China - Second Rural Credit Project

Docuentof The World Bank FOR OFMICIAL USE ONLY C A;, /14'etp_CkQ RePat No. P-4193-A REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION ON A PROPOSED IDA CREDIT OF SDR 84.0 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SECOND RURAL CREDIT PROJECT November 25, 1985 I ThI dmSta h a inSi_ dIbtSe. m may be _ed by edopms sIly Is te erfama.c of thIr Stint dS Iu.t ess insfl w urhxe be d_acseu wideo Wi But l  CURRENCY EQUIVALENTS Currency Unit = Renminbi - Yuan (Y) Calendar 1984 November 1985 US$1.00 = Y 2.32 Y 3.14 Y 1.00 = $0.43 $0.32 (Project cost estimates are based on the exchange rate of Y 2.8 per US$1.00 which prevailed at the time of appraisal.) FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft)- 1 kilometer (km) 0.62 miles 1 hectare (ha) 2.47 acres 1 ton = 1,000 kg = 2,205 pounds 1 kilogram (kg) 2.2 pounds 1 hectare (ha) = 15 mu ABBREVIATIONS AND ACRONYMS ABC - Agricultural Bank of China BOC - Bank of China RCCs - Rural Credit Cooperatives PBC - People's Bank of China MAAF - Ministry of Agriculture, Animal Husbandry and Fisheries PKC - Project Management Committee PO - Project Office PU - Project Unit IFAD - International Fund for Agricultural Development  FOR OFFICIAL USE ONLY CHINA RURAL CREDIT II PROJECT Credit and Project Summary Borrower: People's Republic of China - Beneficiary: Agricultural Bank of China (ABC) Credit Amount: SDR 84 million (US$90 mlflion equivalent) Credit Terms: Standard Relending Terms: From Government to ABC: 20 years including five years of grace, with interest at 3Z p.a. and commitment fees of 0.5% p.a. Repayment of principal by ABC would be the amount of Renminbi, and the SDR equivalent of the foreign currency used. From ABC to subborrowers: Interest at prevailing rates, currently ranging from 5.76% to 10.08% p.a., with maturities and grace periods depending on subpro- ject cash flows. Where ABC extends subloans using foreign currency, ABC would pass on the foreign exchange risk to subborrowers. Project Description: The project would expand the Bank Group's support of ABC's medium and long-term lending for the diversifica- tion and modernization of agricultural production and processing which was initiated by the ongoing first Rural Credit Project (1462-CHA). Project subloans would be provided by ABC to individual farmers and households, collective units, and enterprises owned by local government entities and collectives in the two provinces of Fujian and Hunan to finance investments for the development of aquaculture, orchards, agro- processing and livestock enterprises. A technical assistance component is included in the project for effective project implementation and to strengthen the operations of ABC. At full development, the value of the incremental output from the project would be about US$140 million p.a. The project would benefit directly some 16,000 families from increased production and incomes, and generate additional employment equivalent to 61,000 full time jobs. This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contenst may not otherwise be disclosed without World Bank authorization.  Estimated Costs: Local Foreign Total (US$ million) Aquaculture 89.1 7.7 96.8 Orchards 79.9 8.8 88.7 Agro-processing 27.9 18.7 46.6 Livestock 15.9 4.1 20.0 Technical assistance 1.5 3.3 4.8 Total Project Cost 214.3 42.6 256.9 /a Financial Plan: Local Foreign Total (USS million) IDA 47.4 42.6 90.0 ABC 90.0 - 90.0 Subborrowers 76.9 - 76.9 Total 214.3 42.6 256.9 Estimated Disbursement: IDA FY 1987 1988 1989 1990 1991 Annual 5.4 18.0 25.2 26.1 15.3 Cumulative 5.4 23.4 48.6 74.7 90.0 Rate of Return: 28Z /a Taxes and duties of about $7 million are included in the cost estimates.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF CHINA FOR A SECOND RURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed IDA credit to the People's Republic of China to help finance a second rural credit project. The credit, for SDR 84.0 million ($90 million equivalent), would be on standard IDA terms. The proceeds of the credit would be onlent to the Agricultural Bank of China (ABC) with a 20-year term, including 5 years of grace, at 3% p.a. interest and commitment fees of 0.5% p.a. Where ABC extends subloans using foreign currency, ABC would pass on the foreign risk to subborrowers. PART I - THE ECONOMY 2. A country economic report entitled, "China: Long-Term Issues and Options" (No. 5206-CHA) was distributed to the Executive Directors on May 22, 1985. Basic data on the economy are given in Annex I. Background 3. Since 1978, China has initiated economic reforms in both rural and urban areas and in the external sector. Reforms have been greatest in rural areas. Following some experiments with the abolition of collective farming in impoverished areas, the Government implemented a comprehensive restructuring of rural institutions based on various forms of the "production responsibility system". By 1983 the farm household had become the fundamental unit of management and production in agriculture, within a framework of collective or state ownership of land and major fixed assets. Reforms have not yet proceed- ed as far in the urban economy, but there have been significant changes in enterprise management and finance. The scope for collective and individual economic activities has been enlarged and state enterprises have been allowed greater freedom in production, pricing and marketing above their mandatory plan targets. State enterprises have also been alLowed to retain some profits and investment projects have increasingly been financed on a loan rather than a grant basis. 4. In international trade and investment, China has promoted opening up to the rest of the world in recent years. Between 1978 and 1984, the share of exports to CDP nearly doubled to about 10Z, a ratio similar to other large economies such as the U.S. and Brazil. Foreign investment has been encour- aged, first through establishment of four Special Economic Zones and signing of joint venture contracts for off-shore oil exploration, and more recently through opening of several coastal cities to foreign investment.  -2- Growth and Stabilization 5. Reforms have helped stimulate rapid development of the whole economy. Real GDP growth averaged 5% p.a. between 1978 and 1981 and 10% p.a. between 1981 and 1984. During these six years, per capita incomes in real terms more than doubled in rural areas and increased by more than 50Z in urban areas. Agriculture has continued its remarkably strong performance, with gross agricultural output value (excluding rural industry and commerce) rising at nearly 11 p.a. between 1981 and 1984 and grain output at 8% p.a. (reaching over 400 million tons in 1984). Cash crops and animal husbandry, stimulated by rising demand and attractive prices, have also grown rapidly. Gross indus- trial output value grew at over 10% p.a. over the same period, with heavy industry growing somewhat faster than light industry (12% p.a. vs. 9% p.a.). If rural industrial output is included, total industrial output value grew at close to 12% p.a. in real terms between 1981 and 1984. The energy constraint on industrial growth was eased by rising coal output (8% p.a. between 1981 and 1984), renewed increases in crude oil production (4% p.a. between 1981 and 1984) and improvements in the efficiency of energy utilization (primary commercial energy consumption grew only 60% as fast as GDP between 1981 and 1984). Manufactured exports growth at 8% p.a. between 1981 and 1984 was slower than during the 1978-81 period but it started from a much higher base and in the face of worsening world market conditions. 6. The Government continues to face difficulties in combining system reform and rapid overall growth with maintenance of economic stability. During 1979 and 1980, China experienced large budget and current account deficits combined with excessive investment and inflationary pressures. In response, a strict stabilization program was introduced in 1981 relying mainly on administrative controls on investment spending. The program slowed growth but also helped lower the budget deficit from about 5% of GDP in 1979 to less than 1X in 1981, reduce inflation to around 2Z p.a., and change China's external position to one of current account surpluses averaging nearly $4 bil- lion during 1982-84. As a result, foreign debt and debt service ratios remained at low levels ($6.4 billion and 5.5Z respectively in 1983) and China's foreign currency reserves (excluding gold) rose to $17 billion (over 7 months' imports) by mid-1984. 7. This comfortable balance of payments position, achieved at the cost of drastic reductions in investment spending and some recentralization of investment decisionmaking, disappeared rapidly during the course of 1984 and early 1985. Partly as a result of decentralization of decisionmaking and the lack of effective indirect levers, there was a rapid acceleration of invest- ment and consumption during 1984 and the first half of 1985 causing the economy to overheat. Real GDP grew by 14% during 1984, while average wages in state-owned enterprises rose by 20% and domestic credit grew by 36%. The retail price index rose by only 3% in 1984, but inflation is expected to be higher in 1985. Imports of capital goods increased from $4 billion in 1983 to over $7 billion in 1984, with most of the increase occurring in the second half of the year. There was also a rapid expansion in consumer goods imports. These trends continued during early 1985. As a result, foreign exchange reserves (excluding gold) had fallen to about $10 billion by July 1985 (equivalent to 3.1 months of exports), and the current account deficit for the year is likely to be in the range of $10 billion. The Govern- ment has responded quickly by launching a strict stabilization program that  includes further increases in interest rates as well as a series of adminis- trative directives governing bank credit and project approval. As a result, aggregate credit and demand as well as new import orders have begun to slow down, though total imports will continue to rise as past orders are filled. Recent Reforms 8. The Central Committee of the Chinese Communist Party issued a major document on "reform of the economic structure" in October 1984. Recent reform developments have been fully in accordance with the directions indicated in the October decision: (a) state enterprises should be made fully independent units which pursue profits and are responsible for losses; (b) the scope of mandatory planning should be reduced and replaced by indicative planning while the focus of planning should shift from annual to medium- and long-term guidance planning; (c) a more rational price system should be introduced by reducing the role of state-controlled prices and increasing the role of "floating" and free market prices; and (d) the tax system should be improved, finance and banking should be reformed and a larger role should be given to indirect macroeconomic regulation through instruments such as tax, credit and pricing policy. 