WASHINGTON, July 2: The World Bank is set to begin talks with China on a new five-year loan programme that will encourage the Asian powerhouse to focus on economic inequality and environmental problems, a top official said.

In a Reuters interview, the World Bank’s chief of mission to China, David Dollar, said the new programme should see lending to Beijing of between $1 billion to $1.5 billion a year.

We have a big programme in China, so any change will be gradual but the issues and needs are changing and it makes sense that our assistance program responds to that, said Dollar, who is based in Beijing.

Some development experts argue the bank’s resources would be better spent in needier countries that do not have access to international capital markets as China does.

But Dollar said China’s loans generate profit of about $85 million for the World Bank that is funneled into projects in impoverished regions like Africa.

Critics take issue with the bank’s long involvement in Chinese infrastructure projects such as ports, power plants and highways, now built by the private sector.

The talks with Beijing, likely to get underway in the next few weeks, highlight a key challenge World Bank chief Paul Wolfowitz faces in his new job — to keep the bank relevant to rising economic powers like China and India.

Wolfowitz has said the bank must make itself attractive enough to stay involved with such fast-growing countries that are still plagued by poverty.

China is at a stage where the main contribution of the World Bank is not financial. China can borrow on international capital markets at a lower interest rate than the World Bank charges, so we don’t provide any subsidy and we’re not particularly attractive financially, said Dollar.

The government is interested in borrowing from us because we can package money and knowledge together in ways it’s difficult for the private sector to do, he added.

Dollar said the biggest issue was China’s growing environmental woes, mostly due to industrial and human waste and heavy consumption of scarce natural resources.

Worse is to come as many people stream into the cities to reap economic benefits from China’s rapid growth.

China’s urbanization has gone pretty well so far, but there is a lot more urbanization ahead and it’s challenging to manage housing and environmental issues, traffic, air pollution that are quite daunting, Dollar said.

He said the takeover bid of US oil company Unocal by China’s third-biggest oil and gas group CNOOC is a “natural move toward outward investment by China.

It makes sense that initially some of the investments are in these resource areas where China is scarce, Dollar said. I don’t think that buying up these companies locks up supply.

The US Congress has urged the White House to block the CNOOC takeover of the California company — a bid that has further irked lawmakers miffed by China’s currency peg to the dollar and subsidies affecting US manufacturing.

Such protectionism worries Dollar, a US national.

It is very important that the (US) government takes it seriously, he said.

Dollar said China-US relations would be a dominant economic theme over the next 10 to 15 years.

I think in a lot of ways the Chinese and US economies are complementary, so there is very powerful mutual advantage, he said.

Dollar called Beijing’s fixed exchange rate policy a “legitimate choice” and not a currency manipulation.

I don’t see how you can call it a manipulation when they have had one for more than 10 years, he argued.

It’s a difficult issue to debate in public. China has a restricted capital account but as restrictions are inevitably eroding, a lot of people are moving money into China. I have some sympathy for the government who doesn’t want to reward the speculators, he added.

Dollar said China can ease discontent among its poor — mostly fueled by growing income disparity — only through land reforms and better access to health and education. —Reuters