China and the Multilateral Development Banks

CRS Report for Congress
China and the Multilateral Development Banks
Updated October 31, 1997
Jonathan Sanford
Analyst in International Political Economy
Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

China and the Multilateral Development Banks
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.

Should the MDBs Lend to China?.....................................1
What Activities Do MDB Loans Support in China?.......................1
Tiananmen Square and MDB Lending to China..........................8
U.S. Law and U.S. Votes on MDB China Loans..........................9
Perspectives on the Future..........................................12
List of Figures
Figure 1. IBRD Assistance to China,
Types of Activities.............................................5
Figure 2. IDA Assistance to China,
Types of Activities.............................................5
Figure 3. ADB Assistance to China,
Types of Activity..............................................6

China and the Multilateral Development Banks
Should the MDBs Lend to China?
The World Bank and Asian Development Bank (ADB) have been large and
growing sources of loans for China. In 1985, the World Bank and ADB agreed to
lend China $1.1 billion. Ten years later, the annual total for their loan commitments
to China had quadrupled, to $4.3 billion in both 1995 and 1996.
Today, many debate what role the MDBs should play in the world’s most
populous country. Resources are scarce at the multilateral development banks
(MDBs) and there are many alternative claimants for available funds. China has one
of the fastest growing economies in the developing world, yet it is also the home of
many very impoverished people. Some people ask whether the United States, Japan,
and other major countries should help finance the development of a country that may
be their international rival in the coming century. Should the MDBs stop making
low-cost concessional rate loans to China? Should they make these loans only for
activities that promote poverty alleviation, environmental preservation, and
economic reform? Should they lend at all, given China’s questionable record as
regards official respect for internationally recognized human rights, its military
buildup, and its apparent readiness to use force in settling international disputes?
Alternatively, can the MDBs justify not lending to China, given its low per capita
income, the prevalence of poverty in its less developed regions, and the Chinese
government’s apparent orientation towards development?
This report does not attempt to answer these questions. Rather, it provides a
brief analysis of China’s relationship with the MDBs to highlight some issues and
help Members of Congress, congressional staff, and observers better understand the
context for the current debates in Congress and the multilateral agencies. For further
information, see the following CRS products: CRS Report 97-211, Appropriations
for FY1998: Foreign Operations, Export Financing and Related Programs, by Lary
Nowels; CRS Issue Brief 96008, Multilateral Development Banks: Issues for the
105th Congress, by Jonathan Sanford; and CRS Report 97-933, China: Pending
Legislation, by Kerry Dumbaugh.
What Activities Do MDB Loans Support in China?
China borrows more from both the World Bank and ADB than any other single
country. Its share in World Bank commitments increased from 6.5% in 1985 to

12.7% in 1996. More dramatically, ADB assistance to China grew from zero in 1985

to 19.9% of all 1996 commitments. China has increased its access to foreign credit
quite rapidly — receipts from new loan disbursements from all sources of foreign
Table 2. MDB Loans to China, 1985-97
(millions of U.S. dollars)
World Bank Group Asian Development
Priv Sector

1985 659.6 442.3 17.0 -.- - .-

1986 687.0 450.0 -.- - .- -.-

1987 867.4 556.2 8.0 133.3 -.-

1988 1,053.7 639.9 15.0 282.9 3.0

1989 833.4 515.0 3.0 39.7 -.-

1990 -.- 590.0 -.- 50.0 -.-

1991 601.5 977.8 -.- 498.3 14.3
1992 1,577.7 948.6 16.4 853.0 50.0

1993 2,155.0 1,017.0 43.2 1,050.0 -.-

1994 2,145.0 925.0 83.4 1,167.0 -.-

1995 2,369.5 630.0 104.2 1,201.0 -.-

1996 2,490.0 480.0 184.5 1,040.0 102.0
1997 2,490.0 325.0 133.6 906.0* NA
*Through Sept. 3, 1997. Many ADB loans are approved between October
and December. Table excludes guarantees not involving some use of MDB resources.
Source: Annual reports of the World Bank, IFC, and ADB, relevant years.
debt grew from $6.1 billion in 1985 to $26.8 billion in 1994. MDB disbursements1
accounted for 13% of China’s new receipts of long-term credit in 1995.
The World Bank provides aid to China through its four main “windows:” the
International Bank for Reconstruction and Development (IBRD), the International
Development Association (IDA), and the International Finance Corporation, and the
Multilateral Investment Guarantee Agency (MIGA). The IBRD, the original2
World Bank, lends on market-based terms. IDA, the Bank’s concessional loan
(text continues page 5)

1World Bank. World Debt Tables, 1993-4, Vol. 2, p. 90. Long-term disbursements were $5.3
billion; the net flow of short-term debt was $819 million. Global Development Finance,
1996. [New name for series.] Vol. 2, p. 152. Long-term debt disbursements were $21.955
billion; the net inflow of short-term debt was $4.842 billion. MDB disbursements in 1995
were $2.838 billion; less than a third ($838 million) was concessional MDB aid.
2BRD loans are repayable over 12 to 25 years, depending on the type of project. Its floating
interest rate is pegged one-half of 1% higher than the average price the IBRD pays to borrow
money in world commercial capital markets. In recent years, it has generally been around


