Regions and Countries

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p. 1 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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Executive Summary

When the economic history of the last part of the 20th century is written, the People’s Republic of China (PRC) will be recognized as one of the world’s great development success stories. The PRC’s macroeconomic performance has been exceptionally good. Five consecutive years of pro-active fiscal policy, prudent monetary policy, continued opening up to the global economy, and market reforms enabled the country to contain the adverse effects of the 1997-98 Asian crisis and the 2001-02 global slowdown. Gross domestic product (GDP) grew by an average 8.1% per annum and per capita GDP increased by 44% from $671 in 1996 to $964 in 2002. The PRC was the world’s sixth largest trading nation and became the world’s largest recipient of foreign direct investment in 2002. Ambitious and wide-ranging reforms have been undertaken in all sectors. World Trade Organization (WTO) accession will increase the PRC’s participation in the global economy and will help the Government deepen a wide range of structural reforms.

Social Development Achievements. Because of sustained, rapid economic growth and targeted government programs, by 2002 the PRC was ahead of schedule in achieving most of the Millennium Development Goals (MDGs). The PRC has achieved the target of halving poverty from the 1990 level. The proportion of the rural population with an income below $1 per day was 31.3% in 1990 and declined to 11.5% in 2000. While the progress in achieving most MDGs has been good, more progress is needed to further improve some indicators such as providing safe drinking water to the rural population, reducing child mortality, controlling HIV/AIDS, and improving some environmental indicators. Also, more attention should be put on addressing regional disparities in achieving the MDGs.

Government Vision. The Government’s medium- to long-term vision for development is set out in the November 2002 16th Party Congress, the March 2003 10th National People’s Congress, and the Tenth Five-Year Plan (TFYP) (2001–2005). The long-term development objective is to establish an all-around well-off society by maintaining steady economic growth and continuously improving people’s living standards. Rapid economic growth, at 7% per year, is expected to continue. The Government has adopted four targets: (i) promoting GDP growth; (ii) reducing unemployment; (iii) maintaining price stability; and (iv) maintaining balance on the external accounts. Key strategic themes include (i) continuing market-oriented reforms and opening up to the global economy; (ii) promoting the private sector; (iii) accelerating urbanization; (iv) continuing to transform government functions and endeavoring to build a clean and diligent government; (v) protecting the environment; and (vi) improving the quality of life for all, including implementing programs to reduce poverty, develop education, health, technology, scientific, culture and other fields, and strengthening the social safety net.

New Challenges. While rapid growth and structural changes have resolved many problems, new challenges are emerging. It is becoming clear that rapid economic growth alone is not sufficient. It must be complemented by inclusive social development and more progress in areas such as health and education. Despite the exceptional progress that has been made, the PRC requires further reform in virtually all sectors. The Government’s development strategy is very broad and merits support from the Asian Development Bank (ADB) as it covers all elements in ADB’s medium- and long-term strategic frameworks. ADB’s task is to select niches where ADB can add value and be a true partner to help the Government address selected development challenges.

ADB Focus. This country strategy and program (CSP) focuses on a set of four interrelated challenges: (i) promoting pro-poor inclusive economic growth; (ii) building an enabling environment for the private sector and strengthening public sector governance; (iii) fostering regional cooperation to help integrate the PRC into the global economy; and (iv) promoting environmental sustainability.

Equitable and Inclusive Growth. For economic growth to be sustainable, the benefits of such growth must be inclusive and reach most people, particularly the poor. Almost all major economic and social indicators have improved during the past two decades except for income distribution. While some deterioration in income distribution is inevitable as PRC moves from a centrally planned to a market economy, the speed of the growing inequality is worrying. There are three dimensions of the rising inequality: (i) the growing gap between the wealthy coastal provinces and the poorer interior provinces; (ii) urban incomes have grown faster than rural incomes; and (iii) increasing inequality within both the rural and urban populations. If inequality continues to grow and a large proportion of the population do not benefit from economic growth, the impetus for continued reform could be undermined.

Poverty is multidimensional. Success in reducing income poverty has not fully addressed all of the dimensions of human poverty. Gaps are evident in many indicators of poverty between the richer and the poorer regions and within various segments of society. Disparities have widened in education, health, social security, and by gender. Some of these problems have been aggravated by the transition from a centrally planned system to a market economy, including rising unemployment and weaknesses in the social safety net.

Making Markets Work Better. Despite the success of the past two decades, economic reforms are far from complete. Weaknesses in the financial sector, including the large volume of nonperforming loans (NPLs), represent a major financial risk. Increased government debt and contingent liabilities mainly resulting from NPLs, underfunded pensions and enterprise arrears could undermine the Government’s ability to provide public goods such as health, education, poverty, and a relatively clean environment. By making markets work better, production will become more efficient and the jobs necessary to win the war against poverty will be created. This requires restructuring the financial sector, promoting private sector development, and fully integrating the PRC into the global economy in a rules-based manner. Improved governance to promote sound development management is the key to progress in these areas.

