Three years ago, in the aftermath of the deadly crackdown on demonstrators in Tian An Men Square, the United States and the other leading industrialized nations organized a freeze on international lending to China, cutting off Beijing’s access to billions of dollars in credit.
Yet since then, with the quiet acquiescence of the Bush Administration and the active encouragement of Japan and Western European countries, China has managed not only to get the money flowing again, but to increase it above the levels that existed before 1989.
Last year, the Washington-based World Bank lent Beijing a stunning $2.5 billion, more than it provided to any other nation. China got more World Bank money than all the countries of Eastern Europe combined. And more than a third of these loans were interest-free for periods of three to four decades.
The loans--many of them from a special World Bank fund set aside for the poorest nations on Earth--help to buttress the booming Chinese economy. While China has enough lingering poverty to qualify for the loans, its foreign-exchange reserves now rank among the largest in the world, and its economic growth rate is several times greater than that of the United States.
China got a $60-million, interest-free World Bank loan last year to help the urban transport system in Shanghai. It obtained a $162-million loan, also interest-free, to aid Guangdong province, China’s richest area and the fastest-growing region in all of East Asia.
The United States contributes more than any other nation, about $1 billion each year, to the World Bank fund that makes these interest-free loans.
Former U.S. Ambassador to China Winston Lord said these World Bank loans are “an indication of business as usual between China and the rest of the world, a testimony to China’s success in having the world overlook what it’s doing to its people.”
How did it happen?
The story of Beijing’s successful run on the World Bank is a tale of persistence and diplomatic skill (by China), of avarice and mercantilism (in Western Europe and Japan) and of intrigue (by the Bush Administration).
An investigation by The Times shows that Japanese, French, German and Italian companies pressed their governments to make it possible for China to get World Bank loans again. Beijing could then use the funds to buy those countries’ power plants, dams, helicopters and other equipment.
“Procurement won out over idealism,” former World Bank President Barber Conable Jr. said in an interview.
The Bush Administration, facing congressional pressure to hold the line against World Bank lending to China, publicly opposed most loans. But privately, the Administration went along with the Japanese and European eagerness to restore China’s access to cheap credit. And there are signs that the Administration may have agreed to do this in secret diplomacy with Beijing.
Supporters of the huge World Bank lending program say that it helps to alleviate poverty in China. However, critics, both outside and inside the Bush Administration, believe that the huge lending should be curtailed.
“The repressive central government of China is the beneficiary and gets the credit” for the World Bank loans, said Richard Schifter, who served as the Bush Administration’s assistant secretary of state for human rights until he resigned early this year.
Over the last decade, China has garnered more than $13 billion in loans from the World Bank, nearly $6 billion of them interest-free.
The World Bank was set up in 1945 to raise the living standards of developing countries by helping them get capital. Some of the bank’s loans are made at normal market rates but with longer periods of repayment than ordinary commercial loans.
But other World Bank loans--those made by the International Development Assn.--are interest-free for periods of 35 to 40 years. The borrowers must merely pay a small service fee of 0.25% to 0.75% per year.
These IDA loans are designed for countries where per capita income is less than $610 a year. China, with a per capita income of only $370, is one of about 40 nations that qualify for IDA funding. But its robust economy and financial stability also qualify it to obtain other World Bank financing that most IDA loan recipients are ineligible to receive.
“It’s not as though China were a classic lesser-developed country with no trained personnel and no ability to do things on its own,” one Administration official said. “They could borrow on private markets at reasonable rates. What they’re getting is cheaper financing.”
The world’s wealthiest nations give the World Bank the money for the interest-free loan program. The U.S. share is about 22% of the total.
Under its charter, the World Bank is not supposed to make loans--or to stop them--for political reasons. The bank’s goal is to raise living standards throughout the world, and its decisions are supposed to be based exclusively on economic factors.
A law passed by Congress, however, requires the United States to oppose World Bank lending to any country that engages in “a consistent pattern of gross violations of internationally recognized human rights.” (An exception permits the United States to support loans that serve “basic human needs.”)
In the past, the United States has used this provision to prevent the World Bank from lending money to Vietnam, Laos, Chile under Gen. Augusto Pinochet and the Philippines under President Ferdinand E. Marcos.
Two weeks after the Tian An Men Square crackdown, then-Secretary of State James A. Baker III, under pressure from Congress to take action against the Beijing regime, announced that the United States would support a freeze on all World Bank lending to China.
While the United States is the World Bank’s largest shareholder, it cannot by itself ensure a cutoff in lending. Each nation on the bank’s board casts votes in proportion to its financial contributions.
In July, 1989, at a summit meeting of the world’s seven leading industrial democracies in Paris, Western European nations and Japan agreed to follow the U.S. lead, assuring a halt in all lending to China. These so-called G-7 nations (the United States, Japan, Britain, France, Germany, Italy and Canada) control more than 50% of the vote for World Bank loans.
Conable, the World Bank president, was furious.
“They (China) were important. To begin with, they owed us more than $10 billion,” said Conable, a former Republican congressman and an associate of Bush. If the World Bank cut off future loans to China, it would be putting its existing loans in jeopardy.
Moreover, Conable said, the credit freeze seemed to confirm the worst fears of Third World nations--that the World Bank is an imperialist institution. “I didn’t want to have a picture drawn for developing countries of an institution that was run by the major powers.”
The World Bank’s cutoff devastated China’s ability to borrow money abroad. The World Bank had lent it $1.3 billion in the year before the 1989 crackdown and was planning to lend about $2.3 billion in the 1989-90 fiscal year.
Other international lending institutions, such as the Asian Development Bank, cut off their loans, too. Even worse, from China’s viewpoint, Japan held up plans to extend a five-year, $5.6-billion package of subsidized loans to China--the largest single source of credit available to Beijing. Commercial banks in Japan and other nations followed suit.