9. Rural reforms have continued to progress more rapidly than reforms elsewhere in the economy. There has been a remarkable spread of nonagri- culturaL activities like processing, transport, and commerce. "Specialized households" (which concentrate on cash crops, animal husbandry, or nonagri- cultural activities) and pooling of capital by small groups of households in various types of ventures are becoming increasingly common forms of economic organization in China's rural areas. Wholesale markets for some agricultural products have emerged. To encourage investment in land improvement and development, farming contracts between collective and peasant households for the use of land (which typically had been fixed for no more than 3-5 years) can now be extended to as long as 15-20 years. In early 1985, the system of agricultural procurement was changed. Previously the Government purchased quota output of grain and other crops at relatively low prices and stood ready to purchase all above-quota output at a higher price. Under the new system, procurement up to a certain amount (below former quota procurement) is based on contracts concluded voluntarily between peasants and procurement agencies. Prices for these purchases are based on the relatively high average price of past years. Output above the contracted amount must be sold by peasants directly on the free market, but the Government will intervene to purchase grain if the price falls to the original low quota procurement price. Thus a considerably larger portion of basic crop production will be produced for and traded on markets with flexible prices. 10. The momentum of urban reforms has revived, with significant progress on several fronts. In enterprise management, the focus has been on broadening and delineating the decisionmaking authority of urban enterprises. Profit retention now extends to virtually all state-owned industrial enterprises and to nonindustrial sectors Like transport, commerce, construction, and other services. Urban collectives and individual enterprises, as well as a variety of joint ventures between them and state enterprises, have grown rapidly (the number employed in urban individual enterprises rose from 150,000 in 1978 to 2.31 million in 1983).  11. In financial reforms, the most important new development has been the implementation of a profit tax system to replace profit remittances by state enterprises to the government budget. Though most enterprises have switched to this system, the benefits have been limited because of the application of a different effective tax rate for each enterprise, to offset the impact of distorted relative prices and other factors. Similar problems have resulted in the abandonment of an attempt to impose a fee or charge on the fixed capi-tal provided to state enterprises by the Government, and they have hindered the shift from grant to loan financing of new fixed investment. Financial discipline at the enterprise level =emains weak, in spite of efforts to strengthen accounting and auditing systems and more strictly enforce existing financial regulations. 12. Some progress has been made with price reform. The majority of agriculture commodity prices were decontrolled even before the recent change in pricing and procurement of grain. Prices of many minor consumer goods are also set by negotiations between producers and commercial units. "Floating prices" (up to 20Z above or below official prices) are now allowed for many industrial producer goods (either for all output or for output above the mandatory plan target). Price adjustments for key energy products and raw materials (which in many cases are severely underpriced) and for subsidized basic consumer goods like grain and edible oil have proven more difficult to implement, hindered by the potential impact of price changes on urban living standards and on the finances of energy-using enterprises. Nevertheless, some price rises have occurred (e.g., for coal and petroleum), and moreover the share of free market transactions, at largely uncontrolled prices, has increased in recent years. Gradually over time, and only partly as a result of conscious policy, a two-tier system is emerging; a large but shrinking share of the total supply of most important goods is subject to mandatory plan allocation and administratively set prices, while at the margin a substantial and growing share is allocated by the market mechanism, largely at flexible prices. This pattern may permit China to "grow out of the plan" in a rela- tively smooth transition, though there are obvious threats to this strategy arising from the strong incentive for arbitrage between planned and unplanned realms. 13. The Government recognizes the need to develop new tools of indirect macroeconomic management and has taken some steps to do so. The People's Bank of China was established as a separate central bank at the beginning of 1984, with its commercial banking functions taken on by the newly created Industrial and Commercial Bank of China. In 1985, new methods of credit planning and control were introduced and lower-level and specialized banks were given significant redeposit requirements. Interest rates (including deposit rates) were also raised in 1985, with some move toward unification of rates and development of a term structure resembling that in other countries. Technical transformation loans with a maturity less than one year and loans for working capital now carry the same 7.9% interest rate while loans of longer maturity carry higher rates, up to 10.8% for 10-year loans. However, interest rates on budgetary capital construction loans (formerly grants) remain low and there are a variety of directed credit schemes. On the external side greater use is now being made of the exchange rate. The old internal setclement rate was abolished at the beginning of 1985 and between January and end-October 1985 the rate against the U.S. dollar declined by over 13%. Despite these changes progress in developing new indirect levers of control has been slow. Recent  difficulties in securing macroeconomic balance highlight the need to strengthen institutions and macroeconomic management tools (including monetary, fiscal, and exchange rate instruments) for a decentralized and more market-oriented economy. Long-Term Issues and Prospects 14. In September 1985 a national party conference adopted a proposal which will be the basis for drafting a new Seventh Five Year Plan covering the period 1986-90. The proposal reaffirms a political commitment to economic reform and provides guidelines for future reform and development. One of the main objectives of the plan will be to create a favorable environment for reform which, in turn, will set the stage for future development. Target growth rates (7% p.a. for industry, 6% for agriculture, a Little over 7% for CNP) are below rates of growth achieved with the Sixth Five Year Plan, invest- ment is to be restrained in the next few years, and emphasis is to be placed upon quality rather than quantity of output. It is felt that slower growth will facilitate reform. 15. The plan proposal identifies three main areas of reform. First, enterprise management and incentives are to be improved by: giving enterprises greater autonomy in production, pricing, and employment decisions; lowering and equalizing taxes; increasing competition, increasing accountability for performance; and reforming personnel procedures. In addition, some small state enterprises will be turned over to collective or individual management through contract or lease. Second, the role of the market is to be extended and market networks strengthened. The scope of mandatory planning will be further reduced and markets for capital, technology, and labor will gradually be developed. Third, the emphasis of planning will shift from detailed administrative control to indirect macroeconomic control through economic policy. To this end a series of mutually reinforcing reforms in the plAnning, pricing, fiscal, banking, and labor and wage systems will be introduced during the plan period. 16. Implementation of the plan proposal will help foster an environment in which fundamental reforms can be gradually implemented in a coordinated way. But specific policy measures will take time to design and then to implement. Many of the reforms required will be difficult, particularly since reforms in different areas are closely interrelated, and thus appropriate sequencing and coordination are essential. For example, price reform in the absence of improvements in enterprise financial discipline will have limited benefits, yet the more profit-oriented behavior that would resuLt from tighter financial discipLine would exacerbate the adverse impact of distorted prices. Similarly, reform of the labor allocation system will be incomplete without eliminating many of the "social responsibilities" of enterprises (which now provide housing, medical care, and pensions for their workers and in many cases education and jobs for workers' children) and replacing them with Government-supported social service programs. The plan proposal suggests moving in this direction by commercializing housing. 17. China's objective of quadrupling the gross output value of industry and agriculture between 1980 and 2000 (which means GDP growth of well over 6% p.a.) will require significant improvements in efficiency as well as continued high saving and investment rates. The plan proposal recognizes there must be  major structural changes in the economy over the next two decades, including a reduction in the share of agriculture, a rise in the share of industry and services (which at present is unusually low), and substantial urbanization. There will also be a shift within agriculture, away from grain and basic crops and into cash crops and animal husbandry. The new plan will emphasize development of the service sector, mainly through removing restrictions on collective and individual activity. Urban development will focus on small and medium sized cities and towns while restrictions on growth of large urban areas will continue. 