The transition from a centrally planned to a market economy is a fundamental change in the system of governance. Thousands of new rules and regulations have been promulgated and new regulatory agencies have been established. However, there are problems of clarity, consistency, lack of transparency, and weaknesses in enforcement. Although the Government has launched an attack on corruption, and adopted policies aimed at containing corruption, additional steps need to be taken in this area.

Challenges Related to Globalization. The PRC is becoming increasingly integrated into the world and Asian regional economies. More liberalized trade and capital account management under WTO rules are likely to improve the efficiency of resource utilization and reduce tensions with other countries. As the PRC becomes one of the region’s largest economies, it will play an increasing economic role in Asia. Regional cooperation can help other Asian countries capture the full benefits of the PRC’s global emergence. The Asian financial crisis and the outbreak of severe acute respiratory syndrome (SARS) underscore the importance of regional cooperation so that countries can jointly meet common challenges and prosper together.

Environmental Sustainability. The PRC faces many environmental challenges—air, water, and solid waste pollution, as well as land degradation. There are also weaknesses in the environmental legal and regulatory frameworks, and enforcement and use of market-based instruments. Although the general rate of environmental degradation slowed in the 1990s, it was not reversed and some problems, such as land degradation and desertification, worsened. Continued economic growth will exert increasing pressures on the environment. Steps must be taken to ensure that the PRC’s continued growth and development are environmentally sustainable.

Broad Based and Pro-Poor Development. Many of the remaining challenges cannot be solved by rapid economic growth alone. While such growth should continue to be fostered, policy makers should place more priority on addressing social and income inequalities. One of the lessons of SARS is that growth must be accompanied by social development, including adequate investment in public goods such as primary health care. Inequality and poverty need to be addressed more effectively to manage the social risks that accompany the transition to a market economy.

New ADB Strategy. This document sets out ADB’s PRC CSP (2004–2006). The CSP draws on ADB assessments of poverty, governance, and the private sector, an agriculture and natural resources strategy study, the Western Region Development Strategy, ADB’s first Country Assistance Program Evaluation, and some analytical work prepared by other development partners. The CSP draws on consultations with the urban and rural poor, central and local government officials, and representatives of civil society, the private sector, and the external development community. The CSP reflects the lessons learned from ADB’s past operations and the good performance of the PRC portfolio. Based on ADB’s comparative advantage, poverty will be addressed primarily through pro-poor growth.

Lending Scale and Focus. Annual ADB public sector lending to the PRC from 2004 to 2006 will be in the order of $1.5 billion, compared to an average of about $1 billion during the past 5 years. The PRC’s absorptive capacity and good portfolio performance are more than adequate for such an increase in lending. To support pro-poor economic growth and reduce regional inequalities, ADB will allocate most of its lending assistance to the poor interior regions (84% based on the proposed 2004–2006 program). Public sector lending along the east coast will mainly be related to poverty, the environment, or improving urban infrastructure. ADB’s lending operations will focus mainly on three areas: (i) agricultural and rural development (12% of lending), mainly on green side environment projects including land degradation, soil and water management, and renewable and rural energy targeted at the rural poor; (ii) transport infrastructure (61% of lending), mainly in the central and western regions including highways complemented by feeder roads, urban transport, railway, and regional cooperation; and (iii) environment (27% of lending), including water supply/wastewater treatment, clean energy, and improving the urban environment. The potential for solid waste management operations will be explored.

The program is dominated by infrastructure lending, an area in which the Government believes, and ADB evaluation findings confirm, ADB’s strength and comparative advantage lie. ADB’s operations are designed to create an environment to allow growth to take place in poor areas and to promote environmentally sustainable growth. Most ADB projects will have an indirect but significant impact on poverty, such as improving the access of the poor to markets, increasing job opportunities, and improving the living environment of the poor.

New Areas to be Explored. In the past, the Government preferred to use its own resources or concessional funds to address issues of poverty, health, and education. Although the Government remains concerned about the cost of ordinary capital resources (OCR) funds, and related repayment obligations, during the program period, the Government and ADB have agreed to explore possible ways for ADB to be involved in these areas. If suitable opportunities materialize, loans and technical assistance (TA) will be added to the program in the health and/or education sectors.

Expanding Private Sector Operations. There are opportunities to expand ADB’s support for private sector development. ADB will try to substantially increase its private sector operations in the PRC and will explore the possibility of issuing yuan-denominated bonds and of helping borrowers raise local currency debt funds. The latter initiatives will help avoid currency mismatches—an important lesson of the Asian financial crisis. ADB’s private sector lending activities will focus on infrastructure, the financial sector, 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 small and medium enterprises (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. ADB should also make more effort (i) to broaden its public sector operations in terms of helping create a conducive environment for private sector development and (ii) 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 its PRC Resident Mission (PRCM).

