The controversy sparked by the World Bank’s admission that one of its key reports had been manipulated in China’s favor has brought an enduring question back into focus: Why does the world’s second-largest economy still borrow so much from the leading global development institution?

The Washington, D.C.-based World Bank last month abruptly canceled its flagship ‘Doing Business’ report, an annual ranking of countries based on how favorable their environment is for business. The announcement came after an internal investigation revealed that senior bank management, including the International Monetary Fund’s current managing director Kristalina Georgieva, had pressured staff to shift China up the rankings in 2017 — just as a broader debate over the bank’s funding was taking place. 

China’s desire to move up the Doing Business rankings was hardly unusual, says Timothy Ash, an emerging markets strategist at BlueBay Asset Management, as the report did have some influence over how international investors allocate their funds. The issue, he adds, is the World Bank leadership’s apparent willingness to accommodate its wishes.

“This is about accountability, credibility, [and] good governance at the World Bank and the IMF,” he says.

The furor over the Doing Business report has brought the broader issue of China’s four-decade relationship with the World Bank back to the fore. When China started borrowing from the multilateral institution in the 1980s, it was an undeveloped nation emerging from the traumas of Mao Zedong’s long rule. Today, China is a key driver of the global economy with foreign exchange reserves of over $3 trillion and a massive domestic banking sector. It spends billions of dollars abroad under the Belt and Road Initiative, and has even launched a multilateral development institution, the Asian Infrastructure Investment Bank.

Yet China also remains the second-largest borrower from the World Bank with a total of nearly $66 billion in loans outstanding, according to the institution’s data. And although the bank’s lending to China has slowed, with $19 billion in loans committed since 2010, it is still in fifth place as a borrower over that period.

For critics, this slower pace of lending still isn’t good enough. In 2019 the bank adopted a plan to provide China with $1-1.5 billion of loans annually until 2025, a decision that sparked criticism in the United States. In August, 18 Republican senators introduced a bill calling for an end to World Bank and Asian Development Bank lending to China.

“It really isn’t appropriate at this point for China to be a major recipient of World Bank loans while at the same time they are out there with their own massive lending programs,” says Clete Willems, a former trade negotiator in the Trump administration who is now a partner at law firm Akin Gump Strauss Hauer & Feld. “China clearly holds itself out and aspires to be a global leader. It aspires to be on par with the United States and international organizations. And if that’s the case, then China needs to step up and play a role commensurate with its global ambitions.”

Critics of the World Bank’s ongoing lending say China is ready to “graduate” from needing its support, and that its money could be used better somewhere else given its mission to end extreme poverty and build shared prosperity. China’s GDP per capita now stands at $10,500, above the World Bank’s own threshold, which on paper limits its lending to countries that have income per head of less than $7,065. It is also the sixth-largest funder of the World Bank, with significant voting power at the institution.

Such figures cloud the need for a more nuanced debate over how much China should be allowed to borrow from the World Bank, others say.

“When the bank lends to China, there isn’t any kind of donation or conditionality on the loan. That means, essentially, that the bank makes money from lending to China,” says Yukon Huang, senior fellow in the Carnegie Asia Program and the World Bank country director for China from 1997 to 2004. Lending to China also helps to improve the World Bank’s own creditworthiness, he argues, which helps keep the bank’s own funding costs down. In turn, that helps it lend to other, poorer nations on more favorable terms.

“From a banking perspective, [lending to China] is clearly a positive,” says Scott Morris, a senior fellow at the Center for Global Development. “That doesn’t mean that this will be deeply disruptive for the institution if China becomes a much smaller player.”

Loans made to China in recent years have focused on the poorer, inland areas of the country, according to an analysis carried out by the Center. Its work also showed that some 38 percent of World Bank loans to China are targeted at what it calls “global public goods” — issues that affect people beyond China’s borders, such as climate change and pollution. For example, the bank this year approved a $430 million loan for a project to improve China’s plastic waste management, covering roughly 70 percent of its expected cost.

“The World Bank is getting involved in specific projects in China, for reasons that are not necessarily linked to the relationship between the United States and China but simply [because] the World Bank was presented with a project based in China that made sense from a financial point of view and from its objectives,” says Paola Subacchi, professor of international economics at the Queen Mary University of London.

As for why China is still keen to borrow from the World Bank, experts say it is mostly about getting access to institutional knowledge — with the loans comes the banks’ expertise on planning and implementing projects.

The process can work both ways, says Bert Hofman, former World Bank director for China from 2014 to 2019 and currently a director of the East Asian Institute at the National University of Singapore. “I always felt that I learned as much from China as China learned from the World Bank. In my view, a lot of knowledge for development is actually generated in successful developing countries.”

The controversy over the Doing Business report has, however, added to concerns that China is continuing its borrowing to gain so-called “borrower influence” over the institution. China received less funding between 1981 and 2018 than it would have if the World Bank had used its lending allocation formula equally for all countries, according to a draft study co-authored by Erasmus Kersting of Villanova University entitled “Hidden Dragon? Chinese Influence at the World Bank.” However, the research also found that disbursement of funds for projects in China has been much faster than for other countries. 

That, Kersting says, could be proof that China is better at handling World Bank bureaucracy, or point to its growing influence at the bank.

“[Our data on lending ] probably captures the flavor of yesterday, which is when China was still small enough and treated differently in a negative way to score some political points,” he says. “But those days have probably passed. Now we are seeing China trying to assert itself more and more.”

---