18. Certain physical/technical constraints will hinder the attempt to achieve China's targets for the year 2000 and its longer-term goal of catching up with developed countries. Despite rapid growth and substantial improve- ments in efficiency in recent years, agriculture may again become a constraint on overall growth, since land in China is severely limited. In energy, short- ages of fuel (primarily coal) and electricity may continue to constrain growth in transport and commercial infrastructure. Without large new investments and improved efficiency, economic growth will lag. In mobilizing resources in all these areas, China could profitably make use of foreign borrowing. Finally, the rising share of the elderly ia China's population (related to the slowdown in population growth) means that more resources will have to be devoted to maintaining their consumption levels, especially in the decades after 2000. 19. Poor motivation and inefficient utilization of labor in the state sector of the economy are major problems which can be solved only by coor- dinated reforms in labor allocation, the wage system, enterprise management, and social services, among other things. Reforms in the system of education and training to develop China's "human capital" potential also are crucial. Backward technology and inefficient use of existing technology must be addressed by a combination of reforms, appropriately directed investment, and transfer of advanced foreign technology. Irrational location of factories, suboptimal scale of many plants, and poor utilization of physical capital in general are related problems. 20. If reforms successfully transform the economic system, with a bene- ficial impact on growth and efficiency, a new set of issues will come to the fore, as the plan proposal recognizes. Management of a reformed economy with indirect fiscal, monetary, and other instruments is a major issue (see para. 13 above). In this context, maintaining an adequate saving rate (if the Government no longer accounts for the bulk of aggregate saving) and avoiding inflation (as well as deep cyclical downturns) will be major goals. Ass-ring an adequate minimum standard of living for the population and an appripriate level of social services will become a major challenge as enterprise and rural communal responsibilities in these areas are reduced. The problem of poor, backward rural areas in various parts of the country will continue to require attention. Redistributing financial resources to these areas through the fiscal system, easing restrictions on migration out of the poorest areas, and lowering nonagricultural wages to make investment in them more attractive are some options for alleviating poverty. 21. In order to mobilize the external resources needed for rapid, sustained growth the plan proposal calls for export growth of 40-50% over the next five years, greater efforts to attract foreign investment, and increased commercial borrowing. If exports grow at 8Z p.a. between 1984 and 1990 and  - 7 - imports grow at 9% p.a., China would have a relatively modest current account deficit of around $4-5 billion p.a. (except in 1985) during the remainder of this decade, equivalent to about 1Z of GNP. This implies that the present debt service ratio would increase only moderately by 1990. If China's exports grow more slowly imports will probably have to be cut back because a higher borrowing target, though feasible in terms of debt service indicators, would probably run into supply constraints as China would become one of the largest developing country borrowers. This highlights the need for continued export growth in order to meet other plan objectives and service greater commercial borrowing. The pLan proposal recognizes that greater use of exchange rate and pricing policies will be needed to encourage export growth. 22. Even with continued good export performance, China will have substantial external capital requirements during the remainder of the decade. Under the trade growth assumptions outlined above (exports growing at 82 p.a. and imports at 9Z p.a. during 1984-90), the current account deficit would be over $5 billion in 1990 and the gross borrowing requirement would be about $6.5 billion. If export growth fell to 6% p.a. during this period and imports continued to grow at 9% p.a., the current account deficit would reach $14 billion by 1990. Although the plan proposal calls for increased borrowing at commercial rates, access to concessionary capital will play an important role in sustaining China's growth. China also has a claim to concessionary lending because it is still one of the poorer countries of the world. But China's access to concessionary capital to finance development and moderniza- tion is limited; apart from Bank Group funds, a significant amount of conces- sionary capital is Likely to come only from Japan and a few other bilateral donors and will probably average no more than $500-600 million p.a. during the rest of the 1980s. PART II - BANK GROUP OPERATIONS 23. To achieve the target growth rates envisioned in proposals for the Seventh Five-Year Plan, to increase efficiency and innovation, and to maintain equity in distribution, China will need continuing and fundamental reforms. Large investment will be required and China will need to import more technol- ogy and increase trade. In the next few years, therefore, the Bank can best assist China by increasing its access to foreign technology and practices and supporting the development and implementation of reforms that will help to increase the efficiency of resource use and reduce poverty. 24. To address China's objective to update technology, the Bank will play the role of intermediary. In transportation, energy, industry, agriculture and the social sectors, the Bank will contribute to technology transfer by bringing the Bank's experience to bear on project design and by helping China to seek appropriate technical solutions through international competitive bidding, training, and foreign technical assistance. 25. Bank assistance will be closely linked with the Government's reform efforts. There are five major elements common to both rural and urban reform in China that will be the focus of the Bank's involvement. First, institu- tional change, involving both the separation of economic and administrative functions and further decentralization of decisionmaking, will extend to every  - 8 - sector in which the Bank is involved as well as the overall process of planning and management. Second, financial sector reform, primarily develop- ment of financial institutions that can serve as intermediaries between the suppliers and users of resources, has become a focus of reform and is an area where Bank assistance can play a useful role. Third, improving planning and project analysis will be critical to reform in sectors such as jgriculture and industry, where decisions are now being made by households and independent enterprises, as well as in infrastructure where direct government involvement will be required. The Bank will therefore continue its emphasis on introducing appraisal methods and will include sector investment and financial planning as well as analysis of intersectoral issues. Fourth, the Bank will be involved in the Government's major program of price reform and development of indirect levers such as control via money, credit and fiscal policies. And finally, the Government will make institutional and policy changes to further improve the quality of social programs. The Bank will thus support reforms in health, education and other social services and measures in particular, to address the problems of poor regions. Economic and Sector Work 26. Our economic and sector work in China aims to develop the Bank's understanding of the structure and direction of the Chinese economy and to introduce to the Government new perspectives on economic management. This work builds a foundation for lending and for the dialogue with Government on issues of reform and development options and policies in the various sectors. Past work has included two major economic reports, studies on sectoral investment analysis and planning, and collaborative research with Chinese institutions. We have also organized seminars on macroeconomic and sector issues. 27. Over the next two years, the Bank will carry out a large program of studies to follow up on issues identified in the most recent economic report and analyze policy options. In this program, we will examine alternatives for developing the financial system and foreign trade and investment. We will also analyze issues of intersectoral and interregional planning and develop- ment of resource-poor regions. One such study is already underway in Gansu province to review and formulate programs to increase interregional resource flows, improve the spatial efficiency of development and reduce poverty. Research on urban development and transport planning and finance at the provincial level will also be initiated, and we will undertake studies of regional industrial subsectors to form the basis for project preparation. Collaborative studies with Chinese research institutions will continue. An ongoing study of management and guidance of state-owned industrial enterprises will be followed by a study of collective enterprises, which are expected to become increasingly important industrial organizations in the reformed system. Lending Operations 28. Since China's change of representation in the Bank Group in May of 1980, 30 projects involving lending of $2949.9 million to China have been approved. Of the projects, ten have been in the agriculture sector, seven in energy, four in transport, three in industry, three in education and one each in health, water supply and technical cooperation. In FY85, IFC made its first investment in China of US$17.02 million in automobile manufacturing.  - 9 - Annex II contains a summary statement of these loans, credits and IFC invest- ment as of October 31, 1985. 29. In addition to the proposed project we expect to presenit projects to the Board this year for provincial higher education, power infrastructure, port and railway development, aquaculture, health, industry, and technical cooperation. For FY87 and beyond, we expect the China lending program to continue to grow from current levels. Infrastructure projects in energy and transport will remain priorities. Technical renovation of enterprises, particularly in industry, will be given greater attention and support as will the regional approach to project development, now being used to assess the needs of Gansu province. 