Regions and Countries

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p. 5 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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IV. ADB’s Operational Strategy

68. Although ADB is one of the PRC’s major development partners, ADB’s financial, institutional, and staff resources are limited. Total ADB annual lending will be well under 0.2% of total fixed asset investment of the country, although ADB’s contribution in some sectors (e.g., roads and railways) is higher. These factors lead to two conclusions. First, ADB’s value added will increasingly reflect its knowledge transfer and strategic/policy influence rather than financial transfers. While the level of lending must be sufficient for ADB to be a significant development partner, efforts need to be made to ensure that ADB’s knowledge-based products result in greater strategic/policy impacts. Second, ADB’s operations must be selective and focused on a limited number of sectors where ADB has a comparative advantage.

A. Main Features of the Poverty Partnership Agreement

69. The poverty partnership agreement (PPA), which sets out strategies and interventions for poverty reduction, was signed in September 2003. The Government believes that its lack of access to Asian Development Fund (ADF) resources significantly narrows the range of feasible options for ADB's direct involvement in poverty reduction. The Government does not find it appropriate to use ordinary capital resources (OCR) to support interventions for direct poverty reduction, education, and health projects where prospects for direct cost recovery are limited. In these cases, the PRC Government prefers to use domestic funds or concessional funds. Accordingly, the Government and ADB agree that ADB’s focus should be to support pro-poor sustainable economic growth through pro-poor infrastructure and environmental improvement projects, by promoting a vibrant private sector to create jobs and by undertaking policy studies and other knowledge products related to poverty. The PPA will be reviewed and modified periodically, depending on achievements and contextual changes.

B. ADB’s Strategy for the PRC

70. The following objective will guide ADB’s PRC operations: To promote pro-poor economic growth by enabling greater access of the poor to the benefits of economic prosperity and opportunity to achieve it. Based on ADB’s comparative advantage, poverty will be addressed primarily through pro-poor growth. ADB’s operations will be designed to help:

• Promote equitable and inclusive growth: (i) promoting pro-poor growth in the poor interior regions by removing infrastructure barriers, (ii) supporting rural development and rural finance, (iii) supporting social sector development and social security reform, (iv) promoting pro-poor fiscal reforms, and (v) encouraging greater participation of the poor in decisions that affect them.
• Make markets work better: (i) promoting good governance, the rule of law, and transparent regulation; (ii) developing an enabling environment for the private sector; (iii) providing infrastructure to improve the business environment; (iv) supporting financial sector reforms; (v) supporting SME development; and (vi) expanding ADB’s private sector operations.
• Foster regional cooperation: (i) addressing policy and institutional barriers on regional cooperation, (ii) removing infrastructure constraints and other barriers to cross border trade and investment, (iii) encouraging private investment to support regional cooperation, and (iv) strengthening regional economic surveillance and regional financial infrastructure.
• Promote environmental sustainability: (i) strengthening environmental legal, policy, regulatory and institutional reform; (ii) encouraging the use of clean production technologies and renewable energy; (iii) addressing land degradation, water resource management, water pollution, air pollution, and solid waste management; and (iv) promoting private sector and civil society participation in the provision of environmental infrastructure and services.

C. Promoting Equitable and Inclusive Growth

71. Reducing Regional Inequalities. ADB will channel most of its lending to the central and western regions where the majority of the poor live. ADB will help create the conditions necessary to foster pro-poor economic growth in the poor interior regions by (i) improving infrastructure and including components that will improve the access of the poor to project benefits, (ii) promoting market-based policy reforms and improving the environment for private sector development, (iii) improving the fiscal capacity of local governments, and (iv) addressing environmental issues.