Table 3. MDB Lending to China, by Bank and Type of Activitya
(millions of U.S. dollars)

World Bank infra-agri-socialenviron-economic
(IBRD)structureindustryculturesectors ment reform
Total $9,861 $2,869 $885 $558 $1,240 $28
1985 $545 $97 $17 $0 $0 $0
1986 $583 $87 $0 $17 $0 $0
1987 $355 $448 $20 $45 $0 $0
1988 $624 $190 $240 $0 $0 $0
1989 $243 $591 $0 $0 $0 $0
1990 $0 $0 $0 $0 $0 $0
1991 $100 $200 $222 $79 $0 $0
1992 $1,450 $82 $0 $46 $0 $0
1993 $1,330 $151 $325 $0 $349 $0
1994 $1,984 $0 $0 $0 $161 $0
1995 $1,128 $623 $0 $360 $230 $28
1996 $1,520 $400 $60 $10 $500 $0
1997 $2,330 $170 $120 $40 $0 $0
Intl Developinfra-agri-socialenviron-economic
Assoc (IDA)structureindustryculturesectors ment reform
Total $743 $230 $3,638 $2,449 $774 $317
1985 $30 $0 $187 $225 $0 $0
1986 $70 $25 $150 $185 $0 $20
1987 $125 $50 $260 $100 $0 $21
1988 $99 $0 $474 $67 $0 $0
1989 $191 $0 $215 $109 $0 $0
1990 $0 $0 $510 $80 $0 $0
1991 $131 $65 $562 $89 $0 $131
1992 $97 $0 $287 $450 $115 $0
1993 $0 $0 $427 $330 $149 $110
1994 $0 $0 $465 $110 $350 $0
1995 $0 $0 $0 $485 $110 $35
1996 $0 $90 $100 $220 $50 $0
1997 $0 $0 $0 $325 $0 $0
Asian Developinfra-agri-socialenviron-
Bank (ADB)structureindustryculturesectors ment
Total $2,711 $1,283 $205 $160 $518
1985 $0 $0 $0 $0 $0
1986 $0 $0 $0 $0 $0
1987 $0 $133 $0 $0 $0
1988 $0 $283 $0 $0 $0
1989 $40 $0 $0 $0 $0
1990 $0 $0 $50 $0 $0
1991 $28 $22 $0 $0 $0
1992 $407 $338 $55 $0 $103
1993 $610 $300 $0 $0 $140
1994 $773 $77 $0 $160 $158
1995 $853 $130 $100 $0 $118
1996 $652 $280 $70 $0 $140
a See footnotes 5,6, 7, and 8 for changed categorization of certain projects.

What is China’s Per Capita Income?
There are two methods for calculating a country’s per capita income. Both are valid
but they are not interchangeable.
Per Capita GNP in Dollars. The first method, which the World Bank uses for
determining IDA eligibility, calculates a developing country’s per capita income in dollars
through a simple conversion process. The per capita Gross National Product (GNP) is
measured in local currency and converted to dollars using the average exchange rate for the
past three years as adjusted for inflation. China’s annual per capita GNP in 1995 was about
5,200 yuan. On the basis of this calculation, the World Bank said in 1996 that China’s per
capita annual income the previous year was $620.
This system is useful for comparing the income levels of countries when the ability
to buy imported goods is an issue. It gives an unrealistic picture of local living standards,
however, since products not traded internationally (services, rent, etc.) are valued by an
exchange rate applicable only to traded goods. Actual living standards can be much higher
than implied in this dollar figure.
The system is also subject to technical problems and relies on GNP calculations that
may not be very accurate. For example, many transactions are outside the purview of
official data collection. The Bank made adjustments in the base data for China in 1994 and

1995. Earlier World Bank data reported that China’s per capita GNP stood at $370 in 1993.

Two years later, according to World Bank figures, China’s per capita GNP was $620.
China’s economy was not two-thirds larger in 1995 than it had been in 1993. Technical
changes in the method of calculation account for much of the apparent change in the Bank’s
figures for China’s per capita annual income. The Bank made no similar recalculation of
income figures for other countries.
Purchasing Power Parity. The second method seeks to establish purchasing power
parity (PPP) using a fixed market basket of goods and services to compare income levels
in different countries. People’s ability to purchase the items in the basket will vary from
country to country. However, the items are valued according to a common standard,
regardless of their local price. The World Bank says China’s PPP income in 1995 was
$2,920 (slightly higher than those of El Salvador and the Philippines).
The PPP system allows better comparisons of living standards among countries.
However, it prices the income generated in a country’s domestic economy as though it were
useable in the international economy and it does not take the varying quality of goods sold
in different countries into account. Thus, it tends to blur the differences in countries’
relative capacity to purchase imported goods. The World Bank uses the per capita GNP in
dollars method as its benchmark for determining countries’ eligibility for IDA aid. IDA
loans mainly finance the purchase of foreign goods. The World Bank has not specified an
alternative measure using the PPP methodology for determining whether countries are
eligible for IDA loans.
affiliate, lends on low-cost terms, mainly to countries with per capita incomes below3
$869 annually. Most have per capita income levels below $400. The IFC mainly

