Countries and Regions

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p. 4 of 7 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program A. Progress in Poverty Reduction B. Progress in the Country Strategy and Program Focus Areas C. Implications for Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2007-2008: People's Republic of China : II. Implementation of the Country Strategy and Program

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B. Progress in the Country Strategy and Program Focus Areas

10. The four pillars of ADB’s assistance and operations, as stated in the CSP (2004–2006), are (i) promoting equitable and inclusive growth, (ii) making markets work better, (iii) improving the environment, and (iv) promoting regional cooperation. Although ADB’s operations have contributed to the Government’s long-term development goal to establish a balanced and harmonious society, ADB’s financial assistance is modest considering the PRC’s size, its needs, its own investment program, and private sector investments. Stronger support in priority sectors and wider dissemination of innovation, good practice, and demonstration effects of projects and knowledge products are essential to leverage and maximize the development impact of ADB’s financial assistance. Preparation of PRC operations has drawn on lessons learned from ongoing and completed projects, policy-oriented technical assistance and other knowledge products, and regional cooperation initiatives. Various stakeholders—including the central and selected provincial governments, the private sector, NGOs, and other funding agencies—have been consulted in the preparation of the CSPU. Developments on specific strategic and thematic aspects of the CSP (2004–2006) and the CSPU (2005–2007)⁸ are summarized below.

1. Promoting Equitable and Inclusive Growth

11. Promoting pro-poor equitable and inclusive growth has been ADB’s primary goal in the PRC. This is reflected in the enhanced focus of the 2007–2008 program on rebalancing development between rural and urban areas, and among regions. Agriculture, natural resources, and social infrastructure projects have increased in lending size in the program. While loans for infrastructure projects are still ADB’s main means to reduce poverty, there is more emphasis on infrastructure projects in rural areas and less developed central and western regions. To further explore financial and other aspects of rural road and other infrastructure projects, advisory TAs are programmed. Other new TAs with direct and indirect impacts on pro-poor growth will cover rural health care strategy, support for rural migrant workers, biomass renewable energy, flood management, and rural financial reform.

12. To support social development under the current government’s policy on utilization of loans from multilateral financial institutions, ADB will explore projects in technical education and vocational training. ADB will continue to work with the Government to ensure that ADB’s future operations are in line with the 11th FYP.

2. Making Markets Work Better

13. The PRC has been steadily transforming from a central planned to a market economy, and markets have become the basis for economic development. At the core of markets is the governance of private and public institutions, which is integrated in all ADB operations in the country. This is done through various TAs in strengthening public administration, rule of law, the financial sector, and the private sector. In the 2007–2008 program, tariff reform and converting public utilities to commercial entities will remain important objectives. Knowledge-based assistance will consist of promoting the rule of law, including support for drafting the antimonopoly and anti-money laundering laws, improving public debt management of local governments, supporting financial sector reform, and strengthening development and finance of small- and medium-sized enterprises (SMEs).

3. Improving the Environment

14. Land degradation and air and water pollution have caused major losses to the economy, and depleted natural resources needed by rural residents. Growth has outpaced environmental sustainability in many areas, and the environment is a constraint for sustained economic development. The 11th FYP emphasized seven aspects of environmental protection, which calls for ADB’s continued support for protecting and improving the environment.

15. The 2007–2008 program will cover (i) land and water resource management (e.g., reversing land degradation, improving water resource management and flood management); and (ii) urban environmental improvement (e.g., increasing wastewater treatment rate in Guiyang, Hefei and Nanjing). In addition, ADB is playing a growing role in promoting and demonstrating new opportunities for long-term solutions to address energy and environmental issues. The Energy Conservation and Resource Management Project listed in the pipeline will finance an “efficiency power plant” in Guangdong Province. TA support (e.g., rural water resource management, interprovincial acid rain control, and strengthening provincial environment legislation) will ensure that ADB’s knowledge products help improve environmental policies and regulations. The PRC’s partnership with the Global Environment Facility (GEF) on land degradation in dryland ecosystems was formulated with ADB’s help, and has let ADB and other development partners to work with the Government to combat land degradation. This will be accomplished through GEF Operational Program (OP) ¹² by introducing integrated ecosystem management and removing institutional barriers.