30. In the energy sector, future Bank lending will be aimed at reducing energy consumption and expanding energy production. For example, in the coal subsector, we will assist in upgrading the facilities and operations of existing mines and in transferring improved technology for mines under construction or in operation. In power, we will assist China in technology transfer, staff training and institution building. Through a power tariff study, we will seek to introduce a tariff system based on marginal cost and the need for a nationwide power system development program. In the gas subsector, the rationale for project involvement will lie in the identifica- tion, packaging and transfer of specialized technologies as well as in the strengthening of investment planning and management capabilities. 31. Future transport projects will both upgrade technology and strengthen institutions. In roads, major changes in organization and financing will be required as a result of administrative decentralization and introduction of the production responsibility system in rural areas. In rail- ways, we will focus on technologies to improve domestic production of railway equipment and materials in addition to our work on line construction and electrification. We also intend to broaden our involvement in ports to include coastal shipping and inland water transport. For all transport subsectors, we will support efforts to improve financial analysis and investment planning. 32. Agriculture lending will focus on developing institutions to provide services to individual farmers and to monitor and stimulate change in the pace and pattern of agricultural development. The shift from grant to loan finance and the increased autonomy of the rural banking system will be major aspects of change that will be supported through rural credit projects. We will continue to assist with the training, research, extension, and other service activities of the ministries concerned with agriculture. In addition, we expect to finance programs for specialized agricultural development such as livestock and fisheries, and for irrigation and area development. 33. Bank lending in industry, as in agriculture, will focus on strength- ening of financial intermediaries which provide credit to state and collective enterprises. In addition, we expect that there will be large regional projects in fertilizer, cement and machine tools and other subsector projects concerned with upgrading technology and improving organization and management. 34. Bank lending in education will gradually be broadened beyond the present concentration on higher education. For example, we will finance  - 10 - vocational and technical education which is now being given great emphasis in China. In view of the Government's recent decision to universalize access to primary and lower secondary education, another major aim of education lending will be to assist with basic education, particularly in poor rural areas. In this context, support for teacher education will be given priority. 35. Project preparation in the urban sector is currently concentrated in Shanghai on efforts to improve services, especially in environmental upgrading and housing, and development of municipal institutions. Future Lending is expected to include support for development of medium-size and small urban areas in specific provinces. In addition, we expect to continue lending for rural water supply. Bank lending in health will provide access to new medical technologies for more efficient health care in both the lingering problems of communicable disease, primarily in poor rural areas, and the emerging problems of chronic disease. This will involve further support for medical training and planning and management of service delivery systems. Projects will also support the reform of systems for supplying and financing health services. 36. Cofinancing with multilateral and bilateral agencies has been arranged for projects in coal, power and rural water supply and will remain a feature of our assistance program. We will explore options for cofinancing with export credit agencies. Commercial bank cofinancing and the use of B-loans also appear viable, particularly as China increases the overall volume of its foreign borrowing. En technical assistance, we will continue to incorporate into projects components for training, overseas study, and access to foreign expertise. In addition, we will be the executing agency for a second UNDP umbrella project in China. EDI activities remain an important element of the Bank's program and in coming years will provide an extensive program of policy seminars for senior Chinese officials, and economic and financial management courses and sector-specific training for officials from core and line agencies. ImpLementation 37. Project implementation is generally proceeding well. Most project agencies, as well as the Ministry of Finance and the State Planning Conmmission, have established and staffed offices to handle Bank projects. Disbursement performance has also been satisfactory. Special accounts have been established for 22 of the 30 approved projects and have helped to speed disbursements. In October 1985, the Bank opened a resident office in Beijing to support further expansion of the lending program, accelerate project preparation, improve project implementation and further economic and sector -work. PART III - AGRICULTURAL SECTOR AND THE AGRICULTURAL BANK OF CHINA Agriculture 38. Agriculture in China, including crops, livestock, forestry and fisheries provides sustenance to over one billion people. It is the source of income for some 190 million farm families, and accounts for about 35Z of the country's GDP. Only about 100 million ha of China's land area of 960 million  - 1i - ha are arable. Farming systems are intensive, with large inputs of labor, chemical and organic fertilizer and water. Nearly half of the arable land is irrigated. Fcodgrains occupy about 80% of the cropland and account for about 65Z of total agricultural output. This intensive system of food production allows China to meet the basic food requirements of its population (about 22Z of the world's total) from less than 8% of the world's arable land. Agricul- tural production is carried out largely on household-managed farms within a framework of collective or state ownership of land and major fixed assets. Since 1979, the gross value of agricultural output has grown at an average annual rate of about 7Z, or more than twice the rate achieved over the pre- vious two decades. Output of foodgrains increased by about 3.4Z annually over the last decade, reaching a record of over 407 million tons in 1984 despite declines in cropped area and area sown with grains. Demand for agricultural products is expected to increase steadily over the next two decades in response to increasing per capita income and moderate population gro.7th. China's cultivated area will remain essentially unchanged over the lperiod- land Lost to roads, urbanization, and industrial development will be approx- imately offset by newly reclaimed land. As a result, the production gains required to feed a population growing by at least ten million per year and to supply the raw materials to meet rapid growth in industrial demand will have to come almost entirely from increased yields on existing cultivated areas. Agricultural Bank of China 39. The Agricultural Bank of China (ABC) is the dominant institution in the mobilization of rural savings and the financing of agriculture and rural development. ABC's general objective is to contribute to the effective execu- tion of Government economic policy throughout the rural areas of China. Its activities extend beyond agricultural lending to include financing rural com- mercial and industrial activities which support agriculture and rural develop- ment. In addition to its main tasks of mobilizing rural financial resources and extending credit and a wide range of banking services to the rural areas, ABC provides leadership to the large network of rural credit cooperatives and financial guidance to collectives (communes, production brigades and produc- tion teams) and other rural organizations. The communes and production bri- gades have recently been renamed townships (xiang) and villages (cun) respec- tively. 40. At the end of April 1985 the ABC had 28 branch offices in the provincial capitals, municipalities and autonomous regions, 304 central subbranches at the prefecture level, 174 business offices in major urban centers, 2,260 subbranches at county level, 25,350 offices at township (conmmune) level, 1,090 offices on state farms and 405 savings offices in urban areas. The ABC is therefore represented at all administrative levels with close to 30,000 offices, and has a total staff of some 328,000. ABC's work is further complemented by some 56,000 rural credit cooperatives (RCCs) with some 250,000 full or part-time staff organized at the township and lower levels. Although they are separate entities, the RCCs function as the smallest operating units of the ABC. Thus, the wide network of ABC's offices and the RCCs means that virtually all of China's 53,000 townships and 2,000 state farms have at least one ABC office or RCC in their area. This extensive national coverage is a major strength in ABC's total operations and reflects ABC's role as banker to the rural community as well as its responsibility as the financial agent of the central and local governments for the rural areas  - 12 - of China. Most ABC and RCC staff at the local level have had many years of experience in rural finance. Local office managers and department heads are usually middle school graduates with professional training at ABC's banking schools. Only a small proportion of ABC staff (less than 5Z) are university graduates. 