Regions and Countries

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p. 2 of 4 BACK | NEXT I. Development Situation II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Lending Level

Country Strategy and Program Update 2002-2004: People's Republic of China

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II. Implementation of the Country Strategy and Program

A. Poverty Reduction

8. Despite significant achievements in reducing poverty in the past two decades, the PRC’s fight against poverty is not over. The official poverty line at 625 yuan (Y) is much lower than international standards and only reflects subsistence food and clothing. About 30 million people live below this poverty line. As in other countries, different poverty definitions and methodologies can yield substantially different results. In 2001, ADB will complete the PRC poverty profile, which will provide a basis for addressing a broader measure of poverty.

9. The rural poor live mostly in the western and central regions. Official statistics indicate that poverty incidence in the western region is more than four times the national average, and about seven times that of the eastern region. Inadequate infrastructure, severe ecological problems such as desertification and soil erosion, and weak human resources partly explain why the western region has lagged behind the coastal region. Poverty has grown in urban areas due to rural-urban migration and increased urban unemployment as restructuring of SOEs deepened. The floating urban population and the urban unemployed are susceptible to falling into poverty in the absence of new job opportunities and a well-developed social safety net.

10. The PRC’s and ADB’s shared long-term vision to fight poverty will be formalized in a poverty partnership agreement, currently being drafted. The agreement would be ADB’s basis for assisting the PRC in achieving its poverty reduction goals. Some of the proposed strategies include (i) investing in the poorer, inland areas; (ii) developing social safety nets; and (iii) strengthening poverty intervention components of proposed projects. ADB is also helping the PRC develop a strategic partnership with the Global Environment Facility (GEF) for implementing the operational program 12 aimed at addressing land degradation, which affects 260 million hectares (or about 27 percent) of the PRC's total land area.¹ Nearly 90 percent of the rural poor live in areas suffering from land degradation, a major element of rural poverty.

B. Thematic Priorities

1. Economic Growth

11. Sustained, broad-based economic growth is the key to the PRC’s transformation into a modern, market-oriented economy and is an essential element to reducing poverty. Each year, six million new jobs are needed to absorb new labor market entrants. About seven million people have been laid off as part of the Government’s program to restructure SOEs and downsize government. In addition, 120 million rural residents are underemployed. The PRC’s economic indicators are given in Appendix 1.

12. One of ADB’s core strategic areas of intervention is supporting pro-poor economic growth. Sustained rapid economic growth over the last two decades has been a major contributor to the PRC’s success in increasing productivity and incomes and in sharply reducing absolute poverty. The rapid growth strategy must be accompanied by (i) increased emphasis on environmental protection to ensure that growth is environmentally sustainable, and (ii) increased emphasis on rectifying regional disparities and urban and rural poverty issues to ensure that the benefits are inclusive and pro-poor. Infrastructure development is critical to creating the conditions in which economic growth led by the private sector can take place and to integrating regional markets in a large economy. Most of the infrastructure projects in ADB’s operational program for 2002-2004 will be located in the poor central and western provinces, including road projects in Guangxi, Hunan, Ningxia, Shanxi, Sichuan, and Yunnan provinces and the Hubei-Chongqing and Ningxia-Shanxi railway projects. Roads and railways projects will include components that spread project benefits to the poor and address the needs of rural communities. A technical assistance (TA) in 2002 will assess the socioeconomic impact of roads and railways in improving productivity and income in rural communities. Another TA will help map out the rural road requirements in the western region.

13. Sustained economic growth will also require expanding and diversifying energy sources and reducing energy intensity. Annual per capita energy consumption in the PRC is relatively low, at 0.63 ton of oil equivalent (toe) in 1999, or about 40 percent of the world average. Despite significant progress in promoting energy efficiency, energy intensity is still quite high at about 0.82 toe per $1,000 of GDP. Proposed energy projects in 2002-2004 include the development of more environment-friendly types of energy (e.g., coal-bed methane, hydropower, and renewable sources such as wind or solar) and the improvement of interregional system efficiency for transmitting power from the west to the energy-deficit eastern region. In addition to developing cleaner biomass energy in four provinces, a proposed project would enhance efficient use of agricultural wastes (2002) and enable poor rural households to reduce their dependence on coal and firewood for cooking and heating. A TA in 2002 will build on previous successful work on restructuring the power sector and developing competitive power markets.