3 IDA loans for China are repayable over 35 years, including a 10-year grace period. The
borrower pays a 3/4 of 1% service charge on the disbursed balance.

helps private domestic firms in developing countries.4 MIGA insures or guarantees
foreign investors in developing countries against various non-commercial risks
(expropriation, etc.). Its exposure in China is about $112 million and is not
discussed here.
In 1996, assistance to China comprised about 17% of all new IBRD loan
commitments and 7% of all loan commitments approved by the IDA. Loans or equity
investments for China accounted for less than 3% of all new commitments by the
IFC in 1996.
China is what the World Bank calls a “blend” country. That is, it receives loans
from both the IBRD and IDA. Theoretically, the projects the Bank finances in China
could be funded by either the IBRD or IDA, depending whether the Bank decides
China can afford to service additional non-concessional debt. In practice, the World
Bank has used its market-rate loans and its concessional loans in China to finance
activity in different sectors. The IBRD has concentrated mainly on infrastructure or
industrial projects, whereas IDA has focused much more on agriculture and social
development activities.
Figure 1. IBRD Assistance toFigure 2. IDA Assistance to China,
China,Types of Activities
Types of Activities
Between 1985 and 1997, as Figure 1 indicates, the IBRD targeted 68% of its
funds it lent to China for the construction of infrastructure and 16% for industry,
mining, or oil and gas production. Most of these projects were located in areas
experiencing rapid economic growth, mainly in urban or coastal regions. Another

4 IFC loans carry commercial interest rates. IFC equity investments involve no participation
in management. Most IFC projects in China have focused on the industrial or mining
sectors. In some countries (but not China), the IFC also lends to or invests in private utility

6% went for agricultural development.5 (These are represented by the four grey
triangles having their widest points in 1988, 1991, 1993, and 1997.) About 3%
of all IBRD lending to China has financed social projects.6 (The main allocation of
social sector lending occurred in 1995, represented by the striped triangle shown for
that year.) Projects oriented towards effecting improvements in the environment
comprised almost 7% of the total. Loans to facilitate or encourage economic policy
reform accounted for one-tenth of 1% of all IBRD lending to China. The 1995 loan
for this purpose is represented by a small black spot at the top in that part of the
By contrast, as Figure 2 shows, IDA has used 9% of the money it lent to China
for infrastructure and 2% for industry, mining or oil and gas production. (The latter
is represented by the four small white triangles centering on 1987, 1989, 1991, and
1996.) Most IDA assistance to China went to finance agricultural development
projects (43% of total IDA lending), mainly in the poorer or less developed regions.
Another 33% went for social sector (mainly health, primary education or direct
poverty-alleviation) projects. Environmental projects comprised more than 9% of
the total. Loans to encourage or facilitate economic policy reform accounted for the
remaining 4% of all IDA aid to China.
The pattern of ADB activity in
China resembles that of the IBRD. As
Figure 3 shows, infrastructure
accounted for 56% and industry
accounted for 29% of ADB lending to
China. The two agriculture loans in the
figure comprised less than 3% of the
total. One (represented by a thin grey
triangle in 1992) funded a
commercially oriented project
developing tropical crops. The other
(a thin grey triangle in 1996) funded a

Figure 3. ADB Assistance to China,
Types of Activity
5 The agriculture share would be slightly higher if two IBRD loans in 1996 ($80 million for
seed sector commercialization and $150 million to strengthen the animal feed industry) were
counted as agriculture rather than industry. The World Bank lists them among its agriculture
loans. The published descriptions of the projects suggest, however, that they are more
industrial in their focus and they have been included in that category here. The parallel $20
million IDA seed sector loan has been treated here similarly.
6 The proportion lent by the IBRD for social sector projects in 1996 would be higher if the
$250 million sewerage project in Shanghai and the $125 million wastewater and solid waste
disposal project in Hubei were counted in the urban development category (per the World
Bank categorization). However, the published project descriptions show that environmental
measures comprise the bulk of the activities funded by the projects. Thus, they are treated
as environmental projects here, as is the parallel $25 million IDA project in Hubei. Control
of industrial pollution was a major focus of the $170 million IBRD industry sector loan in
1996, but this loan is assigned here to the industrial category because improvements in the
efficiency of production facilities in the steel industry was also a central concern.

marine aquaculture project.7 Environmental projects comprised another 11 percent.8
The one social project, accounting for less than 3% of the total (the striped triangle
in 1994) funded an urban water delivery system.
The ADB lends to China through its ordinary capital (market-based loan)
“window.” In 1996, commitments to China comprised 28.4% of all such loans
approved by the ADB. This includes some equity investments financed by that
window’s private sector assistance facility. By agreement among the ADB member
countries, neither China nor India receive concessional assistance from the Asian
Bank, though their levels of per capita income might qualify them for such aid.
The ADB has not lent directly to fund economic reform in China. The
promotion of reform — for example, better management or accounting practices and
more market-oriented policies or procedures for state firms — has been built into
many ADB and World Bank loans and is not reflected in the sectoral statistics. The
Chinese government has been willing to adopt economic reforms when it sees that
these will strengthen its economic situation. China is particularly sensitive to any
appearance that it was compelled to adopt reforms as a result of conditions in MDB
loans or other leverage applied by the multilateral agencies.