41. ABC's total loans outstanding qty the end of 1984 amounted to Y 112.4 billion (about USS40.1 billion).._ The majority of the portfolio are short-term loans. Loans to rural commercial and industrial enterprises accounted for 63%, loans to collective units 21Z, loans to state-owned agri- cultural enterprises 6Z, loans to individuals 4%, loans to RCCs 3% and other loans 3Z. ABC places considerable emphasis on full and timely repayment of its loans, and estimates that bad debts currently are less than 2% of loans outstanding. Until recently, ABC also acted as an agent for the People's Bank in a number of fields of which the most important were loans to the commercial department of the Ministry of Food and Commerce for the purchase of agricul- tural commodities from producing units. The amounts onlent by ABC on a commission basis have been substantial (Y 48.0 billion at the end of 1984). As the former agency activities are expected to be increasingly funded by ABC with its own funds, the relative importance of its major sources and uses of funds, and items of revenue and expenditure would undergo significant changes in the future. Recent interest rate reforms would enable ABC to supplement its resources by greater deposit mobilization and to safeguard its profitabi- lity through improved interest spreads. Sources of financing ABC's funds mainly comprise deposits and capital contribution from the central govern- ment. Major deposits as of December 31, 1984 were those of the RCCs (Y 87.2 billion), rural commercial, industrial and state-owned enterprises (Y 16.3 billion), individuals (Y 9.7 billion), local governments (Y 3.5 billion) and other deposits (Y 3.4 billion). The deposits consist of demand deposits and fixed-term deposits with maturities ranging from six months to eight years. ABC reported a profit of Y 1,755 million in 1984. Revenues were derived mainly from interest earnings, agency fees and interest on interbranch deposits (Y 8,084 million). Administrative costs of about 21 of total resources employed are low by international standards, and reflect generally low salaries. 42. Recent economic reforms, including banking system reforms, have increased the potential role of interest rates in the Chinese economy. Deposit rates were raised in early 1983 and in April and August 1985, while lending rates were increased significantly at the beginning of 1982, 1984 and in April and August 1985. The present rates on loans range from 5.76X to 10.08% p.a. The average rates for loans of three to five years and for loans of more than five years are 8.28X and 9% respectively. These rates are positive in real terms. Interest rates on deposits range from 2.882 for demand deposits to 10.44% p.a. for an eight-year deposit. The average cot of ABC funds is about 5.8% including interbranch borrowings and the funds lent by the People's Bank of China. 43. The RCCs, while collectively owned, serve as the basic level units of the ABC. They play a major role in the provision of credit and 1/ This does not include loans by the RCCs.  - 13 - mobilization of savings at the township and lower level. Lending by the RCCs is generally focused on short-term loans to individual farmers, households and collectives whereas the Larger and longer-term loans are usually provided by the ABC. The ABC supervises th. management and operations of the RCCs, including carrying out periodic inspection of the accounts and training staff. 44. RCC sources of funds include deposits of individuals and collec- tives, operating profits, member subscriptions and loans from the ABC. Uses of funds include loans to individual households and to callectives, and deposits in ABC. In general, RCCs are net suppliers of funds to ABC. RCC lending rates are the same as ABCs for similar types of projects and similar borrowers. The RCC loan portfoLio more than doubled between 1979 and 1983, reflecting largely the sharp increases in lending to individuaLs and collectives. 45. In recent years ABC has been attempting to improve the quality of its project appraisal work. Emphasis continues to be placed on ensuring that projects conform to the state plan and overall government policy, that the necessary supplies and materials are available and chat there are markets for the project output. However, most of the project proposals are still not reviewed in much detail; there is little examination of issues of scale, tech- noLogy, location and timing of proposed projects; and formal financial or economic analysis using discounting techniques is usually lacking, although pay-back periods are occasionally calculated and used as supplementary crite- ria for investment decisions. The first project has introduced changes in appraisal procedures (including the project appraisal manual) to address the aforementioned issues. As in the case of the ongoing first Rural Credit Project (para. 58), subprojects under the proposed project will be subject to detailed technical, financial and economic analysis using criteria and procedures set down in the project appraisal manual. Based on the experience gained with appraisal of these subprojects ABC expects to use such techniques much more widely in its project appraisal work. 46. Sound project appraisal by ABC has become more important as the autonomy granted to ABC has increased. Large projects requiring funds from ABC and especially those in industry and commerce still require approval by local planning committees and relevant line agencies as well as by ABC. But in the case of smaller projects and almost all agricultural projects the planning committee decides only on the total amount of loans to be made (taking into account available materials and supplies and other sources of finance). ABC then approves the allocation of those resources among different types of projects and different areas and townships. Procedures for loan approval by the ABC have been established by ABC Beijing and are uniform throughout the country. 47. ABC is placing increased emphasis on project supervision and monitoring. It enters into a formal contractuaL arrangement with the borrower which stipulates the loan amount and disbursement schedule, specifies the type, quality, quantity and delivery times for the equipment, indicates the repayment schedule for the borrower and requires the timely repayment of the loan. The contract also provides for remedies in the event of default, such as suspension, acceleration and penalty interest. The State Council recently promulgated Loan Contract Regulations which stipulate and confirm these provisions. On completion of a project ABC compares the actual use of funds  - 14 - with the stated intent and measures production achievements against targets. Efforts are also made to assess the lending experience gained as a guide to future loan operations. 48. In most provinces ABC has an adequate number of accounting and statistical staff at all levels. Few of these are experienced in comprehen- sive financial analysis, but they prepare timely, consistent and detaiLed records. ABC requires the financial accounts to be balanced daily at each office. Summary details are reported by township-level offices every two weeks by telephone to the county office and township-leveL accountants come to the county once per month to reconciLe accounts. County offices report monthly to provincial offices which in turn send detailed accounts to head- quarters every six months. Statistics on loan operations, which vary from province to province but which always compare actual operations with loan targets in the credit plan, are forwarded to provincial levels on a similar schedule. These statistics are quite detailed with reference to types of investments financed, geographic location of subprojects, expected incremental production, etc. 49. The accounts of ABC headquarters are audited by the Ministry of Finance. Recent moves to restore auditing in China, especially the establish- ment in September 1983 of the State Audit Agency (SAA), directly accountable to the State Council, and emphasis on financial accountability are expected to lead in the future to a satisfactory external auditing of ABC's accounts and improvement of its internal auditing. The SAA has indicated that it has started auditing all projects financed by the Bank and other multilateral agencies, but that its capability of carrying this out can only be built up gradually and over an extended period because of its lack of experienced auditing staff. Bank Group Assistance to Agriculture 50. The objectives of Bank Group lending for Chinese agriculture are to: (a) assist China in expanding and diversifying agricultural production to keep pace with the rapidly growing demand for food and other farm produce resulting from population growth and increases in per capita incomes; (b) finance inputs which will help remove development constraints; (c) help improve economic efficiency through better planning and improved project analysis; and (d) raise rural earning power in the poorer regions of the country. These objectives are being pursued through both sector work and project lending. 51. The North China Plain Agriculture Project (Credit 1261-CHA), the first Bank Group operation in the agriculturaL sector, provides irrigation and drainage for 200,000 ha covering parts of nine counties in three provinces. Work on this project, the first large-scale attack on soil salinity and waterlogging in CLiina, is proceeding well. The Agricultural Education and Research Project (Credit 1297-CHA) supports the Government's program to strengthen higher education and research in the agricultural sector by providing technical assistance and equipment to selected agricultural colleges and research institutes. Implementation of the project is proceeding well. The Feilongjiang Land Reclamation Project (Loan/Credit 2261/1347-CHA) is developing 200,000 ha of new land through land reclamation and use of modern farming equipment in Northeast China. Project implementation is proceeding  - 15 - well. The Rubber Development Project (Credit 1417-CiA) in Cuangdong Province involves new planting and replanting of 40,000 ha of rubber with high yielding clones. Procurement of equipment is underway. The first Rural Credit Project (Credit 1462-CHA) finances investments in the development of orchards and other economic tree crops, agro-processing, livestock and aquaculture in Guangxi. The Second Agricultural Research Project (Credit 1516-CHA) will expand and improve 15 agricultural research centers and include a pilot pro- ject for 10 agro-technical extension centers. The Seeds Project (Credit 1577- CiA) will modernize facilities at 18 seed production, processing and distribu- tion centers in 12 provinces and two autonomous regions to increase the supply and improve the quality of certified seeds. The Forestry Development Project (Credit 1605-CHA) will establish about 82,000 ha of forest plantations and improve the management and exploitation of 122,000 ha of existing forests in Guangdong, Heilongjiang and Sichuan, and strengthen forest research facilities and extension services. The Pishihang-Chaohu Area Development Project (Loan/Credit 2579/1606-CHA) will improve irrigation and flood control drainage on about 710,000 ha in the Pishihang and Chaohu areas in Anhui Province. 