14. Promoting economic growth and diversification in rural areas is critical to raising incomes and living standards of the rural population. The proposed program includes a second project for soil conservation and rural development in Fujian Province. The proposed program also includes two projects that will have strong poverty reduction impact, which will support integrated ecosystem management and help develop dryland agriculture in the north.

2. Human Development

15. The PRC ranked 87th among 162 countries based on the United Nations’ 2001 human development index. Commendable progress in overall human development is reflected by improvements of social indicators (Appendix 2). Domestic and concessional funds are used to finance social development projects, such as in health and education. ADB has not been involved in these two sectors because the PRC has no access to the Asian Development Fund (ADF). ADB has been increasing its assistance for water supply and wastewater treatment projects, which have a direct impact on human development through improved access to clean water. A number of such projects are included in the 2002-2004 program (e.g., Fuzhou, Harbin, Mudanjiang, Wuhan, and selected cities in Hebei and Henan that rely on the polluted Hai River for water supply). ADB will provide TA to prepare a rural water supply strategy (2003) and a long-term national water sector framework (2004) to redress the water shortage problem, particularly in the rural areas where about 24 million rural dwellers still have no access to water.

3. Gender and Inclusive Development

16. The PRC’s lack of access to ADF has prevented ADB from financing projects that directly support the role of women in development. However, the proposed TA (2003) for the development of the legal aid system is aimed at developing mechanisms for improving access of the poor and other vulnerable groups, including women, to legal assistance. Gender concerns are being addressed through social impact assessment during processing of loan and TA projects. An ongoing TA² is building in-country capacity in social assessment that will underpin work in planning, monitoring, and evaluating resettlement, gender, poverty reduction, and other social issues. The new Trust Law, which ADB helped draft, provides the legal basis for the development and regulation of charitable trusts in the PRC, including those for poverty relief, emergency relief, and assistance to the disabled. This should help mobilize private sector resources for social development. A proposed TA in 2002 will help strengthen NGO partnerships for poverty reduction.

4. Sound Development Management

17. Since 1978, the PRC has embarked on a series of reforms to redefine the role of the State. The transition has put extraordinary demands on the Government to change the legal, fiscal, policy, and regulatory environment to accommodate public administration reforms; increase decentralization of power from central to local levels; and increase the role of the private sector. Joint initiatives between the PRC and ADB have contributed to these reforms, including the drafting of key economic laws under an ongoing TA.³ The implications of WTO membership on foreign trade laws will be studied under a TA to be implemented in 2001-2002.

18. ADB is conducting a study on governance issues in the PRC, entitled "Sound Development Management," to be completed in 2001. The study will review issues encompassing public expenditure management, public administration reforms, legal system and judicial reforms, enhancement of service delivery, public accountability, decentralization, and corporate governance. The proposed TA program includes a range of activities for strengthening the financial sector (corporate governance, and banking law and regulations); developing laws and legal infrastructure (budget law and legal aid system); and capacity building at the subnational level (public finance and provincial development strategy).

19. The Government has strengthened its efforts to combat corruption. These include strengthening auditing methods, regularly inspecting public works, and creating a special body to enforce anticorruption measures. To reduce the potential for corruption in the longer term through the use of transparent, competitive bidding, ADB support includes an ongoing TA to help draft the implementation regulations for the 1999 Tendering and Bidding Law and a TA to prepare a government procurement law.⁴ During 2002, a TA will be implemented to help strengthen the accounting profession and government auditing standards.