4. Promoting Regional Cooperation

16. The PRC has played an active role in integrating the global and regional markets, and promoting regional cooperation has helped the country in many ways. In March 2005, the PRC committed $20 million to set up the PRC Fund for Poverty Reduction and Regional Cooperation, the first developing country to set up such a fund with an international development agency. So far, the Fund has supported 4 TAs for $1.5 million, with 7 more TAs under consideration in 2006. The PRC has participated in ADB’s initiatives in (i) the Greater Mekong Subregion (GMS) with focus on Yunnan province and Guangxi Zhuang Autonomous Region; (ii) the Central Asia Regional Economic Cooperation (CAREC) Program with focus on Xinjiang Autonomous Region; (iii) PRC–Mongolia Subregion with focus on the Inner Mongolia Autonomous Region; and (iv) Association of Southeast Asian Nations (ASEAN) + 3 (Japan, PRC, and Republic of Korea). Improving cross-border trade, transport, and environmental protection will benefit the livelihood of the poor living in the border areas.

17. PRC has urged ADB to strengthen its efforts in regional cooperation. ADB’s lending in Yunnan and Guangxi have comprised seven projects totaling $1.182 billion, including a railway project that will enhance connectivity with neighboring GMS countries. These projects form important sections of the North–South Economic Corridors in the GMS; three have been completed and four are ongoing. Xinjiang Road Development Project (CAREC) is programmed for 2007 and Western Guangxi Road Development Project is scheduled for 2008. In addition, ADB has provided several TAs to the PRC, some of which were performed through regional TAs on transport and tourism. In Central Asia, ADB approved 13 loans totaling $357 million for ⁹ CAREC-related projects, and leveraged cofinancing for these projects totaling $162 million as of 2005. In addition, ADB approved 37 TA grants totaling $24 million. Besides GMS, the CAREC Program has proved to be a powerful alliance in promoting trade and customs infrastructure, and in physical connectivity in transport and energy.

5. Private Sector Development and Operations

18. The private sector in the PRC has recently contributed more than 40% of GDP, 60% to economic growth, 75% of new employment, and in many areas more than half of the tax revenue. Constraints to private sector development lie in unequal competition for operation, and weak governance and capacity of the sector. In the operational environment, the private sector faces insufficient protection of private property, limited market entry in some areas, difficulty in accessing finance, high and unfair tax treatment, inadequate social services, and weak supervision of markets and intermediaries. Most private enterprises suffer from weak corporate governance and human capacity. To address these impediments, the Government issued Opinions to Promoting and Guiding Private Sector Development in early 2005,9 and ADB’s work has supported implementing measures. ADB’s study ¹⁰ was adopted by the China Political Consultative Committee and submitted to the National People’s Congress in March 2006 as its No. 1 proposal. ADB also provided TAs to formulate the supervisory framework for SME credit guarantee companies, and to improve corporate governance of companies where ADB owns shares.

19. In addition to policy advice, ADB also provides project-based financing support. ADB’s private sector lending in the PRC has focused on the infrastructure and energy sectors, the financial sector, and environmental improvements. In the infrastructure and energy sectors, ADB prioritizes pioneering projects with innovative contractual and financial structuring to encourage private sector participation, enhance management expertise, and improve corporate governance. ADB promotes commercialization, privatization, and private–public partnerships by assisting technology and management transfer to local entities currently owned by the public sector through acquisition, rehabilitation, or expansion projects. While most infrastructure investments will probably be in the coastal provinces, ADB will try to find projects in the central and western regions. In the financial sector, ADB helps strengthen banks and other financial institutions to mobilize resources and manage risk. ADB also supports SMEs through equity investments in regional investment funds through capital provision in the form of debt and equity.¹¹ Equity infusions in selected financial institutions—such as commercial banks, security firms, and credit guarantee companies—will promote financial sector reform and good corporate governance. Securitization, nonperforming loan resolution, municipal finance, and trade finance are new areas that will be explored. For environmental improvements, ADB supports Clean Development Mechanism (CDM) related projects, sponsored mainly by private sector developers, under the Kyoto Protocol as well as existing carbon credit markets.

20. To help develop domestic capital markets, ADB launched CNY1 billion RMB-denominated bonds (Panda bonds) in October 2005, signifying the Government’s effort to adopt best international standards—particularly in documentation, disclosure, and deal management. The use of Panda bonds proceeds for private sector projects will expand the financing channel of private sector enterprises with limited access to finance. Moreover, ADB has been exploring projects to promote private–public sector partnership, which can take the form of listing ADBfinanced projects and subcontracting operations and maintenance services to the private sector.

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