52. Other projects at various stages of processing are an aquaculture project and a red soils development project. Future project possibilities include livestock, agro-industries, and land development in the Northwest. First Rural Credit Project (Credit 1462-CHA) 53. The project provides funds to the Agricultural Bank of China (ABC) for medium- and long-term loans to individual farmers and households, cWlec- tive units and state-owned enterprises in the Guangxi Autonomous Region.. for investments in orchards and other tree crops, aquaculture, livestock and agro- processing; and technical assistance to ABC. The major objectives of the pro- ject are to (a) support a three-year lending program of the ABC which would be part of a high priority government development effort to increase agricultural and rural production and incomes through the diversification and modernization of agricultural production and processing, and (b) assist ABC in developing and implementing procedures and methodologies for appraising agriculture and rural development projects. Other objectives are to: expand rural employment and make full use of the rural labor force; alleviate rural poverty; raise the value added of agricultural production; improve production efficiency; and increase the supply and quality of agricultural produce, including processed foods, to consumers. Total project costs were estimated at about $142 million of which IDA financed $50 million (35%), ABC $30 million (21Z), the Government $20 million (14%), and subborrowers $42 million (30%). 54. The project, which is scheduled to be completed by the end of June 1988, became effective on November 1, 1984. Implementation of the project has been proceeding well and project lending and disbursements are ahead of sche- dule. ABC, as of the end of April 1985, had already appraised 449 subloans for Y 221 million of which 210 subloans for Y 86 million (312 of total project 2/ At the time of its appraisal, the Bank also appraised on behalf of IFAD a similar type project w'iich supports ABC's medium- and long-term lending for agricultural diversification in Hubei Province. The proposed Rural Credit [I Project would in effect be the third such project for ABC.  - 16 - funds) were approved as of the end of 1984. The subloan appraisals were based on ABC's Project Appraisal Manual which was prepared with the assistance of IDA (para. 62). PART IV - THE PROJECT 55. The project was identified in August 1984 and appraised in April 1985. Negotiations were held in Washington in November 1985. The Government of China was represented by Ms. Sheng Jinxia, Deputy Division Chief, External Finance Department, Ministry of Finance and the Agricultural Bank of China by Mr. Lin Zihong, Division Chief, ABC. A Staff Appraisal Report entitled (No. 5810-CiA, dated November 25, 1985) is being distributed separately to the Executive Directors. Supplementary project data are provided in Annex III. A map showing project locations is attached. Project Rationale 56. As part of China's effort to diversify, modernize and enhance the efficiency of its agricultural sector, the Government is increasing the role and autonomy of the banking system and making greater use of credit instead of grants to finance development projects. ABC has a large staff and a wide network of offices which serve households, collectives and state enterprises throughout the rural areas of China. ABC's capacity to lend for projects aimed at agricultural diversification is constrained, however, by the limited availability of medium- and long-term funds and by its lack of experience with sound technical, financial and economic analysis of development projects. The major rationale for the Bank's expanded involvement with ABC is therefore to assist ABC both in expanding the availability of medium- and long-term funds for agricultural diversification and in developing and implementing improved project appraisal techniques. 57. Under the first Rural Credit Project (Credit 1462-CHA), considerable progress has been made in upgrading the technical and financial expertise of ABC in Guanrgxi. A project appraisal manual has been prepared with the assi- stance of the Bank and distributed to offices throughout Guangxi as well as other provinces and regions, and a series of training courses in the use of the manual have been held. The technical capabilities of ABC have also beer. PnhAnced by secondment to ABC of experts from various technical bureaus. The quality of project preparation and appraisal is improving. Under the Second Rural Credit Project, it is proposed to extend the experience gained in tbe appraisal and supervision of subprojects in the first project to two other~, provinces, Fujian and Hunan. These two provinces are relatively poor; their agro-climatic conditions are suitable for fish culture and for growing a wide range of crops. The ABC offices and government technical bureaus in both provinces are keenly interested and their respective provincial and local leaderships have expressed strong support for the project. More emphasis will be placed on training of ABC staff in appraisal of agricultural and agro- processing investments and on the dialogue with ABC headquarters on its overall financial situation and future role in a reformed financial system. This will complement the study on investment finance in China that the Bank will shortly be initiating.  - 17 - Project Description 58. The project would provide funds to subborrowers in Fujian and Hunan to finance a three-year program of investments for the development of aquacul- ture, orchards, agro-processing and livestock enterprises. Project funds would be channelled through ABC to subborrowers comprising individual farmers and households, collective units, and 'niterprises owned by local government entities and collectives. ABC expects that of the total project loan funds, some 80X would be utilized by farmers (as members of households and collec- tives) and the remaining 20Z by local government entities, including enter- prises jointly owned by these entities and the collectives. The project would also have a technical assistance component to ensure effective and efficient project implementation and to strengthen the operations of ABC. 59. Aguaculture. This component would finance investments to expand the production of freshwater fish, mainly carp and tilapia, and marine fisheries, such as shrimp, mullet, oysters, clams and other shellfish. It would comprise construction of new fish ponds and improvements to existing fish ponds, including supporting infrastructure and equipment such as dykes, drains, canals, sluice gates, pipes, hydraulic structures, roads, pumping stations, manure holding pits, fishing gear, aerators, boats, hatcheries, and floating platforms or rafts for culture of oysters and clams. 60. The improvements to existing fish ponds would include partitioning the ponds for more efficient operation, raising the dykes and excavating ditches, deepening and leveling pond bottoms and canals, and constructing additional sluice gates. The investments to be financed would aLso include production of green manure and the purchase of fry, organic manure, fertili- zers, lime, pesticides and feed required to produce the first harvest from the ponds. A total of some 12,300 ha of ponds would be developed of which about three-fourths would be fresh water ponds. The greater part of fresh water fish pond development would be in Hunan Province and would be centered on Dongting Lake and the surrounding area. The development of salt water (including brackish water) fish and shrimp ponds would be located along the coastal region of Fujian Province. These ponds would account for about one half of the pond development in the province. In addition to these ponds, about 2,500 ha of coastal water surface would be utilized for oyster and other h'iellfish culture. 61. Orchards. This component would provide for the establishment of new plantings and improvements to existing plantings amounting to some 14,000 ha of orchards of which about three-fourths would be orange (mainly mandarin orange). The other fruits would include litchi, longan, banana, plum, peach, persimmon, loquat, bayberry and pomegranate. Most of the new plantings would be on slope lands of up to 20' which are generally uncultivated. The main investment costs would be for land preparation (clearing, leveling and terrac- ing), access roads, establishment of cover crops, irrigation works and equipment, planting material, fertilizers, pesticides, spraying equipment, other small hand tools and labor. Production inputs, until the initial crop is produced, would also be financed. 62. Agro-processing. This component would include (a) the construction and equipping of plants for freezing and cold storage; processing fish and poultry feeds, fish, poultry, and fruits; fruit storage, including facilities  - 18 - for sorting, grading and waxing of fruits; and orange and other fruit juice extraction and concentration; and (b) procurement of trucks (some with refrig- eration) and other vehicles to support the operations of the above plants and the marketing of project output. These plants would help meet the rapidly growing demand for their output and would provide the project with the required production inputs, such as fish and poultry feeds, and improve the quality, increase the value added and facilitate the marketing of the project output, e.g. freezing and cold storage plants to reduce spoilage and preserve quality of fisheries output (shrimp, fish, etc.) and to facilitate their marketing. Improvements to existing similar type precessing plants would also be financed. Freezing and cold storage, fish feed processing, and fruit storage plants would account for about two-thirds of the total investment cost of this component. 63. Livestock. This component would finance the production of poultry (including ducks, geese and turkeys), goats, pigs, and beef and draft cattle. Major investment items would include procurement of improved breeding stock to upgrade local stock, construction of cattle and goat sheds, pig and poultry pens, incubators, feed storage, and veterinary facilities; establish- ment of improved pastures mainly on slopeland presently under wild grasses, and procurement of supporting equipment, such as feed choppers, watering facilities, hauling carts, etc. The cost of establishing improved pastures would be mainly for land preparation, fencing, seed, fertilizers, manure, lime and labor. The costs of chicks, kids, piglets, calves, feedgrains and labor required to raise the initial batch of livestock for sale would also be financed. Poultry and goats would account for about 85Z of the total invest- met cost under this component. 