Countries and Regions

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p. 3 of 7 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy and Development Issues III. ADB’s Development Experience IV. ADB’s Operational Strategy V. ADB’s Assistance Program VI. Risks, Performance Monitoring and Evaluation

Country Strategy and Program Update 2004-2006: People's Republic of China

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II. The Government's Development Strategy and Development Issues

A. Development Goals and Strategy

41. The Government’s development vision was set out at the November 2002 16th Party Congress, at the March 2003 10th National People’s Congress (NPC), and in the Tenth Five- Year Plan. The long-term development objective is to establish an all-around well-off society by maintaining steady economic growth and by continuously improving people’s living standards. The Government has adopted four targets: (i) fostering rapid GDP growth; (ii) reducing unemployment; (iii) maintaining price stability; and (iv) maintaining a balance on the external accounts. Key strategic themes include (i) continued reliance on market-oriented reforms; (ii) promoting nonstate sector development; (iii) accelerating urbanization; (iv) continuing to transform government functions and endeavoring to build a clean, diligent and efficient government; (v) protecting the environment; and (vi) improving the quality of life for all, including programs to reduce poverty; develop education, health, scientific, technological, cultural, and other fields; and strengthen the social safety net. Box 5 summarizes the main features of the Government’s reform program.

42. Specific plans and programs have been prepared for individual sectors. The following sectors are related to ADB’s PRC operations:

• Agriculture Sector: The agriculture development strategy focuses on increasing farm productivity, restructuring the rural financial system, increasing value-added production, and adopting integrated, environmentally sustainable approaches to farming. The Government will strengthen environmental protection by: (i) implementing new natural forest protection projects on the upper reaches of the Yangtze River and in the upper and middle reaches of the Yellow River; (ii) protecting the rural environment, especially from pollution caused by farm chemicals; (iii) improving water resource management; (iv) addressing land degradation; and (v) improving environmental, meteorological, and seismological monitoring systems to help reduce natural disasters.
• Energy Sector: The main activities include (i) power sector reform to increase efficiency by relying more on market forces and competitive markets, (ii) improving rural and urban electricity networks, (iii) strengthening power transmission systems to transfer electricity from the west to the east, (iv) promoting the interconnection of power grids, (v) adopting clean coal technologies for power generation and developing hydropower and renewable energy, and (vi) transporting the natural gas resources in the west to consumers in the east.
• Transport Sector: The Government will (i) corporatize and commercialize transport organizations; (ii) adopt appropriate pricing policies; (iii) address traffic safety and environmental issues; (iv) use alternative methods of investment financing, including private sector participation; (v) construct a network of highways and national roads, with a focus on five north-south and seven east-west sections of the national trunk highway system; (vi) commence construction of eight new highways in the western region; (vii) improve rural roads; (viii) construct 6,000 kilometers (km) of new railway lines to provide access to unserved areas, the western region, and poverty areas; and (ix) provide 3,000 km of double rail lines and electrify 5,000 km of key lines to increase capacity.
• Financial Sector: Financial reforms will include: (i) restructuring state-owned financial institutions, including banks, nonbank financial institutions, and insurance companies; (ii) strengthening the regulatory and supervisory framework following the separation of bank supervision from the People’s Bank of China (PBC); (iii) enhancing corporate governance in financial institutions and publicly listed companies; (iv) strengthening the institutional capability of policy banks; (v) preparing for the intensified competition in the financial sector resulting from WTO accession; (vi) reforming the rural credit system and strengthening its regulation and supervision; and (vii) moving toward interest rate liberalization and capital account convertibility, although no fixed time tables have been announced.
• Water Supply/Wastewater Treatment: Major objectives are to: (i) undertake policy reforms and increased investment to improve urban infrastructure management; (ii) raise the municipal wastewater treatment rate from 32% to 45%; (iii) increase the use of recycled water by industries from 50% in 2000 to 60% in 2005; (iv) improve water resource management and conservation; (v) increase water tariffs to achieve commercial levels, charge wastewater treatment fees, improve financial management options for water and wastewater, and allow greater private sector investment.
• Poverty Reduction: Key features of the strategy include (i) improving targeting by focusing on poor households and village activities; (ii) giving priority to remote and mountainous areas, minority areas, and pockets of severe poverty; (iii) using participatory approaches to involve the poor in decisions that affect them; and (iv) developing programs to address urban poverty by strengthening the social safety net, minimum living standards, and job creation initiatives.
• Environment: Environmental priorities include (i) mainstreaming the concept of environmental sustainability into all development policies and objectives; (ii) strengthening the environmental legal and regulatory frameworks; (iii) using market-based instruments; (iv) allowing more public and community involvement in environmental management; (v) placing more emphasis on “green” environmental operations for natural resource protection, land degradation, and development of renewable energy; (vi) developing a consistent environmental information database and better mechanisms for environmental monitoring, public disclosure, and community involvement; and (vii) exploring innovative ways to improve the urban environment.

