Countries and Regions

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Country Strategy and Program Update 2005-2007: People's Republic of China

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. In March 2004, the National People's Congress (NPC) of the People's Republic of China (PRC) announced that sustaining strong economic growth would remain a priority, but that a more balanced and equitable development agenda would be adopted, covering (i) rural/urban issues, such as how to increase rural incomes, reduce rural taxes, reform the grain production and procurement system, and protect land-use rights; (ii) how to balance human development versus preservation of nature and the environment, with the main topic being environmentally sustainable development; (iii) economic growth while maintaining social development (more emphasis on health, education, social security reform and protecting rural migrants); (iv) regional imbalances (stimulating development in the west and northeast); and (v) domestic interests versus international ones (expand trade and investment, implement World Trade Organization commitments). This pro-poor development agenda merits the Asian Development Bank's (ADB) support. The PRC constitution was amended to protect lawful private property rights, to pay compensation for expropriated land and private property according to the law, to establish a sound social security system, and to respect and preserve human rights.

B. Economic Assessment and Outlook

2. The economy grew by 9.1% in 2003, the highest annual economic growth rate since 1997. In the first half of 2004, gross domestic product (GDP) grew by a faster-than-expected 9.7% and fixed asset investment increased by 28.6%. The government, concerned about economic overheating, used monetary policy to control excessive investment. The measures it took included limiting real estate loans, raising the reserve requirement ratio, and increasing the rediscount rate. Administrative measures were also used to control overheated sectors such as real estate, steel, aluminum, and cement. Some investment projects were deferred or cancelled, particularly those that did not meet environmental emission standards or for which inadequate compensation was paid for land acquisition. By the middle of 2004, there were signs that the economy was cooling. Industrial value added rose by 16.2% in June 2004, 1.3 percentage points lower than in May 2004. However, inflation was still a concern, coming in at 5.3% in July 2004.

3. The incomplete economic reforms weaken the impact of monetary policy instruments.¹ While parts of the economy are overheated, the growth of other sectors such as agriculture, services, and small- and medium-sized enterprises (SMEs) are lagging. These sectors will create jobs necessary to win the war on poverty. The government can avoid an economic hard landing if a judicious combination of monetary, fiscal, and administrative measures is used to channel capital from overheated sectors to those that require capital, as well as from the eastern coastal provinces to the central, western, and northeastern provinces. Although the economy is growing rapidly, there are several concerns: (i) not enough jobs are being created to lift people out of poverty and absorb surplus rural labor; (ii) rapid economic growth has a high environmental cost²; (iii) the growth is resource intensive³; and (iv) more fair competition could improve economic efficiency⁴, particularly for the factors of production⁵.

4. ADB's economic assessment is that the PRC will continue macroeconomic tightening policies and achieve a soft economic landing. The economy is expected to continue growing rapidly at 8.8% in 2004 and 7.8% in 2005. There are some uncertainties in the external economic environment include significantly higher oil⁶ and natural resource prices and expected higher interest rates.

C. Implications for Country Strategy and Program

5. The strategic objectives and sectoral operations in the PRC Country Strategy and Program (CSP) for 2004-2006⁷ remain relevant. However, Government policies remain as constraints for ADB to provide loans in areas that are at the core of ADB's development agenda and directly related to the achievement of the Millennium Development Goals (MDGs)⁸. ADB's future operations must anticipate changing priorities in the PRC. Policy dialogue with the government is underway to ensure that ADB operations remain relevant and to identify possible new lending opportunities⁹. ADB is supporting the preparation of the 11th Five-Year Plan (FYP 2006-2010) so that it is (i) more reflective of broad public consultation, (ii) linked more realistically to budgetary and human resource forecasts, (iii) better coordinated with the priorities of sector ministries and the plans of regions, and (iv) incorporates poverty reduction in a more integrated fashion. Other ongoing assistance will support the preparation of the FYP in pro-poor areas in which ADB has not previously lent.¹⁰

6. The government is also concerned about the transaction costs and lengthy processing time associated with borrowing from ADB. A joint ADB-PRC task force was established in April 2004 to identify ways to expedite project preparation without comprising quality or the integrity of the process. The Strategy and Policy Department’s study on strengthening partnerships with middle-income countries and the Regional and Sustainable Development Department’s initiative on infrastructure and utility finance should help strengthen ADB’s role as an effective development partner. The recommendations from these initiatives should give ADB an improved set of tools to meet the PRC’s changing needs.

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