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World Bank redacts report critical of China financial system

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The World Bank has removed a chapter from a report on China’s economy issued on Wednesday that called for urgent steps to reform the country’s “distorted” financial system, saying it had not been properly reviewed before publication.

The incident risks heightening tensions between China and the western-dominated World Bank and International Monetary Fund, even as China launches its own development bank seen as an attempt to create parallel institutions over which it can exert greater control.

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The redacted chapter, titled “Special Topic: Reform Priorities in China’s Financial Sector”, was included in the original version of the bank’s China Economic Update but has since been removed.

It warned that “the poor performance of the financial system” had confirmed previous assessments that the system was “unbalanced, repressed, costly to maintain and potentially unstable”. It also highlighted “risks stemming from wasteful investment, overindebtedness and a weakly regulated shadow-banking system”.

Progress on financial reform is expected to be a key criterion for the IMF’s decision within the next year over whether to endorse the renminbi as an official reserve currency.

But China has long been sensitive to criticism of its economy from the World Bank and IMF, which remain dominated by the US and EU.

The redacted version of the update now available on the World Bank’s website says the financial system chapter “was removed because it had not gone through the World Bank’s usual internal review and clearance procedures”.

In April 2014 a finance ministry official publicly rejected a warning by the IMF that China’s economy faced the risk of a “hard landing” due to problems in the financial system, including shadow banking and a rise in bad debt.

“In general, we think they are a very professional financial institution, but some of the methodology used, and some traditional thinking, they also need reform,” Zhu Guangyao, vice-minister of finance, said on the sidelines of the IMF and World Bank spring meetings in April, according to Reuters.

“We said not just to the IMF, but also to the World Bank, that not one size fits all. If your policy suggestion is (to be) a valuable suggestion, you must base it on reality.”

In 2012 Robert Zoellick, then World Bank president, was interrupted by a protester during a press conference in Beijing for the release of a major report called “China 2030”.

That report, produced in conjunction with the Development Reseach Center, a Chinese government think-tank, stopped short of calling for privatisation of state-owned enterprises, as many western economists advocate. But some Chinese critics still viewed its less radical recommendations as an attempt to undermine Chinese socialism.

The redacted section of “China Update” contained extensive references to “China 2030”.

Additional reporting by Shawn Donnan in Washington

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