The IMF and China
This report does not discuss the International Monetary Fund and China. The
IMF is an international monetary, not a development assistance, agency. It does
not make project loans. China last borrowed from the IMF during 1986-7, when
it drew the equivalent of $777 million from its reserve tranche. The loan was
fully repaid by April 1992. A country’s reserve tranche is, in effect, its own
money, though it must repay the money and pay interest on the outstanding
balance when it borrows these funds. IMF conditionality for loans of this sort
is not rigorous. China’s current reserve position in the IMF is worth
approximately the equivalent of $1.3 billion.
7 Two other agriculture sector loans (1990 and 1995) helped the state agricultural bank
modernize agro-industry. As with similar World Bank loans, these are counted here as
industrial loans.
8 The ADB made two loans in 1996 for energy conservation and pollution control in
industry. It categorizes them as energy or industrial projects. Environmental protection was
a major purpose of these loans. In recognition of their dual focus, one of them was counted
here as an environmental project. Likewise, the $28 million ADB loan for environmental
improvement in municipal wastewater treatment was treated here as an environmental project
rather than (as per the ADB classification) as social infrastructure.

Tiananmen Square and MDB Lending to China
The Tiananmen Square bloodshed in June 1989 caused a sharp (albeit
temporary) break in MDB treatment of China. Lending fell substantially. The
United States and other major member countries urged the MDBs to stop lending in
light of the human rights situation in China. Although the World Bank and ADB
have no provisions in their Articles of Agreement specifically taking human rights
conditions into account, World Bank and ADB management justified their
suspension of new lending for China on grounds they were waiting to see if the
crackdown on political expression would be followed by a slowdown or reversal of
China’s support for economic liberalization and reform.
The Chinese crackdown on dissidents came in the last month of the World
Bank’s July-through-June fiscal year, a time when many new projects would
normally be sent to its Board of Executive Directors for final approval. Top Bank
management withdrew its plans to recommend several new China loans that month
and the volume of IBRD, IDA, and IFC lending to China fell considerably. The
ADB, whose fiscal year runs from January to December, had lent only a small
amount to China in 1989 when further action on new loans was suspended, as
management waited to see what was happening in China.
In early 1990, representatives of the Group of Seven leading developed
countries (G-7) — who together with other countries in the European Union own
well over a majority of the World Bank and ADB’s voting stock — agreed that their
representatives at the MDBs could support a limited flow of lending to China so long
as the loans were targeted to fund activities meeting basic human needs (BHN). The
IBRD made no loans to China during its fiscal 1990, while IDA made six loans (for
earthquake reconstruction, agricultural development in poor provinces, vocational
education, and afforestation) between February and June 1990. The ADB made only
one loan (to support an agricultural development bank) in late November.
At the Houston summit meeting in mid-1990, leaders of the G-7 countries
decided to maintain their policy of limited support for MDB aid to China. However,
they added two new criteria that would garner their support — loans to facilitate
economic reform and loans for projects benefitting the environment. Following the
Houston summit, the volume of MDB lending to China increased substantially. By

1992, it was almost one-quarter larger in dollar terms than the amount lent in 1988.

According to the Treasury Department, the United States continues to support
the policy approved at the Houston summit. To do otherwise would contradict the
requirements of U.S. law as well as Administration and congressional preferences.
Other countries, however, have broadened their attitude towards MDB lending for
China in subsequent years. Two factors seem to be at work.
First, the determination of the G-7 countries to only support MDB loans that
would promote basic human needs, environmental protection or economic policy
reform has proven hard to sustain. Many MDB loans to China have some link to
economic policy reform or an environmental component. Thus, in the absence of a

clearer definition of the terms, those criteria could be used to justify G-7 support for
a wide variety of loans.
Second, as the events 1989 recede, most G-7 countries are giving other foreign
policy and trade factors higher precedence in their MDB policy calculations. Many
seem to have abandoned the Houston criteria entirely, as these seem to apply only
tangentially to many of the MDB loans approved in recent years.
U.S. Law and U.S. Votes on MDB China Loans
Existing Legislation
Section 701(a) of the International Financial Institutions (IFI) Act (P.L. 95-118),
adopted in 1977, requires the United States to oppose MDB loans to countries
evidencing a pattern of gross violations of internationally recognized human rights.
The U.S. representatives at the MDBs may vote for loans to such countries only if
they are deemed to meet basic human needs (BHN). Other countries do not seem to
have similar requirements governing their votes in the MDBs. Sections 701(c) and
1701(b)(9) of the IFI Act require the Administration to submit quarterly and annual
reports to Congress indicating what MDB loans it supported or opposed and whether
those loans meet basic needs.
These reports show that between 1985 and 1995, the United States supported
111 of 182 loans approved by the World Bank Group (including the IFC) and 15 of
92 loans approved by the ADB. (See
Table 3. U.S. Votes on MDBTable 3.) Before the Tiananmen
Loans to China, 1985-1995square events in 1989, the United
Total LoansSupported by U.S.States supported 70 of 74 approved bythe two banks. Later, it voted for only
198512012 056 of 200 MDB loans. The BHN
1986100100exception was the criterion justifying
1987152132these 56 votes. The United States
1988154153abstained or voted “no” on all other
1989141141loans to China. The U.S.
1990 11 1 10 0
19912213110representative abstained on a World
19921914110Bank rural water and sanitation loan
1993201470for China in January 1992 even
1994221895though the Administration’s quarterly
1995 21 25 7 4
report to Congress said it had a BHN