Strengthening Nonlending Activities. ADB’s role as a development lender will be complemented with the role of provider of knowledge resources. To strengthen ADB’s role in this area, the nonlending program will be more focused, better targeted, made more forward looking to cover emerging topics, and better managed to improve the impact of knowledgebased products. More effort will be made to ensure “quality at entry”, including better topic selection and more consultations with multiple stakeholders. 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, an area must: (i) fit with both the Government’s and ADB’s strategies; (ii) demonstrate a government commitment to implement major structural reforms in the area where strong stakeholder ownership will be essential; (iii) have a clear long-term vision and roadmap for the reforms; and (iv) have a strong executing agency with the mandate and capacity to manage the reforms. Sector and institutional reforms associated with ADB’s lending activities and policy dialogue during the project design and implementation stage also present opportunities to bring in best international practice and strengthen the policy impacts of ADB’s operations. Given an increasing importance of policy advisory services, ADB must be able to respond quickly to the needs of the Government and the market so that results are available when they are needed. Umbrella advisory TAs would be a useful instrument for accelerating ADB’s response time.

In addition to better managing ADB’s knowledge-based products, the work of departments or units such as the Economics and Research Department (ERD), Regional Economic Monitoring Unit (REMU), Regional and Sustainable Development Department (RSDD), and Operations Evaluation Department (OED) will be better used to complement the work of the operations departments. The Asian Development Bank Institute (ADBI) is also an important source of knowledge-based products and its work will be better used to provide an analytical basis for ADB’s policy dialogue.

Working Closer with Other Development Partners. With the delegation of the programming function and related economic, thematic, and sector work (ETSW) to PRCM, the linkage between ETSW, programming, processing, and implementation has improved. After the establishment of PRCM, consultations with the international development community increased in the areas of policy coordination, information sharing both during country programming and at the project level, as well as consultations with the Government, private sector, and civil society. Extensive consultations with other development stakeholders took place during the preparation of the CSP. PRCM’s establishment also helped to strengthen portfolio management. The strategies of the Government and many other development partners address issues such as poverty, governance, the environment, and western regional development. These are core areas in the proposed PRC CSP. This convergence of interest represents an opportunity to deepen coordination and collaboration with other development partners. These opportunities will be pursued and efforts will be made to further expand ADB’s partnership arrangements with other development agencies. The country programming framework for the PRC-Global Environment Facility (GEF) partnership on Operational Program 12 (OP12) provides a leading role for ADB in the external development community to assist the PRC in combating land degradation. An ADB, PRC, and Department for International Development (DFID) of the United Kingdom Poverty Reduction Cooperation Fund was approved in 2002 to help deepen the poverty orientation of ADB projects and help ADB have a greater impact in addressing strategic policy issues that affect the poor. Discussions with the Government and DFID are ongoing on a proposal to develop a provincial partnership agreement. ADB has recently facilitated the entry of the Agence Française de Développement as a development partner into PRC to cofinance Greater Mekong Subregion (GMS) projects in Yunnan. ADB is sharing knowledge-based products with the Organisation for Economic Co-operation and Development (OECD), which is increasing its research activities in the PRC. Potential collaboration with other partners is being explored.

Conditions for the Future Success. Successfully delivering a relevant, strategically focused, and value-adding operational strategy requires a strong lending program and increasingly sophisticated knowledge-based products designed to fit the PRC’s changing needs and ADB’s challenging institutional mandate. Delivery of timely and higher-quality economic and sector work in closer collaboration with development partners requires stronger institutional focus, commitment, and resources. ADB’s already limited TA resources are under increasing pressure. This represents a risk to ADB’s ability to deliver a broad-based program of knowledge-based products.

Strengthening Monitoring and Supervision. Success will also require effective monitoring and supervision of individual operations and the implementation of the strategy more broadly so that midcourse corrections can be made as required. Such corrections may be needed in response to changing conditions, including new policy developments. Progress in attaining the MDGs will be one of the primary means of measuring country performance. A set of performance indicators has been developed to monitor the success of CSP implementation. Sector roadmaps will be used to monitor progress at sector level. ADB is working on developing benchmarks and criteria to articulate ADB’s operational impacts on poverty and social development at the project level.

As per ADB’s business processes, the regional management team will be primarily responsible for program implementation, supported by the country team. The establishment of PRCM strengthened ADB’s capacity to undertake these tasks. The Government and ADB will conduct annual reviews of the CSP and the poverty reduction and strategic impacts of ADB interventions. The results of these reviews will be reported in the annual CSP updates and used to determine which interventions are effective and which should be modified or dropped.

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