72. Addressing Rural Development and Poverty. Poverty is mainly rural and is concentrated both in areas of degraded land and in remote, minority, and border areas. Drawing on lessons learned from ADB’s development experience in rural Asia,⁵⁸ the thrust of ADB’s operations in rural development will include: (i) providing infrastructure for broad-based rural development (e.g., roads and electricity), (ii) supporting approaches and technologies that are suited to integrated ecosystem management, (iii) strengthening rural financial markets and institutional frameworks, (iv) integrating water resources management and supporting agricultural and natural resources research, and (v) helping the PRC to take advantage of new agricultural opportunities created by WTO accession. The Government’s priorities for ADB’s operations are to help improve the efficiency and effectiveness of the poverty reduction policies and programs through knowledge-based products, including analytical work related to providing social protection in rural areas, rather than direct lending for poverty reduction and agriculture. ADB will continue to work with the Government to use international experience to develop innovative mechanisms for which the Government wishes to borrow OCR funds. ADB will attempt to mobilize concessional cofinancing from bilateral and other sources for poverty reduction and social development projects.

73. Addressing Urbanization and Urban Inequalities. Policies and programs need to be put in place to ensure that rural migrants have access to job opportunities and that urban poverty does not increase substantially so that the PRC does not experience the negative consequences of urban poverty that are evident in some of the world’s large urban centers. ADB will address urban poverty and environmental issues (e.g., an adequate supply of clean water, reduced water pollution, improved air quality, and better solid waste management) and promote private-public partnerships in these areas. In addition, developing a sound social security system will facilitate SOE reform and capital market development.

74. Promoting Social Sector Development. ADB will make greater efforts to monitor the multiple dimensions of poverty. Although the Government remains concerned about the cost of OCR funds and related repayment obligations, the Government agreed that during the program period, possible ways will be explored for ADB to be more directly involved in the social sectors. If suitable opportunities arise, loans and TAs will be added to the program in the health and/or education sectors. In all ADB supported projects, efforts will be made to ensure that the affected people at least maintain their living standards. Social impact assessments will include a gender analysis for ADB projects when appropriate.⁵⁹

75. Providing Infrastructure. Good infrastructure is necessary for markets to work efficiently. The Government believes, and postevaluation results confirm, that ADB’s competitive advantage is in the area of providing infrastructure. Infrastructure will dominate future ADB lending. ADB will continue to support the infrastructure development that the private sector needs through (i) policy and institutional reform to improve cost recovery and sector governance, introduce competition, improve efficiency and open up opportunities for private sector participation; (ii) financing key transport energy and urban infrastructure projects to remove constraints faced by the private sector, particularly in the central and western regions; and (iii) supporting infrastructure projects that promote public-private partnerships. Good infrastructure is also needed to win the war against poverty (Box 8).

76. Poverty Reduction Cooperation Fund. A strategic partnership with DFID of the United Kingdom was approved in 2002 with DFID providing funding through the Poverty Reduction Cooperation Fund to help strengthen the poverty orientation of ADB operations in the PRC. Cooperation with DFID will focus on rural development assistance to better promote rural income generation through projects targeting poorer farmers and small entrepreneurs. To address emerging urban poverty issues, which are often related to economic restructuring and rural migration, DFID and ADB will cooperate to better target the urban poor and widen project design to include areas such as urban income generation, microfinance, and social protection for both urban poor and rural migrants. DFID and ADB will support efforts to help reform the delivery and planning system for poverty reduction, improve local-level planning for service delivery to the poor, strengthen the fiscal position of poor counties, strengthen legal assistance to the poor, and improve participation of the poor and NGOs in designing and implementing development projects.

77. Provincial Partnership Agreement. ADB will work with the Government and DFID to explore the possibility of designing project activities and pilot testing a provincial partnership agreement. The provincial partnership agreement will be designed to test applications to address both rural and urban poverty to deepen the poverty reduction impact of ADB operations in the selected poor province. The pilot projects financed under the provincial partnership agreement will test approaches that could be replicated and scaled up if they prove to be successful.

D. Making Markets Work Better

78. Building the Governance System for a Market Economy. Using knowledge-based products, ADB will help develop a good governance system suitable for a market economy. Among other things this means (i) promoting the rule of law through a stronger legal and regulatory framework and an efficient judicial system; (ii) supporting financial reforms and regulation to improve efficiency of resource mobilization and to provide the private sector with more access to financing; (iii) supporting fiscal reform initiatives to rationalize expenditure and revenue responsibilities and design a better fiscal transfer system to support the poorer areas; (iv) supporting local public administration capacity in the central and western provinces; and (v) supporting efforts to broaden public participation, particularly the poor, in decisions that affect them.