9 The U.S. Administration is required by law to report annually to Congress and the public
how it votes on MDB loans. The last report submitted covers 1991. Lack of staff reportedly
has prevented the Treasury Department from both filing the required reports and monitoring
U.S. participation in the MDBs. For U.S. votes between 1985 and 1991, see: [U.S. Treasury
Department] International Finance: Annual Report of the Chairman of the National
Advisory Council on International Monetary and Financial Policies [NAC] to the President
and to the Congress The unpublished quarterly reports to Congress show that the United

The concept “basic human needs” has no clear meaning in U.S. law. The
human rights guidelines for U.S. votes in the MDBs were adopted in 1977. The
concept “basic human needs” was borrowed from laws governing the U.S. bilateral
foreign aid program. Section 102(b)(4) of the Foreign Assistance Act (FAA) of 1961
(which governs U.S. bilateral aid) says that activities aimed at improving health
conditions (particularly infant mortality), education (particularly literacy), control
of population growth, increased income equality, reduced unemployment or
underemployment, and agricultural development aid for the rural poor could be
defined as meeting basic human needs.
Other provisions of the FAA of 1961 say that alternative criteria — equitable
growth, better conditions for women, improved development administration,
protection of the environment and natural resources, promotion of private
investment, economic policy reform designed to achieve economic growth with
equity, etc. — may also be key elements of U.S. development aid policy. It is not
clear, however, whether these other criteria exemplify the concept “basic human
needs”. Some might argue that the context is sufficiently general that any criteria
promoting growth with equity or poverty alleviation might be included in the term.
In recent years, the Clinton Administration has made “sustainable development” a
key component of U.S. development aid policy. Environmental considerations are
a major element of this concept.
Since the G-7 conference in Houston in 1992, the MDBs have increased
considerably the number of their projects in China and in other countries that are
labeled “environmental”. The Treasury Department indicates, though, that some
“environment creep” in loan titles is evident. Projects categorized under this label
today might have been listed otherwise in prior years. In addition, MDB
environment projects now often contain funding for many related activities.
Some—water and sewerage or toxic waste disposal, for example—are clearly BHN
activities. Others are not. Some aspects — reclamation or alteration of watercourses
in the context of flood control or industrial upgrades at steel plants, for example —
may not even be “environmental.”

States voted subsequently in the World Bank to support the following loans: (1992)
educational development for poor provinces, Tianjin urban development and environment,
and Sichuan agricultural development; (1993) Chingchan water and environment, effective
teaching, Zhejiang municipal development, agricultural support services, South Jiangsu
environment, rural health workers, and Tangshan/Chengde environmental improvement;
(1994) red soils development, Songliao Plain agricultural development, Xiaolongdi
resettlement, loess plateau watershed rehabilitation, forest resource development, enterprise
housing and social security reform (2), Liaoning environment, and basic education for poor
and minority areas; (1995) southwest poverty reduction (2), iodine deficiency disorders
control (2), disease prevention, and labor market development (2). In the ADB, the United
States voted to support: (1994) northern grassland ecosystem improvement technical
assistance (TA), Dalian water supply, comprehensive maternal and child health, Beijing
urban transport TA, and Beijing environmental improvement; (1995) agricultural
development bank, commercial finance and management TA, Fujian soil conservation and
rural development, and Fujian soil and water conservation TA.

It would seem that the inclusion of BHN activities in a multi-purpose
environmental loan may be deemed sufficient to justify U.S. support, providing the
other components in the loan are not blatantly unacceptable. In large part, the
prospect for U.S. support depends on the way the MDBs “package” their loans.
Thirteen of the MDB loans for China that the U.S. supported — citing the BHN
provisions in Section 701(a) — were environmental projects. However, the
published descriptions of at least ten of them make no mention of activities focusing
primarily on public health or assistance to the poor. These include four general
environment projects, an afforestation project, a watershed rehabilitation project, and
two urban environmental improvement projects. The ADB soil conservation project
was linked to rural development. Several small ADB loans, which the United States
supported, were intended to provide technical assistance to the Chinese agencies
responsible for soil or water conservation and grassland management, and provided
no direct assistance to the public. If this trend continues, the BHN waiver in Section
701(a) could be used (if the Administration wished) to justify U.S. support for a
broad range of MDB assistance for China.
Proposed Legislation
Two bills pending before Congress in 1997 would affect the future U.S.
response to any MDB or IMF loans for China.10 One, titled “The Communist China
Subsidy Reduction Act of 1997" (H.R. 2605), was introduced October 2, 1997, by
Representative Gerald Solomon. The other, titled “The China Policy Act of 1997"
(S. 1164), was introduced September 17 by Senator Spencer Abraham.
H.R. 2605. This bill would require the U.S. representatives at the MDBs and
the International Monetary Fund (IMF) “to use the voice and vote of the United
States to oppose” all concessional assistance to China. China is currently eligible for
concessional assistance from the IDA and the IMF’s Enhanced Structural
Adjustment Facility (ESAF).
The bill is more stringent than existing law, as it allows no exemptions to its
requirement. As noted earlier, Sec. 701 of the International Financial Institutions
Act allows the Secretary of the Treasury to waive, for loans that meet basic human
needs, the requirement that the U.S. representatives at the MDBs oppose all
assistance to countries that violate internationally recognized human rights.
Similarly, Sec. 43 of the Bretton Woods Agreements Act allows the Treasury
Secretary to waive the requirement that the United States oppose all IMF assistance
to “communist dictatorships” if the Secretary certifies to Congress that the IMF loan
is in the best interest of a majority of the people in the borrower country and the loan
will help stabilize the country’s balance of payments situation and relieve severe
constraints in its labor and capital markets.
By itself, U.S. opposition to IMF or MDB assistance to China would not be
sufficient to kill a loan. A majority vote of the IMF or MDB executive board is
required for passage. The United States has 13.2% of the vote in the ADB, 17.03%
of the IBRD, 15.29% of the IDA, and 18.25% of the IMF.

