Countries and Regions

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Country Strategy and Program Update 2006-2008: People's Republic of China

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. In March 2005, the National People’s Congress of the People’s Republic of China (PRC) stated that the country’s medium-term development goal is to achieve sustainable growth that is balanced and equitable to the society. The 2005 targets are:

1. to manage gross domestic product (GDP) growth to around 8%
2. to create 9 million new jobs and keep the registered urban unemployment rate below 4.6%
3. to keep annual inflation below 4%
4. to maintain a sound balance of payments

To achieve these targets, the Government will continue to implement macroeconomic measures to manage growth, stimulate reforms to further open up the economy, and strengthen social development to build a harmonious society. A tighter fiscal policy will include, among others, reducing the budget deficit. Treasury bonds will be used to support rural and agricultural development, social development, and ecological and environmental protection, which are key areas in the Government’s development agenda. Various measures are proposed, including abolishing agricultural taxes, extending social protection to migrant workers, and reducing the cost burden of compulsory education for children in poor regions.

B. Economic Assessment and Outlook

2. Despite the Government’s macroeconomic tightening measures to prevent overheating of the economy in 2004, GDP growth still increased from 9.3% in 2003 to 9.5% in 2004 to reach $1.65 trillion. The manufacturing sector experienced a slower growth than in 2003, while the agriculture and service sectors expanded much more quickly than in previous years. Most noticeable was the increase in farmers’ income, which was the highest since 1997, as a result of rising grain prices and the Government’s pro-rural development policies. The Government’s support to the agriculture sector has had a positive impact on reducing both rural poverty and the income gap between urban and rural residents. Foreign trade maintained robust growth in 2004, with total trade volume exceeding $1 trillion, the third highest in the world. Facing pressures from major trade partners and market speculation on renminbi (Chinese yuan) revaluation, the Government has indicated its commitment to gradually introduce a more flexible exchange rate.¹

3. The assessment of the Asian Development Bank (ADB) is that the PRC will probably achieve a soft economic landing during 2005–2006. The Government’s balanced development strategy and continued macroeconomic controls are expected to slow GDP growth to an estimated 9.2% in 2005 and 8.8% in 2006. Hampered by bottlenecks in energy and transportation, tightened controls on land use, and reduced levels of investment, growth in the manufacturing sector will gradually slow down. The Government’s support to the agriculture and service sectors will benefit job creation and poverty reduction. Inflation is projected to drop from 3.9% in 2004 to 3.6% in 2005 and to 3.0% by 2007. Notwithstanding the Government’s efforts to sustain economic growth at a manageable level and to ensure balanced urban and rural development, several challenges lie ahead:

1. maintaining the desired rural income growth
2. creating enough jobs to absorb the surplus rural labor and workers from defunct state-owned enterprises
3. encouraging the development of small- and medium-sized enterprises (SMEs)
4. speeding up banking reforms
5. enhancing energy conservation
6. improving environmental protection

C. Implications for Country Strategy and Program

4. While political and economic developments since finalization of the PRC country strategy and program (CSP, 2004–2006) indicate that ADB’s strategic objectives and operations in the PRC remain valid, the country’s rapid economic development and its growing importance as a driving force of the global and regional economies will require ADB to coordinate closely with the Government to ensure that ADB will continue to be relevant and to add value to the country’s future development.² ADB’s operations in the PRC must balance the objectives of

1. deepening the impact on poverty reduction which is at the core of ADB’s development agenda and directly related to the achievement of the Millennium Development Goals (MDGs)
2. effectively responding to the Government’s request for ADB support for the country’s development objective of maintaining steady and rapid growth while building a harmonious society through enhancing cooperation in infrastructure development, environmental protection, agriculture and natural resource management, social sector development, private sector development, and regional cooperation³

The Government’s current focus on social sector development and financial sector reforms and the recent decentralization of its investment system⁴ provides opportunities for ADB to strengthen its partnership with the PRC and to diversify its operations to respond to the country’s development challenges (para. 3).

5. Currently, Government policies to use budget resources and concessionary loans for the nonrevenue-generating social and poverty reduction sectors limit expanding ADB’s lending operations in these sectors.⁵ ADB’s Strategy and Policy Department’s Study on middle-income/ordinary capital resources countries partnership framework and the Regional and Sustainable Development Department’s innovation and efficiency initiatives have identified a range of innovative measures, including flexible lending methods, that would help strengthen ADB’s role as an effective development partner in the PRC. ADB is working with the Government to explore new areas of operation for ADB, and providing support to the Government on strengthening the national development planning process and preparation of the 11th Five-Year Plan (FYP, 2006-2010).⁶ This will ensure ADB’s future program is designed in line with the Government’s development priorities and ADB’s poverty reduction objective and reform agenda.

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