79. Expanding Private Sector Operations. ADB will substantially increase its private sector operations in the PRC and will explore the possibilities of issuing yuan-denominated bonds and helping borrowers raise local currency debt funds. The latter initiatives will help avoid currency mismatches. ADB’s private sector lending activities will focus on infrastructure, the financial sector funds, and the environment. Priority will be given to pioneering projects that can serve as models for structuring private sector investment. While much of the private investment in infrastructure will likely be in the coastal region, efforts will be made to identify suitable projects in the central and western parts of the country. In the financial sector, ADB will support investment funds for SMEs, agribusiness, the environment, and instruments to address NPLs. ADB will also consider taking equity positions in existing and new banks, insurance companies, and other domestic financial institutions to promote financial sector reforms and good corporate governance. Trade finance and housing finance are potential new areas that will be explored. Efforts should be made to broaden ADB’s public sector operations to help private sector development and use more innovative approaches to develop public-private sector partnership projects in the road, rail, power, and water sectors. To support the expansion of its private sector operations, ADB will strengthen the staffing of PRCM.

80. Improving the Efficiency of the Financial Sector. ADB’s strategy in the financial sector will be to: (i) strengthen poverty impacts to broaden the coverage and improve the institutional capacity and administrative efficiency of the social safety net; (ii) work with the China Securities Regulatory Commission (CSRC), China Banking Regulatory Commission (CBRC), and China Insurance Regulatory Commission (CIRC) to strengthen sector regulation; (iii) support reform of the rural financial system; (iv) improve the access of the private sector, SMEs, and restructured SOEs to financial resources; (v) support sound corporate governance standards; and (vi) help prepare for the intensified competition in financial sector brought about by WTO accession.

81. Enhancing Public Service Delivery. ADB will help the Government (i) encourage the private sector, NGOs, and civil society to play an increasingly important role in the delivery of public services (e.g., in areas such as the environment, rural development, poverty reduction, health, education, and women’s issues); (ii) reform the accounting and auditing system and develop self-regulation professional bodies for accountants and auditors; and (iii) improve the statistical system to improve the accuracy and transparency of statistical information so that government officials and investors have better information on which to base decisions.

E. Foster Regional Cooperation

82. Regional cooperation initiatives will be designed to (i) improve the policy environment for regional cooperation, remove barriers to cross-border trade,⁶⁰ and stimulate regional economic activity; (ii) support projects to stimulate economic growth in border areas; (iii) support subregional cooperation activities between the PRC and the Greater Mekong Subregion, Central Asia, and Mongolia; and (iv) build capacity for the management of regional cooperation, regional economic surveillance, and regional aspects of the new international financial infrastructure. ADB will seek to expand its role in working with regional organizations and in areas related to regional economic surveillance involving the PRC. While ADB will monitor developments in northeast Asia, since some countries involved are not ADB members, ADB will not be directly involved in promoting regional cooperation in this area.

F. Improving the Environment

83. Continuing to Focus on Policy and Institutional Reforms. ADB will use knowledge products to strengthen the environmental policy, legal, and regulatory framework and to promote the use of market-based instruments. ADB will help build capacity in key agencies to improve enforcement and to increase information disclosure and public participation.

84. Addressing the Increasing Demand for Environmental Protection. ADB’s operations will (i) address land degradation, in partnership with GEF and other development partners, as well as water resource management and ecological management issues affecting soil and water resources; (ii) address air and water pollution and solid waste in urban areas; (iii) promote the use of cleaner forms of energy including hydropower, coalbed methane, and renewable energy; and (iv) promote private sector investment in environmental infrastructure and the provision of environmental services. The PRC-GEF Partnership for combating land degradation offers an opportunity for ADB to play a leading role in the development community in addressing the land degradation problem, a major “green side” environmental issue. Efforts will be made to formulate projects that have regional implications and benefits beyond the PRC (e.g., projects to reduce dust storms and to reduce greenhouse gas emissions). Innovative approaches will be sought to mobilize resources from the Clean Development Mechanism, GEF, and other development partners in the environmental sector.