10 For a fuller list of legislation related to China, see China: Pending Legislation in 1997,
CRS Report 97-933 (updated continuously).

The House Banking Committee has waived jurisdiction for H.R. 2605. The
Rules Committee is likely to report it for consideration by the House in November
1997. A earlier bill (H.R. 2196), with broader sanctions against MDB lending to
China, was introduced by Representative Solomon and referred to the House
Banking Committee.
S. 1164. This bill requires the U.S. representatives at the multilateral banks and
the IMF to vote against virtually all loans to China. Opposition in the form of
abstentions would not be sufficient. The United States can vote for loans to China
if they meet “basic human needs.” However, the definition of that term is drawn so
tightly (only disaster reconstruction and famine relief) that it excludes virtually all
aid China is likely to receive from the IMF and multilateral. Paradoxically, though,
the language of the bill would seem to allow the United States to support any MDB
loans for China that were targeted for disaster relief even if they include only
funding for the reconstruction of infrastructure and economic facilities.
The Senate Foreign Relations Committee held hearings on the Abraham bill on
September 11, 1997. The future prospects for the bill are unknown. The
requirements in a previous version of the bill (S. 810), cutting the U.S. payments to
the multilateral banks dollar-for-dollar or proportionally whenever they lent to
China, were not included in the current bill.
Perspectives on the Future
The U.S. government has opposed long MDB concessional aid to China on
grounds that it can afford to borrow more of its foreign credit on commercial terms
and its potential for absorbing the lion’s share of existing MDB resources. Even
before the Tiananmen Square crackdown, when U.S. relations with China were less
complicated, the U.S. Administration opposed the extension of ADB concessional
aid to China when lending began in 1987. Other countries, however, were willing
to see China borrow concessional funds from the ADB. However, they eventually
acquiesced to the U.S. argument that Asian Development Bank concessional funds
were too scarce and that little would be left over for the smaller Asian countries if
India and China were eligible to borrow those funds.
In the World Bank, the U.S. Administration has argued for a reduction in IDA
lending to China. In part, the U.S. view has been justified on grounds that IDA
resources are limited and the poor countries in Africa and the other low-income
countries in Asia have fewer alternatives than do China and India. More pointedly,
though, the U.S. view has been buttressed with arguments that China’s favorable
balance of payments situation, its substantial foreign reserves ($75 billion in
December 1995) and its growing capacity to attract foreign investment and
commercial credit obviate China’s need for IDA aid.
In the agreement among the donor countries undergirding the IDA ninth
replenishment (signed in 1990), the World Bank’s major member countries agreed
that the combined lending to IDA’s two largest borrowers (China and India) should
not exceed 30% of IDA resources during the three-year replenishment period. In late

1992, in the IDA tenth replenishment agreement, the IDA donors declined to reduce

these countries combined share of IDA further. They did agree, however, that
lending to the “blend” countries (China being arguably the most prominent member
of that group) should see their combined access to IDA resources reduced from the
40 percent level approved in 1990 to a lower combined total of 30% to 35%. Given
the strong pressure for continued IDA lending to some of the other countries in the
“blend” group (Egypt, Pakistan, and India, for example), the IDA 10 agreement
seemed to put clear limits on IDA’s ability to provide aid to China.
In the IDA eleventh replenishment agreement, initialed March 19, 1996, in
Tokyo, the other donor countries finally agreed that IDA lending to China should
stop. China will be eligible to borrow from IDA 11, but the lending framework the
World Bank presented to justify the new replenishment indicated it would receive
only about 4% of IDA lending during the IDA 11 period. China would graduate
from IDA in 1999.
Japan was reportedly one of the countries that most stoutly resisted the effort
to reduce and ultimately terminate IDA assistance to China. The Japanese reportedly
believe that efforts on their part to facilitate strong economic growth in China and
to strengthen their economic relationship with China should be an important aspect
of their foreign policy. In recent years, China has been the largest single recipient
of Japan’s foreign aid. For example, in 1994-95, China received almost 20% of the
net $10 billion Japan disbursed annually for bilateral development aid.11 China also
receives many export credits and other near-market rate official loans from Japan.
The Chinese government has agreed this would be its last replenishment. The
question whether China’s borrowing from IDA would taper down to zero or whether
it would continue at a constant level throughout the replenishment period was not
resolved. The United States is the principal sponsor of the plan to end China’s
eligibility for IDA aid. If U.S. influence in the World Bank remains strong, one may
expect to see the volume of IDA lending to China decline in the next few years. If
U.S. influence wanes and that of Japan grows, the plan to reduce or terminate IDA
aid to China may be reconsidered.
Member countries such as the United States can delay by a few weeks the
consideration of any loan (including China loans) by the MDB executive boards.12

