U.S. Defense Funding Bill Pushes for Graduating China from Receiving World Bank Loans

On January 1, 2021, the U.S. Congress overrode a veto from President Trump in order to pass annual defense spending legislation (the National Defense Authorization Act, or NDAA). One of the provisions in the bill tries to push for “graduating” China from World Bank lending. The key text of this provision is as follows (this is from the House Bill, H.R. 6395):

SEC. 9723. ACCOUNTABILITY FOR WORLD BANK LOANS TO CHINA.

(a) United States Support for Graduation of China From World Bank Assistance.–

(1) In general.–The United States Governor of the International Bank for Reconstruction and Development (in this section referred to as the “IBRD”) shall instruct the United States Executive Director at the IBRD that it is the policy of the United States to–

(A) pursue the expeditious graduation of the People’s Republic of China from assistance by the IBRD, consistent with the lending criteria of the IBRD; and
(B) until the graduation of China from IBRD assistance, prioritize projects in China that contribute to global public goods, to the extent practicable.

(2) Sunset.–Paragraph (1) shall have no force or effect on or after the earlier of–

(A) the date that is 7 years after the date of the enactment of this Act; or
(B) the date that the Secretary of the Treasury reports to the Committee on Financial Services of the House of Representatives and the Committee on Foreign Relations of the Senate that termination of paragraph (1) is important to the national interest of the United States, with a detailed explanation of the reasons therefor.

(b) Accountability for World Bank Loans to the People’s Republic of China.–

(1) In general.–Not later than 180 days after the date of the enactment of this Act, the United States Governor of the IBRD shall submit the report described in paragraph (2) to the Committee on Financial Services of the House of Representatives and the Committee on Foreign Relations of the Senate.
(2) Report described.–The report described in this paragraph shall include the following:

(A) A detailed description of the efforts of the United States Governor of the IBRD to enforce the timely graduation of countries from the IBRD, with a particular focus on the efforts with regard to the People’s Republic of China.
(B) If the People’s Republic of China is a member country of the IBRD, an explanation of any economic or political factors that have prevented the graduation of the People’s Republic of China from the IBRD.
(C) A discussion of any effects resulting from fungibility and IBRD lending to China, including the potential for IBRD lending to allow for funding by the government of the People’s Republic of China of activities that may be inconsistent with the national interest of the United States.
(D) An action plan to help ensure that the People’s Republic of China graduates from the IBRD within 2 years after submission of the report, consistent with the lending eligibility criteria of the IBRD.

(3) Waiver of requirement that report include action plan.–The Secretary of the Treasury may waive the requirement of paragraph (2)(D) on reporting to the Committee on Financial Services of the House of Representatives and the Committee on Foreign Relations of the Senate that the waiver is important to the national interest of the United States, with a detailed explanation of the reasons therefor.

(There is also a sub-section (c), entitled “Ensuring Debt Transparency With Respect to the Belt and Road Initiative,” which we have not included here).

The two key components here are: A political push for graduating China from World Bank lending and for influencing the choice of lending projects in China; and a reporting requirement by the designated U.S. government official on the decisions and actions related to this graduation.

This provision has been pushed by several members of Congress. In the House, Republican Congressman Anthony Gonzalez of Ohio has been leading the charge. In November of 2019, he introduced a bill along these same lines. His press release on the issue stated:

“The United States cannot afford to give the World Bank a blank check as long as they continue to make cloudy investments and misuse taxpayer dollars by providing loans to countries that do not and should not qualify for them,” … “I cannot stand by and allow my constituents’ taxpayer money to go to China while they continue to abuse this nation and suppress democracy as we have seen in Hong Kong.”

The World Bank IBRD program is designed to provide loans for economic-development purposes to middle-income developing countries. The threshold for graduation from the IBRD program currently stands at a gross national income per capita level of $6,975, which China has exceeded since 2016. China currently has a World Bank calculated gross national income per capita of level of $9,470. The Accountability for World Bank Loans to China Act codifies Congress’ support for Administration efforts to graduate China from IBRD lending in a vote at the World Bank.

In July 2020, his legislation was included as an amendment in the House version of the NDAA. On July 21, he offered this explanation in remarks on the House floor:

I rise today in support of my amendment number 151 that is included in this En Bloc amendment. This amendment is based off my bipartisan bill Hill 5051, the Accountability for World Bank Loans to China Act, that I introduced with my colleague Mr. Heck. In recent decades, China has worked to take advantage of international institutions like the World Bank, often in opposition to US interests. Today, China is one of the largest economies in the world and is also one of the largest creditors to developing nations. Despite that, China still receives funding, under the World Bank, IBRD program, even though China has exceeded IBRD’s gross national income threshold for graduation from the program. In other words, the United States contributions to the World Bank help finance Chinese infrastructure projects, including in Xinjiang. This has to stop. This amendment would require the US director at the IBRD to pursue the graduation of China, and until China graduates, prioritize projects in China that contribute to the global public good.

Over in the Senate, Republicans Chuck Grassley, Marco Rubio, and Tom Cotton put forward similar legislation in December 2019. They offered the following explanations:

“China has been lending development money outside its borders to extend its influence for years while taking in U.S. taxpayer dollars via World Bank loans. It’s confounding that these loans still continue and they ought to stop,” Grassley said. “What’s worse is that these loans might have helped free up resources used to violate human rights and force Uighurs into internment camps. Our bills provide a short-term and longer-term means to take away the status that allows China to receive loans and halt loans to any country like China that exceeds the World Bank graduation thresholds or poses a risk to religious freedom.”

