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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2003-2005: People's Republic of China
II. Implementation of the Country Strategy and ProgramA. Progress Toward a Poverty Partnership Agreement7. A poverty partnership agreement (PPA) has been drafted. In principle, a consensus has been reached on the PPA’s basic objectives and approaches, including increasing ADB assistance to the central and western regions. The Government has indicated the difficulty in borrowing Ordinary Capital Resources funds for direct poverty interventions and that the lack of a concessional funding mechanism will limit the operational effectiveness of the draft PPA. More discussions with the Government are needed before the draft PPA can be finalized and signed. B. Progress in the Country Strategy and Program Focus Areas8. Drafting of the new country strategy will draw on recently completed policy-oriented technical assistance (TA) studies and other ETSW. The poverty profile, which guided the drafting of the PPA, is being updated to reflect recent developments such as the new poverty planning methodology and urban poverty issues. The draft sound development management study (SDMS) was recently discussed with the Government and will be finalized after a consultative meeting with government representatives and donor agencies. A private sector assessment (PSA), with results of surveys of domestic private and foreign companies operating in the PRC, is nearing completion. Two studies—Improving Effectiveness of Advisory TA (ADTA) Operation in the PRC, and Country Program Framework for forging a partnership between the PRC and the Global Environment Facility (GEF) on land degradation (GEF operational program 12 [OP12])—were also completed recently. A country environmental analysis and an agricultural and rural development strategy study are expected to be completed in October 2002. 9. Various stakeholders, including the central and selected provincial governments, private sector, nongovernment organizations (NGOs), and other donor agencies were consulted at different times during the preparation of the CSP and related ETSW. This participatory process will continue during the finalizing of the CSP, which will also incorporate the findings of the 2002 Country Portfolio Review. An update on how ADB is pursuing its thematic objectives in 2003– 2005 is summarized below. 1. Pro-Poor Economic Growth10. The primary thrust of ADB’s operations in the PRC is to help reduce poverty by promoting sustainable and pro-poor economic growth. Research shows that improving roads can help reduce poverty as they enhance access to social services and markets. The draft PSA revealed that weak infrastructure and underdeveloped consumer market were the two key reasons why some of the foreign companies surveyed would not consider expanding their operations in the interior provinces. Domestic private companies also cited poor roads as the main operational constraint in the western region. ADB will help improve infrastructure to support the growth of the market economy and integrate the poor interior regions with the more affluent coastal region. All road and railway projects to be supported during 2003–2005 are in inland provinces such as Gansu, Yunnan, Ningxia, and Sichuan. Highway projects will develop local roads to improve the access of rural communities to regional economic growth centers. The financing of transport projects will be underpinned by policy studies on transport sector restructuring, rural road development, and rural transport services. A study to assess the impact of roads on reducing poverty will be completed in 2003. 11. Developing cleaner sources of energy is critical to ensuring sustainable development in a country where coal is the major energy source and air polluter. The proposed program will improve system-wide power transmission and rural electrification systems and develop small-scale hydropower projects in the west, and coal bed methane demonstration projects in Shanxi and Liaoning. Ongoing and proposed TA programs will support power sector reforms to develop competitive markets and the necessary regulatory capability, and develop pro-poor tariff structures for rural consumers and urban district heating. In the agriculture sector, productivity improvement is critical to raising rural income. Future projects will support soil conservation and rural development in Fujian and promote dryland farming technology to provinces such as Henan and Gansu. 2. Sound Development Management12. In its transition to a market economy, the PRC is giving priority to improving all dimensions of sound development management. Joint initiatives between the PRC and ADB have promoted reforms, including strengthening the capacities of financial regulators in banking, insurance, and capital markets. New laws and regulations that were formulated with ADB assistance include the Government Procurement Law; Small and Medium-Sized Enterprises (SME) Promotion Law; Trust Law; and foreign trade regulations on dumping, subsidy and countervailing duties, safeguard measures, and import and export of goods. ADB is also helping streamline banking laws and regulations under a systematic oversight framework, and draft new laws against financial crimes such as money laundering.1 Two other TAs being processed will address fiscal management issues and strengthen the capacity of the judicial system to enforce WTO rules. 