However, no country has a veto over World Bank or ADB lending.
11 Development Assistance Committee (DAC), Development Cooperation, 1996 Report.
Paris: Organization for Economic Cooperation and Development (OECD), 1997, pp. A30
and A76. The United States, by comparison, gave China almost none of the average $6.45
billion in net bilateral development aid it disbursed during those two years. Ibid., pp. A36
and 82. The Peace Corps, at about $900,000 annually, is the only foreign aid the United
States currently provides to China. Compensation to volunteers comprises most of those
12 The United States is the largest single member of the World Bank, with a 17% voting
share in the IBRD, 15.3% in IDA, and 22.7% in the IFC. In the ADB, it is the second largest
member, with a 8% voting share. Japan has a 15.6% share in the ADB. The U.S. share
would be equal to Japan’s if the United States purchased all the stock available to it.

Congress is considering legislation in 1997 to formally authorize U.S.13
participation in IDA 11. The other IDA donor countries approved their comparable
legislation in 1996. Congressional efforts to bar IDA from using U.S.-contributed
funds for China have a low chance of success. The World Bank made it clear in the14
past (as for example the struggle in the late 1970s about IDA aid to Vietnam) that
it will not accept earmarked contributions that direct or restrict the way it can use
those funds. Congress could make the reduction or termination of IDA lending to
China a condition for U.S. participation in IDA 11. The other donors might
acquiesce if (as stipulated in the new IDA agreement) this merely sought a guarantee
that China’s eligibility would end with IDA 11. The other IDA donors will likely
resist, however, if the United States seeks to end Chinese borrowing from IDA any
earlier than now planned.
The effects of a termination of IDA lending to China can only be surmised. On
the one hand, if the Chinese government decides to rely more on foreign investment
and commercial credit to fund China’s development, it may well adopt more market-
oriented economic policy and institutional reforms in order to make itself more
attractive to lenders. On the other hand, the Chinese government may feel it needs
to intervene more in the economy in order to deal with the consequences of increased
economic reform. Private capital would probably flow mainly to the fast-growing
urban and coastal regions, rather than to the poorer inland provinces. This could
magnify existing social and economic strains and inter-regional tensions. One
concern is whether the central government will have the authority and capacity to
control or mitigate these tensions. Another is whether the exercise of such authority
would be compatible with efforts to allow individuals and localities more autonomy
and a larger role in the economic and public policy process.
It is unlikely that private capital will fund the kinds of projects IDA has
financed in recent years.15 The question is whether China will be willing to borrow
regular IBRD and ADB money to fund these activities. As noted before, IDA has
emphasized poverty-alleviation, agricultural development, and other social sector
programs. The IBRD and ADB have lent relatively little for these purposes. Many
other countries (Indonesia, for example) use MDB market-rate money for these
purposes. The Chinese government showed little indication in 1996 that it is
prepared to do this also. IBRD lending for social sector, poverty alleviation, and
agriculture projects may increase as the volume of IDA lending declines. The
descriptions of projects under consideration for China, however, provide only slight
support for this conclusion.16

13 See Title III of the Senate-passed version of H.R. 2159, the Foreign Operations
Appropriations Act for Fiscal Year 1998.
14 See: Jonathan E. Sanford, “Restrictions on United States Contributions to the Multilateral
Development Banks” in The George Washington Journal of International Law and
Economics, 15:3 (1981), pp. 561-573.
15 For additional information, see Multilateral Development Banks and Capital Flows to
Developing Countries, CRS Report 97-881, September 17, 1997.
16 The World Bank’s Monthly Operational Summary dated December 6, 1996 shows 42
projects for China at various stages of preparation. Most will come to the Bank’s executive

It is doubtful, in any case, whether China will be able to replace the funds it
previously borrowed from IDA with increased borrowing from the IBRD. The
World Bank’s rules stipulate that no country may account for more than 10% of the
IBRD’s outstanding loans over a period of time. The Bank has made exceptions, as
in the case of Indonesia and Mexico, which accounted for 9.96% and 11.07%
respectively of the IBRD’s outstanding loans at the close of the Bank’s fiscal 1997.
It makes such exceptions reluctantly, however. At the end of 1997, loans to China
comprised 7.5% of the IBRD’s outstanding loans.
However, if the World Bank keeps lending to China at its current rate, that
country’s share of IBRD lending will soon exceed 10% of the total. At the end of
the Bank’s fiscal 1997, China’s share of all IBRD loan commitments — including
loans that had been approved but not yet disbursed — totaled 10.65%. The
comparable figures for Indonesia and Mexico were 9.75% and 9.7%. In other words,
the current pace of IBRD lending to China is pushing up its share of the Bank’s total
loan balance, whereas the IBRD’s slower rates of current lending to Indonesia and
Mexico are gradually reducing their share of the IBRD’s loan portfolio.
If the IBRD continues lending to China at its current rate, the share of its
disbursed loans allocated to China will exceed 10% within two years. The IBRD
member countries could raise the loan ceiling for China. However, this step would
be controversial and a number of major countries might oppose it.17 China may not
wish to risk its prestige on such an application. In any case, given its current level
of exposure in China, the World Bank may have problems justifying a further

