China and the Multilateral Development Banks

Publication Date: October 1997

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Coverage: China

Abstract:

Congress is currently considering appropriations for U.S. contributions to the World Bank and other multilateral development banks (MDBs) as well as separate legislation that would require U.S. representatives to these institutions to oppose all concessional loans to China. The World Bank and Asian Development Bank (ADB) are together the largest source of foreign development assistance to the People’s Republic of China. In recent years, the multilateral development banks (MDBs) have lent approximately $4 billion annually to China. The ADB makes only market-based loans to China. Most World Bank loans to China are also on near-market terms and lending from its concessional loan “window,” the International Development
Association (IDA) is scheduled to end by 1999.

The MDB market-based loan facilities mainly finance the construction of infrastructure and industrial facilities. Agricultural development, loans for social programs, and funding to directly promote economic reform have accounted for only a small portion of MDB market-based loans. Environmentally oriented loans have become a significant fraction in recent years. IDA concessional loans, on the other hand, have focused mainly on social programs and on agricultural projects in impoverished regions. A significant, though smaller, share has also gone for environment and economic reform programs.

MDB lending to China dipped substantially following the government’s attack on protesters in Tiananmen Square in June 1989. The world’s largest industrial countries, the Group of Seven (G-7), which control a majority of the voting stock in the World Bank and ADB, agreed in 1990 that they would support only MDB loans for basic human needs. The United States still opposes unrestricted lending to China, but most other countries have relaxed their opposition and now support unrestricted MDB lending to China. The United States does not have a veto or other capacity to block approval of MDB loans it does not support.

U.S. relations with other IDA donors have been strained in recent years over U.S. arrears and efforts to impose U.S. priorities on MDB lending policies. In 1996, the other IDA donors gave the United States a chance to catch up on its payments to IDA — instead of making new contributions — but it did not do so. Some have argued that U.S. influence in the MDBs should be diminished if the United States is not willing to carry its share of their costs.

The prospects for the future of MDB assistance in China are uncertain. In a few years, the World Bank will have to cut its level of IBRD lending or waive its rule against lending more than 10% of its funds to one country. If U.S. influence in the World Bank diminishes, Japan and some other countries may want to revisit the question of terminating IDA assistance to China. It is not evident what will replace IDA as a source of credit for social programs and non-commercial agricultural development, since the Chinese government has not shown that it is willing to borrow market-rate money to fund these activities.