13. The proposed TA program in 2003–2005 reflects the findings of the SDMS, to date the most comprehensive treatment of development management issues in the PRC. The program builds on previous and ongoing ADB activities to help strengthen the legal, policy, fiscal, and regulatory environment to accommodate increased decentralization and the emerging role of the private sector, and market reforms. Future collaborative efforts will promote corporate governance through improved capacity for financial market supervision, strengthen the legal and judicial system, and promote NGO partnerships for poverty reduction. 3. Private Sector Development14. The private sector is the PRC’s engine for job creation and productivity improvement. The 1999 constitutional amendment that formally recognizes the private sector as a key component of the economy has removed a major policy barrier to the development of the sector, resulting in its rapid growth. However, the private sector still faces constraints, including those highlighted by ADB’s ongoing TAs2 : inadequate infrastructure, lack of access to finance, and shortage of managerial and technical skills. An action plan to solve these problems was developed through the TAs and has been presented to the Government. ADB’s ongoing PSA also revealed that a lack of transparency, cumbersome project approval procedures, market barriers, and inadequate human resources are major operating challenges for foreign investors. Domestic private companies and foreign investors said that improved access to and clarity of information on government policies and their enforcement was needed to create a pro-business environment. 15. ADB’s public lending program to support infrastructure development in the inland provinces will help overcome a physical barrier to private sector development. Proposed TA in 2003–2005 will remove some policy constraints to help create an enabling environment for the private sector. ADB will support the development of alternative financing mechanisms in line with the SME Promotion Law. The proposed 2003–2005 TA program will cover continued support for SME development through credit enhancement and provision of business advisory services and for restructuring of the transport and power sectors and information industry to allow wide private sector participation. 16. ADB’s private sector operations in PRC will focus on infrastructure development and financial intermediation. The Water Infrastructure Development Facility loan was approved in 2002.3 Another water supply and wastewater treatment project and an environment fund are being considered in 2002–2003. 4. Regional Cooperation17. The PRC believes that ADB has a strong competitive advantage in promoting regional cooperation and is actively participating in ADB initiatives in (i) Yunnan for the Greater Mekong Subregion (GMS), (ii) Xinjiang for Central Asia, and (iii) Inner Mongolia for the PRC-Mongolia Subregion. Improving the cross-border trade regimes under these initiatives can help reduce poverty in the border areas where many of the PRC’s poor live. ADB has been involved in several road projects, which will link Yunnan and southwest PRC with other countries in GMS. The PRC also supports the Kunming–Lao People’s Democratic Republic–Chiang Rai road as a priority transport project under the GMS program. An institutional framework was established in early 2002 to promote the Central Asia initiative, under which the first customs cooperation committee meeting was held in August 2002 in the PRC. ADB is also working out a proposed project that will help the PRC and Mongolia jointly address dust and sand storm pollution. ADB will continue to explore possibilities for more projects to promote regional cooperation through the three initiatives. 5. Environment Protection and Resource Management18. Environmental problems are pervasive. Many cities suffer from air and water pollution, which, if left unchecked, will worsen as cities continue to grow. Environmental degradation has depleted natural resources, particularly arable land and water in many parts of the country, and aggravated rural poverty. About 90% of the officially-defined rural poor live on degraded land. The poor are most vulnerable to environment-induced diseases and least capable of paying for medical care. The PRC recognizes the strong correlation between poverty and the environment and aims to increase total investments in the environment sector from 0.9% of GDP during the Ninth Five-Year Plan (1996–2000) to 1.3% of GDP during the Tenth Five-Year Plan (2001– 2005). 19. ADB assistance in 2003–2005 will help address soil and water resource management problems (e.g., in the Hai River and Baiyangdian Lake); improve the environmental quality of urban areas (e.g., Suzhou and Fuzhou); and develop cleaner forms of energy (e.g., small-scale hydropower, coal bed methane). TA support for policymaking and capacity building will continue as previous interventions have been successful, resulting, for example, in the passing of the 2002 Clean Production Law, formulation of a national strategy for soil and water conservation, and introduction of the cost-recovery principle as the basis for determining water tariffs in cities.4 The clean development mechanism is being promoted, and a study to control and manage nonpoint pollution from agricultural sources is under way.5 Proposed TA in 2003–2005 will focus on improving environment management in the western region, enhancing the effectiveness of environmental investments, controlling interprovincial acid rain, and properly handling and disposing of waste coal. ADB will continue to serve as a member of the China Council for International Cooperation on Environment and Development, which advises senior government leaders on environmental policy. 