board for approval in the next two years. Of these 18 (accounting for most of the money)
are for power or transport infrastructure, with funding from the IBRD. Eight others are for
environmental (mainly pollution control) projects, 7 with IBRD funding and one
(afforestation with an anti-poverty element) with minority IDA funding. Another 5 will
promote enterprise reform (mainly for state firms or finance institutions). Two of these (with
no discernable poverty orientation) will be partly funded by IDA. All this seems to replicate
the previous pattern. A possible change may be found in the funding for planned projects
in the agriculture and social sectors. Of the 4 planned agriculture projects, three have a
commercial or market orientation and are scheduled for IBRD funding. The last, a $150
million poverty and environment project in the Tarim Basin, however, will be funded by the
IBRD (60%) and IDA (40%). The prior Tarim Basin project (1992) was financed solely by
IDA. Likewise, the IBRD seems slated to play a larger role in funding the 6 planned projects
in the social sector. Two health projects will be financed solely by IDA. However, one of
the two water and sewerage projects and one of the two education undertakings (for higher
education reform) will receive partial IBRD funding, as will the Qinba Mountains poverty
reduction project. Even so, total IBRD funding for these social sector projects is not expected
to exceed $150 million. In effect, the share of IBRD lending for social and poverty-oriented
projects would grow slightly (to perhaps $240 million over two years) if all the projects in
the MOS are implemented. Total World Bank lending for these kinds of project would fall,
however, as the volume of IDA lending diminishes.
17 The Economist concluded that the prospects for an increase in China’s loan ceiling are
doubtful, saying “Not all rich-country members of the G7 are yet convinced that China’s
economic reforms are irreversible. They would probably object to a still greater share of the
Bank’s lending going to China.” See: “China: A problem with the Bank.” July 13, 1996, pp.


increase in its annual volume of IBRD lending to compensate for the coming
reduction in IDA aid.
To date, as the previous analysis shows, IDA has financed a major share of the
World Bank’s social sector and poverty alleviation projects in China. The issue is
whether China will be willing to finance these kinds of projects with IBRD money
as its access to IDA resources declines.
China may be willing to do this if its access to IBRD credit is not restricted, its
foreign trade situation remains positive, and its net income from exports to the
United States and other developed countries remains strong. To repay its growing
debt to multilateral and commercial lenders, China will need to increase its net
income from foreign trade.
China’s debt-service ratio — the ratio of its total debt payments (principal and
interest) to its total export earnings — was 9.9% in 1996. This is relatively low,
considering the fact that the average low-income country had a debt-service ratio of
15.0% and the average middle-income country had a debt-service ratio of 16.8% that
year. On the other hand, China’s foreign debt burden has been growing quite
rapidly. Between 1990 and 1995, the low-income countries increased their aggregate
foreign debt by 31.8%, while middle-income countries expanded the size of their
foreign debt by 42.9%. During this same period, China raised its total foreign debt
from $55.3 billion to $118.1 billion, an increase of 113.5%.18
China’s foreign exchange reserves (total reserves minus gold, a standard IMF
benchmark) totaled $127.82 billion in July 1997. This was the largest body of
reserves held by any developing country. Some have suggested, on the basis of the
size of its reserves, that China can afford to borrow more from commercial lenders
and less from multilateral banks. A contrary argument could be made when the size
of China’s foreign exchange reserves are compared to the size of its foreign trade.
In relation to its annual import bill, China’s foreign exchange reserves in mid-1997
were comparable to those of India, Bolivia, and Egypt, all of them current IDA19
If China’s export situation declines, because of a turndown in the world
economy or because of foreign policy-induced restrictions on its trade opportunities,
the Chinese government’s willingness to borrow market-rate World Bank funds for
agriculture and social sector projects may decline. In that case, it seems likely that

18 World Bank. Global Development Finance, 1997, vol. 2, pp. 42, 46, and 152.
19 China’s import bill (c.i.f.) for 1996 totaled $138.94 billion. In other words, its total
reserves were sufficient to finance 92.0% of its annual imports. By comparison, India’s total
foreign exchange reserves in July 1997 were sufficient to have funded 71.5% of its 1996
imports. The comparable figures for Egypt and Bolivia were 141.0% and 70.9%. India,
Egypt, and Bolivia continue to be eligible for assistance from IDA. To be sure, most poor
countries have much lower reserve-to-import ratios. Those for Senegal, Pakistan, and
Honduras, for example, were 21.9%, 11.5% and 29.4%, respectively. See: International
Monetary Fund. International Financial Statistics, October 1997, relevant pages for each
country cited.

a reduction in IDA lending to China will lead to a diminution in MDB lending for
social projects and other programs aimed at the direct alleviation of poverty.