Monday, October 23, 2006

China Lending Under World Bank Scrutiny

Sources: Wolfowitz Hits China Over Lending, China Lending

Paul Wolfowitz, president of the World Bank criticized China heavily for its lending policies towards developing nations in Africa. He claims that China's big banks have been ignoring the "Equator Principles" which is a code of conduct whereby private lending banks promise to meet specific social and environmental standards. Most of the commercial banks of the world have adopted these guidelines which have existed since 2003, when the International Finance Corporation, the private arm of the World Bank, launched them. President Wolfowitz asserts that despite the fact that the Chinese banks are relatively new to these guidelines, they must avoid making the same mistakes that the U.S. and France did with regards to Zaire's president Joseph Mobutu Sese-Seiko. (Mobutu became president of Zaire in a coup in the 1960s with the support of the U.S. and subsequently bankrupted the country by borrowing too much from western banks and the World Bank.)

President Wolfowitz's concerns involve the possibility that China's lending to developing countries that have benefited from debt relief may throw the countries back into the cycle again by causing them to be heavily indebted once more. While good borrowing can help to uplift a nation's income, bad borrowing can undo a lot of good that these countries have worked hard to line themselves up to receive. Countries like India and Venezuela stand in the same position as China with regards to the poor countries they lend to.

Unfortunately, the talks between Wolfowitz and Chinese officials have not resulted in an alignment of viewpoints. This may change as other IMF members pressure China to live up to the increased voting power it received on the IMF board by accepting more responsibility to the international financial system and responding to the increased scrutiny it will be receiving accordingly.

1. What will it take to convince China to be a leader in the international financial community under the terms that the developed nations that went before it have set?

2. Will China respond to the added responsibility and pressure that an increasingly central role in today's global economy?

3. What measures should the World Bank and IMF take to ensure that China's lending policies do not undermine the programs these international institutions have set up to benefit developing nations?

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