Contested China loan approved by World Bank

WASHINGTON (Reuters) - The World Bank Thursday approved a bitterly contested $160 million loan for China against the wishes of its largest shareholder, the United States, but made concessions to placate Tibetan activists.

The bank said its board approved the loan in a divided vote but that the part of the loan to be used to resettle 58,000 poor Chinese farmers to an area populated by ethnic Tibetans would be delayed until a panel reviewed whether the World Bank violated its own rules in processing the loan application.

The loan had angered Tibetan activists and members of U.S. Congress who said it effectively endorsed a Chinese policy of diluting the ethnic Tibetan population and caused the biggest rift in years inside the bank's board.

"This has been a particularly grueling project for all of us, in view of the criticisms that have been leveled at the bank with regard to the handling of environmental and minority issues in China," said World Bank President James Wolfensohn who returned from Paris on Wednesday to broker the compromise.

The United States and Germany both voted against the proposed loan and a further four of the board's 24 members abstained, World Bank sources said. The World Bank typically approves projects via a consensus.

The loan will be used in part to resettle farmers from an overpopulated area to sparsely populated land in the Qinghai province. Neighboring the Tibetan autonomous region, the province was the birthplace of the Dalai Lama, Tibet's spiritual leader. Other parts of the loan, to alleviate poverty in the Inner Mongolia autonomous region and the Gansu province, are not subject to the panel's review.

The bank's inspection panel will review claims made by the International Campaign for Tibet and the Center for Environmental Law which alleged the bank violated its own procedures on the environment, resettlement and disclosure.

The panel will produce its findings and the board will then vote within about two months on whether a full-blown investigation is warranted.

"I believe that an independent review by the inspection panel allowing for full and complete exploration of all issues is the appropriate way to deal with this problem," Wolfensohn said. But critics said the loan's approval showed many countries were willing to bow to pressure from China.

"Countries were simply not willing to vote against China," said John Ackerly of the International Campaign for Tibet of the approval. "But this is still a far cry from what the bank should have done, which is not allow this to come for a vote."

Critics claim the loan was incorrectly classified by the bank to avoid a six-month environmental review and that the bank failed to disclose information in a timely fashion.

The loan comes just days before the June 30 deadline after which China, whose economy has improved in recent years, will no longer qualify for the bank's lowest cost loans. Had the loan been subjected to the environmental review China would not have been able to secure such attractive terms.

The World Bank defended the poverty reduction aspect of the Qinghai resettlement. "There is nowhere else for these people to move, and to stay would mean continued malnourishment, even starvation," said bank Vice-President Jean-Michel Severino.

China, which agreed to the compromise, also volunteered that politicians, journalists and interested parties be allowed unfettered access to the project at any time without government supervision. The Chinese government said in a statement to the board, "We are in favor of transparency. Transparency brings to light facts and scorches rumors."

But Ackerly said he was sceptical of any promise by China to allow access to people living in the region, saying most in China remain too scared to speak freely to the press for fear of retribution from the authorities.

The Chinese government lobbied hard in recent days to secure the votes needed to pass the loan and the U.S. vote against it could worsen the diplomatic chill between the two powers that hit a low with the NATO bombing of China's embassy during the war in Kosovo. )