“This bill will provide the U.S. Governor of the World Bank with the necessary guidance to uphold U.S. interests and to focus on the bank’s development mission,” Rubio said. “For too long, countries like China and Russia have been allowed to exploit the World Bank’s limited resources even after they should no longer qualify for assistance. I’m proud to co-sponsor this bill, which will also reaffirm our nation’s continued commitment to international religious freedom worldwide.”

“The World Bank is sending development aid meant for poor countries to China, the second largest economy in the world with access to plenty of capital. The ruling Chinese Communist Party uses these loans to fund its repression of Uighurs and other ethnic minorities. The United States must urge the World Bank to end these loans, which are contrary to its own guidelines and the demands of justice. Every dollar loaned to China is a dollar spent on strengthening the CCP’s grip over the Chinese people,” Cotton said.

Along the same lines, in March of 2020, Republican Senator Rick Scott sent a letter to the President of the World Bank calling for an end to World Bank lending to China, saying:

I understand that you have begun taking steps to wind down the World Bank’s lending to Communist China, and I appreciate those efforts. However, I was dismayed to learn recently of the World Bank’s new $1.5 billion lending plan to China. I question why a country like China, who has far exceeded the threshold at which it is supposed to graduate from World Bank funding, has been given access to any World Bank loans or services at all. Earlier this year, I was proud to join my colleagues in cosponsoring two critically important bills – S. 3017 and S. 3018, which would finally address these issues. The stated mission of the World Bank is to “reduce poverty and build shared prosperity in developing countries.” There is absolutely no reason the World Bank should be lending to Communist China, a developed and wealthy nation that oppresses its people and denies their human rights. Communist China is the world’s second largest economy and has access to capital markets. They even engage in substantial foreign lending of their own, using it as a manipulative tool to increase their influence and dominance over other countries.

And in the Trump administration, Treasury Secretary Steven Mnuchin also expressed support for this view in response to questions from Congressman Gonzalez:

Treasury Secretary Steven Mnuchin on Thursday agreed that the World Bank should expel China from a supportive loan program that helps middle- and low-income nations finance government projects.

Asked by Rep. Anthony Gonzalez, R-Ohio, whether he’d support graduating Beijing from the lending program, Mnuchin replied, “I do.”

The question from Gonzalez comes as he works to pass legislation that would curb World Bank funding to China by graduating the country from its International Bank for Reconstruction and Development. A unit of the World Bank, the IBRD offers myriad financial products and loans to countries hoping to reduce poverty and promote sustainable investing.

Mnuchin added that the selection of former Treasury Undersecretary David Malpass as the World Bank’s president earlier this year gives him confidence the institution will revise its practices to make its lending more equitable.

This is something “Malpass worked on with the World Bank when he worked for me. This was his No. 1 issue in reforms,” Mnuchin assured Gonzalez from Capitol Hill.

For commentary on this issue, see the following pieces:

Washington Post Editorial Board, “It’s time for China to grow up and leave the World Bank nest,” February 7, 2019:

The case for continued World Bank engagement with China is that the country still has large areas of deep poverty and that current World Bank projects often focus on “global public goods,” such as reducing China’s carbon emissions. It is also true that the World Bank’s activities in China and other middle-income countries produce modest net profits that then help fund its lending program for poorer countries. Still, to the extent the World Bank finances the development of China’s poor regions, it means that the Communist Party dictators who run the country can divert domestic resources to less pressing needs. As for turning a profit on lending to middle-income countries, it would seem more in keeping with the institution’s historic purposes, and the expectations of member-nation taxpayers, to do the job directly and transparently.

The Economist, “America wants the World Bank to stop making loans to China,” December 15, 2019:

But would the money not be better spent in poorer countries themselves? The bank’s friends point out that its lending to China earns a tidy profit (roughly $100m last year). It charges China a higher interest rate than it pays on its own borrowing. That is money that can then be used to help poor people who live elsewhere.

Yukon Huang, “Why Is the World Bank Still Lending to China?,” January 15, 2020:

While China may benefit from World Bank support, skeptics question whether the World Bank — and indirectly the U.S. government — gains anything by lending to China? First, one should note that U.S. taxpayers are not subsidizing World Bank lending to China. China borrows on commercial terms, with interest rates determined by adding a margin to the cost of the funds raised by the lender through its sales of bonds in major financial markets. China has long since been ineligible for any subsidized lending from the World Bank, but its borrowing has helped the lender to become more profitable.

Second, World Bank loans to China are seen as relatively risk-free compared with those to other developing countries. This strengthens the World Bank’s credit rating and in turn lowers the interest rates it pays in marketing its bonds. As a result, all developing countries that borrow from the World Bank benefit by paying less for their loans, while shareholders like the U.S. are under less pressure to help fund its operations. Thus, it would be more appropriate to say that China is subsidizing the World Bank, rather than the other way around.

Finally, the political considerations that some have raised for curtailing lending to China are precluded in the World Bank’s Articles of Agreement which “explicitly prohibit the institution from interfering in a country’s internal political affairs and require it to take only economic considerations into account in its decisions.” China is unique in being a largely risk-free borrower with a history of development success, but also one that still requires help — both for targeted poverty alleviation purposes and to gain expertise from more advanced economies. China’s experience in moving some half a billion of its people out of poverty is seen as a global success story, and the lessons are more easily shared with other developing countries if China continues to be an active borrower.