64. Technical Assistance. This component would entail the training of ABC staff and provision of supporting equipment, machinery and consultant services. Training would be provided in project preparation, appraisal and implementation methodologies based on ABC's project appraisal manuaL, auditing, statistics, finance, management and data information systems. About 1,500 staff are expected to receive such training during 1986-89 at an esti- mated cost of about US$100,000. Training courses would be conducted primarily at ABC Fujian's and Hunan's Banking Schools. To support the long-term insti- tutional development of ABC, training under the project would include staff from the non-project prefectures and counties in Fujian and Hunan. ABC pro- ject managers and senior operational staff will also participate in overseas study tours to observe rural credit project management in other countries with experience in development credit institutions and Bank Group financed pro- jects. About three study tours for each of the two provinces, at an estimated total cost of US$300,000 are envisaged. Consultant services would be financed to assist the project in resolving specific technical problems, especially in agro-processing, and in the introduction and implementation of improved tech- nologies. About 10 man-months of short-term consultants would be provided at a total cost of about US$100,000. The cost of the consultant services would be borne by the subborrowers. 65. Equipment procured under the technical assistance component would support the training and institution-building of ABC Fujian and Hunan. Training equipment would consist mainly of audio-visual items such as video recorders, video cameras, TV sets and tape recorders to facilitate the training programs at the ABC Banking Schools in Fujian and Hunan which are  - 19 - based on the National TV University's curriculum in banking and finance. Other training equipment would include overhead projectors and photocopiers. Office equipment would comprise microcomputers, room air-conditioning units for the microcomputers, photocopiers, telex and telephone-message machines, and calculators. Details of the training and technical assistance program were confirmed during negotiations. Assurances were obtained during negotiations that the training under the project would be carried out in accordance with a program agreed between ABC and IDA, and consultants would be employed in accordance with the Bank's Guidelines for the use of consultants. Cost Estimates 66. The project is estimated to cost about $257 million of which $43 million (17Z) would be the foreign exchange cost. Taxes and duties of about $7 million are included in the cost estimates. Financing Arrangements 67. Of the total project cost of $257 million, IDA would finance $90 million (35%), ABC $90 million (35Z), and subborrowers $77 million (30Z). The IDA funding would cover the foreign exchange cost of $43 million and another $47 million (22%) of the local currency component. Some local cost funding for the project is justified in view of the small foreign exchange component and the need for IDA to make a meaningful contribution to project costs. Procurement - 68. In both Fujian and Hunmn, individual households, collectives and state enterprises usually purchase fertilizers, pesticides, animal feeds, hand tools and other small euipment items from the Federation of Supply and Marketing Cooperatives- or local enterprises. Seeds are purchased from the County Seed Company or local seed farms and machinery and larger equipment items from the County Agricultural Machinery Company or other local agriculturaL machinery companies. Except for the local enterprises, these organizations are represented in each county and serve as intermediaries for retailing of items distributed through national or provincial wholesale systers. There is, however, a growing trend toward product specialization in the distribution system and direct marketing by producing enterprises. Consequently, specialized househoids and collective or state enterprises which procure inputs in some quantity can now, for example, purchase feed from local mills or a Feed Supply Company, breeder chicks from various poultry breeding farms, or cattle from individual cattle raisers or an Animal Products Company, fertilizer from local factories, etc. Civil works, including earthworks and construction of structures, would be undertaken mainly by the collectives with labor provided by their farmer members. Some of the civil works, especially for the farms and facilities belonging to local government-owned entities, may 3/ A cooperative marketing organization responsible for the distribution and sale of most agricultural inputs and consumer goods in rural areas. The organization is also engaged in the government procurement of agricultural products and in price stablization operations.  - 20 - be contracted out to a local construction team (work brigade) selected primarily on the basis of its ability to carry out the job satisfactorily and within a specified time. However, local competitive bidding of civil works has recently been introduced as indicated by the increasing use of price quotations as a major determinant in the selection process. 69. Project investment items for the aquaculture, orchards and livestock components would be varied, generally small and widely scattered and would be procured by subborrowers as and when required by them, and spread over several years. This makes bulk procurement impractical. Procurement of these invest- ment items would therefore not be suitable for international competitive bidding. Moreover, familiarity with local machinery and equipment, their ready availability, including spare parts and repair services, and the need for standardization, strongly support the general preference of the users for locally manufactured over imported items. The investment items, including all civil works, would therefore be procured locally and in accordance with pre- sent procedures (described in paras. 73 above) which are acceptable to IDA. Aside from the many local suppliers, there is also an increasing number of representatives of foreign suppliers in China of machinery and equipment for the agro-processing facilities and the technical assistance component. These investment items would be procured as follows: (a) Contracts for purchase of investment items of up to US$50,000 would be awarded after comparison of price quotations from at least three qualified suppliers. (b) Contracts for purchase of investment items with costs exceeding US$50,000 would be awarded through limited international bidding procedures on the basis of evaluation and comparison of bids invited from a list of at least four suppliers from at least three countries in accordance with the "Guidelines for Procurement under IBRD Loans and IDA Credits". (c) Award of contracts exceeding US$500,000 would require prior review by IDA. Disbursements 70. Project subloans are expected to cover a three-year commitment period commencing in the early part of 1986 and the project is expected to be physically completed by June 30, 1990. Disbursements of the IDA funds are expected to extend over a five-year period ending June 30, 1991 and the Closing Date would be December 31, 1991. Disbursements would be 502 of amounts disbursed for subloans by ABC; 100% of expenditures for overseas fellowships and consultant services; and for machinery and equipment under the technical assistance component, 1002 of foreign expenditures, 1O0Z of local expenditures (ex-factory) and 75Z of local expenditures for other items purchased locally. Disbursements against expenditures for machinery and equipment under the technical assistance component will be fully documented for contracts exceeding US$200,000. For contracts of up to US$200,000 disbursement will be made against statements of expenditures. Disbursements for subloans will be made on the basis of statements of expenditure listing subloans made, and disbursements for overseas fellowships and consultants will be made based on statements of expenditure certifying that the expenditures  - 21 - were incurred on the basis of a training program 8greed with IDA and that the consultants have been employed in accordance with the Bank's Guidelines for the Use of Consultants. Supporting documentation for statement of expenditure disbursements would be retained by ABC and made available to IDA staff for review during supervision missions. 71. Under the project, a special account would be set up for disburse- ments of the IDA credit. This account would facilitate project implementation in view of the large numbers of small expenditures to be made. It would be set up and maintained in US dollars. The initial deposit of the dollar equivalent of SDR 5.6 million ($6.0 million) represents the average estimated disbursements of the IDA credit for any 4-month period. Applications for replenishment of the account would be submitted quarterly, or whenever the special account is drawn down to 50Z of its initial deposit, whichever comes first. Implementation 72. The project would be carried out by ABC under a Project Agreement with IDA. State Council approval of the Development Credit and Project Agree- ment would be a condition of credit effectiveness. The project organization to implement the project in each province will comprise a Project Management Committee (PMC), a Project Office (PO) in ABC's provincial office and Project Units (PU) in each of ABC county offices participating in the project. 73. The role of the PMC is to oversee the implementation of the project and to ensure coordinated planning and execution of project operations between the ABC and other concerned government departments and agencies, especially with regard to ensuring the adequate and timely provision of local cost funding, improved production inputs, technical extension support, and train- ing. Both the PMCs for Fujian and Hunan have recently been established. The membership of the PHCs as constituted can be expected to enable the two comaittees to carry out their assigned roles effectively. 74. Under the direction of the PMC concerned, the PO will be responsible for the implementation and management of the project, including provision of technical guidance to the Project Units (PU), assisting them in their appraisal and supervision of subprojects, and supervision and coordination of their lending operations. The PO would have a core staff comprising a mana- ger, two economists, two finAncial analysts, an accountant/bookkeeper, one aquaculturist, one horticulturist, one livestock expert and an agro-processing specialist. Additional technical experts will be provided by the Technical Bureaus concerned as and when required. The POs have also been recently established. 