5. Private Sector Development

20. The private sector will be an important engine for job creation and productivity improvement, factors that are essential to reduce poverty. The Government should create a business environment that protects investor’s rights and prevents corrupt practices. ADB has been providing policy support in SOE restructuring and corporatization. Assistance has also been provided to encourage the use of competitive bidding procedures for build-operate-transfer infrastructure projects (e.g., the Chengdu Water Supply Project); formulate economic laws; and develop credit support systems for small- and medium-sized enterprises (SMEs). An ongoing TA will identify impediments to developing the private sector.⁵ The PRC’s private sector will be assessed in 2001 when preparing the new country strategy.

21. ADB’s private sector strategy in the PRC will focus on infrastructure development, financial intermediation, and projects that promote the development of SMEs. A proposed TA in 2003 will assess the role of capital markets in expanding the investment and funding options for enterprises and individuals. Private sector projects that generate pro-poor economic growth and employment will be supported. At present, ADB is evaluating proposed water supply projects in several medium-sized cities that will involve private sector participation. Private-public partnership will be pursued through the proposed Harbin Water Supply Project in 2002.

6. Environment Protection

22. Addressing environment problems is a key priority of the TFYP.⁶ The PRC will invest Y700 billion ($85 billion) for the environment, equivalent to about 1.3 percent of annual GDP during the TFYP. The PRC is moving from treating pollution at its exit points to prevention at source, and from command and control to increased use of market-based instruments. Preventing pollution is being promoted by an ongoing TA,⁷ which will help draft the clean production law and develop activities to encourage the introduction of clean production technologies. Environmental indicators are given in Appendix 2.

23. Emissions of major air pollutants, mainly from coal burning, have declined since peaking in 1995. The Government’s target is to further reduce sulfur dioxide emissions by 10 percent from the 2000 levels nationwide, and by 20 percent in some designated control areas by 2005, the end of the TFYP. The program includes TA to help control interprovincial acid rain and to build the institutional capacity for environment management in the western region. Integrating environment considerations in economic activities will be promoted through a proposed TA (2002) to develop implementation capacity for the clean development mechanism.

24. The program will continue to address water pollution, particularly since demand for water has been rising and water shortage is a serious problem in the northern areas. Pricing issues are a key theme of ADB’s operations in the water sector. Water tariffs need to be increased to encourage water conservation, rationalize the use of a scarce resource, and cover the construction and operation cost of water projects. Improved rates of wastewater treatment (currently 32 percent of urban wastewater is treated) are also needed for economic, environmental, and public health reasons. The TA program includes a study for the control and management of nonpoint pollution sources, a major problem affecting farmlands, rivers, and lakes. The PRC-GEF operational program 12 partnership to combat land degradation in dryland ecosystems will enable ADB to broaden its role in environment protection in the PRC.

7. Regional Cooperation

25. The PRC is an active participant in three regional cooperation initiatives: (i) through Yunnan Province for the Greater Mekong Subregion (GMS), (ii) through the Xinjiang Autonomous Region for the Central Asian republics initiative, and (iii) through Inner Mongolia with Mongolia in which an inception workshop was held in May 2001. Improving the crossborder trade regimes is a common feature of these regional initiatives. Since these programs involve the poorer areas of the PRC, poverty could be reduced by expanding regional markets and options. Under the GMS initiative, the PRC has expressed its willingness to provide financial support for improving the section of the Chiang Rai (Thailand) to Kunming (Yunnan, PRC) road that is in the Lao People’s Democratic Republic (Lao PDR), once the issue concerning the public-private concession of the Lao PDR’s section is successfully resolved. The proposed Western Yunnan Roads Development Project in 2002 will further support the GMS-related transport network. An agreement for facilitating the crossborder movement of goods and people is being developed under the GMS initiative. A senior-level Central Asia conference, to be held in Xinjiang in late 2001, will discuss a proposed institutional framework to facilitate the implementation of regional activities in such sectors as transport, energy, trade, and investment.

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