20. ADB is helping the PRC formulate a 10-year strategic partnership with GEF on OP12 to stop land degradation, a major cause of rural poverty. The partnership’s objectives are to (i) combat land degradation and restore ecosystem productivity in selected ecoregions, (ii) achieve global environmental benefits through biodiversity conservation and carbon sequestration, and (iii) generate lessons on integrated natural resources management for replication in the PRC and worldwide. The initial focus will be on Xinjiang, Inner Mongolia, Ningxia, Qinghai, Gansu, and Shaanxi, which account for 97% of the wind-eroded and desertified land and 54% of water-eroded areas in the western region. Should GEF endorse the proposed partnership in October 2002, it will be the first for GEF OP12, and provide a core mechanism for ADB, as the implementing agency, to help finance land degradation projects, which will be developed through several proposed project preparatory TA (PPTAs) in 2003–2005. 6. Social Development21. Despite substantial improvements in the PRC social development indicators (Appendix 1, Table A1.3), more efforts are needed to improve the delivery of social services and broaden their access, especially for the rural population, and solve emerging problems such as urban poverty and growing regional disparities. Health and education account for only 4.1% of the central Government budget expenditures as local governments shoulder most of the costs. Increasing the share of social services in the central budget to ensure that the poor have access to health and education would be consistent with a pro-poor policy agenda. 22. PRC’s policy is to use domestic resources and concessional funds for education and health, so significant lending for these sectors is not expected. ADB will use TA to provide policy support and build institutional capacity to deal with social issues. One TA helped build in-country capacity to develop social assessment guidelines, which have been incorporated into the Government Guidelines for Feasibility Studies of Investment Projects.6 Two pro-poor initiatives are being processed for approval in 2002: a distance education TA that will help bring better educational opportunities to children living in the western provinces, and a TA to help formulate a public nutrition policy. Another TA in 2003 will help reform compulsory education finance to make it more accessible to disadvantaged children, especially girls and ethnic minorities. Lending prospects for distance education will be explored through a PPTA in 2005 and will involve efforts to mobilize concessional funds. 23. Several proposed water supply and wastewater treatment projects in Fuzhou, Jilin, and smaller cities in Henan and Shandong by the Hai River will continue to improve access to clean water. Proposed TAs in 2003–2005 will help solve rural water shortage and sanitation problems, promote urban sector reforms, and continue to strengthen social safety nets and deepen the understanding of the social implications of urban poverty. C. Highlights in Coordination of External Funding and Partnership Arrangements24. The PRC does not have a formal aid group. Through its PRC Resident Mission (PRCM), ADB coordinates extensively with the World Bank Group (WBG) and Japan, the two other major external funding agencies in the PRC, and other development partners. PRCM participates regularly in meetings and seminars of the local aid group and briefs it on ADB operations. Coordination with other development partners has been particularly challenging for ADB since several of them, including the WBG and Japan are also revising their operational strategies for the PRC. Thus, information sharing was an important activity that has resulted in two major initiatives in 2002: (i) a database website (http://oda.un.org.cn/jdd.nsf) that provides information on the projects funded by development agencies; and (ii) a commonality study that maps out their respective country strategies and major areas of operations in the PRC. 25. The Department for International Development (DFID) of the United Kingdom, and ADB have forged a partnership to enhance ADB operations’ poverty orientation in the PRC through a specific component of the Poverty Reduction Cooperation Fund (DFID Fund).7 The proposed PRC-GEF partnership for OP12 will also provide opportunities for interested donor agencies to help the PRC combat land degradation and underpin the PRC’s responses to international conventions such as the Convention to Combat Desertification, Convention on Biological Diversity, and the United Nations Framework Convention on Climate Change. 26. ADB will continue to coordinate with other development partners and pursue official and commercial cofinancing opportunities to support its operations in the PRC. During the first half of 2002, funds were obtained from Spain, France, Italy, Netherlands National Poverty Reduction Strategy Fund, Canadian Cooperation Fund for Climate Change and the Japan Special Fund to finance some TA projects. The Public-Private Infrastructure Assistance Facility will also be tapped to help finance suitable operational activities. ____________________
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