that supports poorer countries) by the U.S. have remained high. Third, the administration agreed to a new capital increase and committed to doing $1 billion more a year for several years to pay for its share of the capital increase.

Given strong U.S. support for the bank, this newly announced country partnership agreement with China is a provocation.

This is not the first time that President Trump has voiced his frustration when he believed China was receiving special treatment from a multilateral organization. In 2018, President Trump tweeted, “China, which is a great economic power, is considered a Developing Nation within the World Trade Organization. They therefore get tremendous perks and advantages, especially over the U.S. Does anybody think this is fair. We were badly represented. The WTO is unfair to U.S.” Similar to the WTO, China continues to benefit more from the World Bank than it contributes.

It is time for multilateral institutions to no longer consider China a recipient of aid but, rather, as a donor. China is the world’s second largest economy. It has $3 trillion in foreign currency reserves, runs its own global infrastructure bank­ — the Asian Infrastructure Investment Bank (AIIB) — and has received more than $60 billion in below-market-rate lending from the World Bank since 1981. According to the World Bank Atlas method of defining global economies, China is an upper-middle-income economy (ie. countries with Gross National Income, or GNI, per capita between $3,996 and $12,375) because it had a GNI per capita of $9,470 in 2018. China does meet the requirements for “graduation” which requires a 2017 per capita income threshold above $6,795.  Further proof that China is one of the leading economies globally is the International Monetary Fund adding the Chinese Renminbi to the basket of currencies that make up the Special Drawing Right (SDR), joining the U.S. dollar, the euro, Japanese yen and British pound in 2016.

While China is required to use the money it receives from the World Bank for economic development and lifting citizens out of poverty, oversight on how the loans are actually spent has been questioned over the years. The World Bank recently came under enormous criticism for its $50 million loan to a “Technical and Vocational Education and Training” program in Xinjiang, China, a region where over one million Muslim minorities are believed to be held in extrajudicial detention facilities.

The loans themselves also allow China to allocate additional resources to state-owned enterprises, defense spending or President Xi Jinping’s Belt and Road Initiative (BRI) in order to more effectively compete with the United States on the international stage. China’s military spending jumped from $31.2 billion in 1998 to $239.2 billion in 2018. Similarly, China has promised to spend over $1 trillion of investment as part of the BRI, and more than 125 countries have already signed BRI cooperation documents since 2013.

As the largest shareholder in the World Bank, the United States should not have the taxpayer money it contributes to the bank used to fund a global competitor. China should be paying for its own development programs.

There are several reasons the World Bank wants to keep lending to China. First, China’s size and influence make it an interesting case study for further research and testing of development programs. Second, China’s excellent credit rating makes it easier for the bank to lend to poorer countries with bad credit ratings, effectively cross-subsidizing countries while maintaining an overall AAA credit rating. Third, some shareholders would argue that, as a poverty agency, the World Bank should continue to lend to China because of the large number of poor people the country has, especially in rural areas. None of these reasons are strong enough to justify a $1 billion plus a year lending relationship with China.

The World Bank needs to quickly rethink the newly approved country partnership framework with China and gradually stop all lending to China over the next five years. The Bank can engage with China around advisory services, similar to those with Oman, but China should not be the recipient of any concessional finance from the World Bank.

Senior officials in the U.S. Treasury, supported by the White House, need to make calls to the 20 largest shareholders of the World Bank (other than China), saying that this plan is not acceptable, and ask them to support a scaled-back version instead.

The World Bank should establish a much steeper lending glidepath and should cut lending to China to no more than $500 million a year starting now, and rapidly decline that over the next five years. The number of World Bank employees operating in China also should be cut in half over the next five years.

The U.S. and its fellow World Bank stakeholders should advise China that it is time to transition its relationship with the bank from a “recipient” country to more of a donor. At the same time, the World Bank should ask China to increase its overall shareholdings in the World Bank without exceeding Japan’s share.

The World Bank remains an important institution, but the World Bank leadership has made a mistake in offering such a large on-going financial relationship with China. The World Bank should fix this error quickly.

Daniel F. Runde is a senior vice president and William A. Schreyer chair in Global Analysis at the Center for Strategic and International Studies. He previously worked for the U.S. Agency for International Development, the World Bank Group, and in investment banking, with experience in Africa, Asia, Europe, Latin America, and the Middle East.