Beijing’s propaganda apparatus was forced to put out press releases reassuring the world that China would not default. “China has always kept its debts within its paying capacity,” proclaimed one statement released by the Chinese Embassy in Washington.
In early December, 1989, White House National Security Adviser Brent Scowcroft visited Beijing in an attempt to settle a series of disputes between the United States and China, including World Bank lending.
Exactly what was negotiated during this visit remains secret. But on Jan. 10, 1990, China agreed to lift martial law in Beijing. Within hours, after a top-level meeting of Bush Administration officials, the United States announced what State Department spokeswoman Margaret Tutwiler called “a partial change in our World Bank policy.”
The Administration agreed to open the door a crack to permit World Bank loans designed to address China’s “basic human needs.” China and World Bank officials rushed to win approval of loans that could be termed humanitarian in nature, such as those for earthquake relief.
Still, the United States and its allies continued to oppose any other kind of lending. The result was that in the year after the Beijing massacre, China received about $600 million in new loans from the World Bank, a little more than a quarter of the amount it had originally expected.
Chinese leaders were angry about the continuing Western clampdown. “They wouldn’t talk to us for quite a while,” one senior Bush Administration official said.
As the first anniversary of the Tian An Men Square crackdown neared, Chinese diplomats enlisted the powerful support of one country: Japan.
The $5.6 billion in loans that Japan froze in 1989 was to have been devoted to more than 40 major projects inside China for the construction of railroads, harbors and power stations. Japanese companies were supposed to get roughly half the contracts for these projects.
Without new credit, China could not buy Japanese goods and equipment or service its debt on Japanese loans. “The Japanese suppliers wanted to go back in (to China),” one source at the World Bank said. “But there was a public-opinion problem in Japan. The Japanese didn’t want to go back in alone.”
The government of then-Prime Minister Toshiki Kaifu pressed the World Bank to reopen its financial spigots to China. And Japan urged the Bush Administration to support a resumption of international lending.
At the time, the Bush Administration had its own conflicting priorities. For nearly a year, China’s leading advocate of democratization, Fang Lizhi, had been trapped inside the U.S. Embassy in Beijing. He faced arrest and imprisonment if he left the embassy, but China would not let him leave the country.
On June 25, 1990, after two weeks of intense negotiations between the Bush Administration and China, authorities in Beijing suddenly allowed Fang to leave their country on a U.S. military plane. And in July, at the Group of Seven’s annual economic summit in Houston, the United States for the first time indicated that it would go along with Japan’s $5.6-billion package of loans to China.
Until this summit, the Administration had sought allied unity in holding the sanctions against lending to Beijing. But in Houston, Bush told reporters that Japan “is a sovereign nation that can make up its own mind on a lot of questions. . . . They work very cooperatively with us, but sometimes they have interests (of their own) that prevail.”
At the same time, Bush and the other G-7 leaders opened the way for much broader World Bank lending to China by suggesting that loans would not, in the future, have to be exclusively for humanitarian purposes. Baker said that the seven nations would explore whether they might approve World Bank loans “that would contribute to the reform of the Chinese economy.”
Were these changes the result of a deal? Did China agree to set Fang free in exchange for an easing of U.S. opposition to World Bank and Japanese loans to China? Was Fang, in effect, a hostage who was ransomed for billions of dollars in loans to China?
Asked whether there was an agreement, one senior Bush Administration official replied: “I don’t really want to get into that stuff. . . . You can use the linkage in time (between China’s release of Fang and the restoration of its loans) as your hook.” Another senior official insisted that there was no explicit deal but acknowledged that setting Fang free removed an “irritant” between China and the West that paved the way for new loans to China.
After the Houston summit, World Bank officials handling loans to China noticed a dramatic change. Japan as well as Western European nations were willing to support some lending to China, and the Bush Administration did nothing to stop them.
“In 1989-90, the Americans were actively campaigning against China,” one bank official said. “After mid-1990, the Americans weren’t saying no.”
Whenever a proposed loan reached the World Bank’s board, the U.S. representative abstained. That permitted the Bush Administration to tell Congress, truthfully, that there had been no change in the U.S. stance of refusing to support loans to China. Yet Administration officials abandoned their previous efforts to round up allied backing for a freeze on loans.
U.S. officials maintain that there was little they could do because the Europeans and Japanese were determined to resume the loans to China.
“We could stomp our feet, jump up and down, but it wouldn’t have made any difference,” one Administration official said.
Over the following year, the World Bank lent China $1.6 billion. Bank officials realized, one source said, that “as long as you stay under $2 billion, no one will say anything.” Still, the officials were careful to approve only those loans that could be portrayed as contributing to China’s economic reforms.
Finally, in the summer of 1991, World Bank and Chinese officials found the perfect project with which to break open what remained of the allied sanctions against lending.
China had applied for a World Bank loan to build a hydroelectric dam and underground power station in Sichuan province. Called the Ertan Dam, the project is one of the largest of its kind in the world.
It was an energy project, hard to characterize as promoting economic reform. But from the standpoint of World Bank politics, it had another virtue. “The general contractor was German, and the two subcontractors were French and Italian,” Conable said.
With strong European support, the World Bank approved a $380-million loan. Within weeks, a smiling Chinese Premier Li Peng signed contracts for work on the project with the French, German and Italian companies.
Once the Ertan Dam money was approved, World Bank officials knew that all restraints on lending to China had been removed. And over the last year, they have broken all records in clearing new credit for Beijing.
“As it turned out,” one Western official involved in the three-year dispute over loans to Beijing said, “China’s business was too good to keep away from.”