B. Resource Mobilization

43. Economic growth and fiscal reforms have improved domestic resource availability and the fiscal position of the central Government. Fiscal revenue increased from 11% of GDP in 1995 to 17% in 2002. Continuing large inflows of FDI have provided additional capital.³⁹ Expenditures on poverty reduction and western region development have increased. Total transfer payments from the central Government to local authorities, mainly to poor interior regions, increased sixfold between 1997 and 2002. Public expenditure on education, health, and science increased by 230%; on social security by 950%; and agriculture by 190%, during the same period.⁴⁰

44. The Government implemented a proactive fiscal policy for five consecutive years beginning in 1998 and RMB 660 billion in special bonds were issued to finance the budget deficits. These bonds were mainly used to finance public infrastructure projects, development projects in the western region, technological upgrading of key enterprises, projects to divert water from the south to the north, and rural infrastructure. According to the Tenth Five-Year Plan, public investment will focus mainly on education, health, environment, western region development, infrastructure, and poverty reduction.

45. Domestic resources have largely financed the PRC’s development efforts. Official development assistance accounts for less than 1.5% of total government expenditure and 0.7% of total fixed asset investment. However, there continues to be a need for external aid, particularly in the central and western provinces, where the fiscal revenue base is weak.

C. ADB’s Assessment of the Government’s Development Agenda

46. The history of the PRC’s reforms shows that with appropriate policy and macroeconomic management, the goals set by the Government can be achieved. While rapid growth over the next two decades is clearly possible, the challenges that the PRC will face should not be underestimated. There is no other successful model of a transition to a market economy that the PRC can follow. For the PRC to achieve sustainable economic and social development in the coming decade, the economic structure and institutional setup will need to be further reformed. The Government, businesses, and civil society will need to manage the risks and uncertainties generated by the country’s transformation to a market economy, address market failures, provide public goods, and build support mechanisms for the most vulnerable members of society.

47. Among many important issues, improving the efficiency of financing is critical for sustainable development. Since 1997, public bonds have been issued to finance much of the public investment. The availability of such a large scale of funding will be reduced as the proactive fiscal policy is gradually phased out. A more focused and efficient way of financing the development program is needed. Many local governments do not have the capacity to manage the responsibilities delegated to them by the central Government. The effectiveness of the intergovernmental transfer system should be assessed to reduce regional income disparities and ensure that the poor have access to health and education.

48. To efficiently and effectively deliver public services, the various levels of government should adopt innovative public service delivery systems including contracting out, franchising, and privatization. To improve efficiency, more competition is required. The provision of timely and accurate information and a more transparent public service system would improve accountability for the delivery of public services.

49. Because the Government’s development strategy is comprehensive and sound, it merits support from ADB. The Government is addressing many of the issues that are at the core of ADB’s development mandate—pro-poor economic growth, poverty, governance, human development, the environment, and private sector development. There is broad consistency with the Government’s development strategy and ADB’s medium- and long-term strategic frameworks. This congruence of interests presents many opportunities for ADB to find niches where it can be a strong partner and add value in supporting the Government’s development strategy (see Appendix 2, Table A2.5).