G. Focus of Lending Activities

85. ADB’s lending will focus mainly on three areas: (i) agriculture and rural development, (ii) transport and energy primarily in the central and western regions, and (iii) the environment. ADB has exited from public sector lending for ports, telecommunications, industry, agroindustry, agro-processing, and fisheries. Agricultural projects will be more narrowly focused on green side environment projects (e.g., land degradation, and soil and water management), productivity enhancement, and poverty-oriented projects. Road projects will include highways complemented by feeder roads to rural communities, and improving urban transport systems. In the energy sector, the emphasis will be on renewable energy and clean energy to reduce air pollution. The financing of thermal power generation projects will be considered in the context of introducing advanced technology, such as clean coal technology, and of promoting energy conservation. Improving the urban environment, including water supply/wastewater treatment, air pollution abatement, and solid waste management projects will constitute the core of social infrastructure projects.

86. While the focus of most of ADB’s assistance will be in the central and western regions, this does not preclude ADB from selectively financing projects in the eastern region that are aligned with its strategic objectives. For instance, environment-oriented projects or transport projects in the eastern region that are directly linked to poverty reduction would be considered. The wealthier eastern provinces have stronger project implementation and loan repayment capacity for projects that do not generate adequate financial returns to service the loans. Thus, if lending opportunities in the health and education sectors emerge during the program period, they may be in the eastern region.

H. Strengthening the Impact of Knowledge-Based Products

87. The nonlending program will be more focused, better targeted, and address emerging topics. More effort will be made to ensure “quality at entry”. Clusters of TAs will be identified to support long-term relationships between ADB and selected agencies involved in strategic policy work. To be selected as a niche for long-term assistance the area must: (i) fit with both the Government’s and ADB’s strategies; (ii) have a Government commitment to implement major structural reforms in the area—stakeholder ownership will be essential; (iii) have a clear longterm vision and roadmap for the reforms; and (iv) have a strong executing agency with the mandate and capacity to manage the reforms. Compared to other external agencies, ADB requires a long time to field consultants under TA financing. Given the increasing policy advisory dimension in the new strategy, umbrella TAs will be used to quickly respond to the needs of the Government and markets. This mechanism will complement the rapid feedback provided by PRCM on various policy issues of interest to the Government. Because of the focus on strategic impacts, few capacity-building ADTAs for individual local executing agencies will be included in the program.

88. Strengthening the impact of knowledge-based interventions is not limited to ADTA operations. Sector and institutional reforms associated with ADB’s lending activities and policy dialogue during project design and implementation also provide opportunities to introduce best international practice and strengthen the policy impacts of ADB operations. Mechanisms need to be developed to better disseminate the findings and lessons learned from ADB’s operational experience, including those identified in evaluation studies, and the results of knowledge-based products to senior PRC leaders, development stakeholders, the private sector, and academia. The terms of reference and budgets for ADTAs and ETSW should provide for a dissemination strategy. These individual dissemination initiatives will be reinforced by external relations work of ADB and PRCM, and by the PRCM page on the ADB web site.

89. In addition to better managing ADB’s knowledge-based products, stronger strategic alliances with other development partners are needed to develop synergies in policy and strategic areas. Stronger relations also need to be built with OECD, which is increasing its activities in the PRC. The work of offices like the Economics and Research Department (ERD), Regional and Sustainable Development Department, Operations Evaluation Department, and Regional Economic Monitoring Unit of ADB will be used to complement the work of the operational divisions. The Asian Development Bank Institute (ADBI) is an important source of knowledge-based products and its work can provide an analytical basis for parts of ADB’s policy dialogue. ADBI is undertaking work in the following areas, some of which was used in the formulation of the PRC CSP: (i) sequencing financial sector liberalization; (ii) corporate governance; (iii) pension and social security reform; (iv) changing Asian trade patterns; (v) capital market development; (vi) human resources development; and (vi) poverty reduction. Ongoing ADBI work includes a study on FDI, the effectiveness of poverty-targeting measures, and corporate governance in the banking sector. Greater efforts will be made to integrate ADBI into ADB’s PRC operations.

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