75. In addition, a Project Unit (PU) would be established in each of ABC's county offices which would supervise and monitor project implementa- tion. The PU would appraise and supervise project subloans, ensure the proper utilization of project funds and procurement of project investment items, maintain separate accounts for the project and record the progress of the project with support from the POs. The POs and PUs would also be responsible for monitoring and evaluating the economic benefits and impact of project lending. Assurances were obtained during negotiations that the PMCs would be maintained, that the POs would be maintained with a core staff acceptable to  - 22 - IDA, and that a PU would be established and maintained in each of ABC's county offices participating in the project. 76. The PU would rely on staff from the local government technical bureaus (agriculture, livestock, fisheries, etc.) for guidance and assistance on the technical aspects of project preparation, appraisal and supervision. This would be an appropriate arrangement and has worked well during the prep- aration and appraisal of both this project and the first Rural Credit Pro- ject. The available technical expertise would be adequate to meet project needs. Project investments would be evaluated in terms of their technical feasibility and financial viability based an incremental returns. ABC would carry out the appraisals using the procedures and criteria set out in the Pro- ject Appraisal Manual prepared by ABC with the assistance of IDA. In addi- tion, as part of the appraisal, ABC shall ensure that: (a) planting mate- rials, soils and topography included in Investment Projects shall be accept- able to the Fujian and Hunan Academies of Agricultural Sciences, respectively; (b) agro-processing plants included in Investment Projects shall be designed in accordance with sound environmental practices as specified in the Environ- mental Guidelines issued from Lime to time by the Bank; and (c) sub-loans for fish and shrimp ponds shall be made only after the design and layout of ponds, incLuding water supply canals and disposal drains, have been approved by the Fisheries Bureau of Fujian Province and Hunan Province, respectively. IDA with ABC has appraised an initial set of representative subprojects, and ABC will appraise the remainder. Individual subloans in excess of $500,000 would require IDA's prior approval. It is estimated that about thirty subloans accounting for about one-fourth of the total project funds would be above the free limit. Subloan Terms and Conditions 77. Based on its present administrative costs, ABC would need a 2Z interest margin to cover the costs of project lending. An assurance was obtained during negotiations that the Government would take steps necessary to enable ABC to achieve at least a 2X spread between the cost to ABC of the project funds (IDA funds and ABC's counterpart contribution) and the project lending rates. ABC wouLd obtain an interest margin (2.6X) based on the present average project lending rate of 7.O p.a. and the present cost to ABC of its counterpart contribution (5.8% p.a.) and the cost of the IDA credit to ABC at 3% p.s. The interest margin would be adequate to cover the cost of project lending as well as the commitment charges on the IDA credit. In addition, an assurance was obtained that the Government and ABC would exchange views on ABC's lending rates with IDA from time to time at the request of any party in light of ABC's cost of funds and profitability, and taking into account inflation and other interest rates in China. The proposed $90 miLlion IDA credit would be lent to the Government on standard terms. The Government would relend these funds to ABC under a subsidiary loan agreement acceptable to IDA, signing of which would be a condition of credit effectiveness. The relending terms would be for 20 years, including five years grace at an interest rate of 3X p.a. and a commitment fee of 0.5Z p.a. ABC would oclend project funds to subborrowers at the same interest rate it charges on surloans for similar purposes and with similar maturities. The present rates range from 5.76Z to 10.08Z p.a. Where ABC extends subloans using foreign currency, ABC would pass on the foreign exchange risk to subborrowers.  - 23 - 78. Subborrowers would be required to contribute a minimum of 30Z of subproject costs. The repayment periods of subloans would be determined by ABC's estimates of the cash flows of the related subprojects but would not exceed 15 years, and would include an appropriate grace period. Based on the cash flow estimates of selected major subprojects and given that the project funds would be disbursed over five years, the cash flow estimated for the pro- ject as a whole indicates that ABC's loan repayment to the Government would require a period of 20 years, including five years grace. ABC would be per- mitted to roll over funds repaid to it by subborrowers and not yet due on its loan from the Government. Accounts, Audit, Monitoring and Evaluation 79. The Project Units in ABC's county offices in the project area would maintain detailed accounts of the project subloans and expenditures. These accounts and other data relating to the implementation and progress of the project would be collated by the Project Offices. The accounts, including the statements of expenditures, and ABC Fujian's and Hunan's tozal operations would be audited annually by independ2nt auditors acceptable to IDA. These auditors are expected to be from the State Audit Agency. The audited accounts together with the annual accounts (balance sheets and income statements) of ABC's total operations would be submitted by ABC to IDA within six months of the close of each financial year. In addition, ABC would forward to IDA half- yearly reports covering the project's progress within two months following the end of each reporting period. Assurances on the above were obtained during negotiations. Benefits and Justification 80. At full development, the value of the incremental output from pro- ject investments would be about $140 million per annum. The project wouLd increase the production of higher value foods which are in short supply and for wnich demand is growing rapidly, and thereby improve the quality of local diets. Increased annual production would include about 266,000 tons of fruits and 65,000 tons of aquatic products (mainly shrimp and fish). In addition, lending for the establishment or expansion of animal breeding and egg produc- tion and fish nurseries would help satisfy the growing demand from individual households for improved stock, while increasing the supply of red meat, poul- try, and table eggs. The project would benefit directly some 16,000 families, or 74,000 individuals, through increased production and incomes. The annual demand for labor would increase by about 18.4 million man-days, equivalent to 61,000 full-time jobs, thereby absorbing part of the surplus rural labor force. The project would also put to productive use land which at present is mostly wasteland or low-productivity land. The ABC would benefit from insti- tutional strengthening through improvements in the efficiency of its overall credit operations and its capability and capacity to undertake proper appraisal and supervision of project investments. 81. The financial rates of return (FRR) of the project components based on typical subprojects in each component would range from 21% to 40Z. Their economic rates of return (ERR) would vary from 23Z to 50Z. For the project as a whole, the FRR and ERR are estimated at 28% and 34% respectively. No major risks are anticipated. Sensitivity analysis demonstrates that all the typical subprojects would yield satisfactory rates of return even with significant  - 24 - increases in costs and reductions in revenues. The technological improvements envisaged are already widely in use in China. PART V - RECOMMENDATION 82. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. A. W. Clausen President November 25, 1985 Washington, D.C.  ANNEX I Page 1 of 6 CUMA. PEOPL1S REP. OF - ioaAL INDICATORS DATA SUT _tt_. nears REF. oF EERNCE cR0015 (UKIGTE AVERAGES) Is MHST (M RECENT ISTVIATE) /b 19GO/b gzccfT ~LOW INCONS flaIl LiCK z,r/b me nn7 an!tk ASIA & *ACnC ASmA *acznc hUlA CTIOUSAN SQ. C) TOTAL 9561.0 9561.0 9561.0 ACjMCULRAL 3257.6 3882.0 3865.9 e F CAA CS) .. .. 300.0 278.3 1011.1 (KIOGRAMS OF OIL EQuTvALEINT) 202.0 259.0 441.9 25.7 566.8 -urnLAt. AND L S _TmC POIULATXON.IHD-TEAR (TEOSANDS) 651000.0 815160.0 1019102.0 UAM POPULAeI (Z DOr TOTAL) 1s.4 Ic .. 21.0 22.3 35.9 POPULATXIa PROJECKIONS * POPULATIS IN TM 2000 CMIL) 1242.3 STATIONART POPULAIOII CM= 1571.0 POPuLA7IIO muumm 1.6 POPULATIONDEST PER SQ. Km. 68.1 85.3 106.2 173.8 386.9 PER SQ. m1. ACar LaW I99.8 210.0 260.8 353.3 159t.24 POPULATION aGE STIU=RZ (Z) 0-14 YIS 38.9 37.6 32.0 36.3 38.2 15-64 us 56.2 57.2 63.1 59.4 57.7 6G AND AN= 4.7 5.0 5.0 43 3.5 POPULATXIO CXOt RAZE (S) TOAL 1.1 2.2 1.7 2.0 2.3 URBAN .. .. .. 4.1 4.1 CRUDE ur R (CpER ;IOUS) 39.2 /d 35.7 18.6 27.5 30.1 CRUE DElAT RATE (CP THWOIS) 23.5 Td 8.8 7.1 10.2 9.4 CROSS REPRODUCrIO RATE 28 7ld 23 1.0 1.7 1.9 FANILT PLMUI2C ACCEPTOUS, AINUAL (TROS) .. USERS CZ O KAMRD W) .7 .. 1 49 4 56.5 aD - non or rM iRem. FM CAPITA C1969-71-100) .. 1DO.O 123.0 116.6 124.4 PER CnrA Snt OF CALORIES (: OF REQUIIIET) 94.6 /d 101.6 119.8 106.3 115.7 WRTKINS (GRMS PER DA) 53. 7;i 56.2 69.7 60.1 60.3 OF raNS ANR AL AND Pm Sz 12.5 77 133 15.9 14.4 14.1 CHTLD (AGES 1-4) DEATH RATE 13.5 8.5 2.0 7.3 7.2 LIFE EhECr. AT DBIR (TEAM) 41.0 1. 60.9 67.1 60.5 604 NFANT mR. RAE (PuR TUWS) 165.0o 77 69.0 38.0 69.2 64.9 ACCESS TO SAFS VAT (S10) TOTAL .. .. 50.0 4.2 46.0 DRBN .. 5.0 77.2 57.A RURAL .. .. 40.0 34.6 37.1 ACCESS LO CA DISPOSAL (C OF :'oPULhoN) TO0AL . .. .. 7. 50.1 UrRA .A . .. 284 52.9 RIVAL .. .. .. 5.5 4.7 POPULATION PER PSICIAN 7940.0 If 3690.0 If 1740.0 If 3318.0 7751.7 FOP. PER NUIISI PERSON 3830.0 2760.0 1710.0 4690.7 24644 POP. PER HOSPrrlA BED TOTAL 1040.0 760.0 40.0 1039.2 1112.1 MU"AN 210.0 .. 160.0 299.1 651.4 UmRAL 10140.0 .. 1020.3 6028.2 2596.9 ASSIQS PE 8SPITAL IED .. .. .. 52.3 41.1 OFZRACIS SIZE OF IlOCEROLD 0TOAL .. .. 5.1 OR .. .. 4.1 RURAL .. .- 5.4 AEURAZ NO. OF PERSONS/R00H TOTAL .. .. Wnu .. .. . .. RURAL .. .. . .. ERC E OF DWEUNCS IrTH ELECT. TOTAL .. .. URN .. .. RUAL '' .  -26 - ANNEX I Page 2 of 6 ClllIU. * o L U7. 07 - SOCIAL ZEDICATOEU DATA S115? CDUT, PELES EE. 0o UFEEC cR0 (1430UD AVRAE) i i,@LkwU s t wr xucos u r /b 1960=6 i AL ASIA A PAcrnc ASIA A PACIFIC ADJUSTED uNmOLUMm ATmOS PMINAEI TOTAL. 109.0 110.0 110.0 92.6 100.7 3w.E 1 .. .. lU.0 103.3 104 . TEJIMAX&.. .. 97.0 79.3 97.2 SECODARTs TOTAL 21.0 23.0 35.0 31.3 47.S HALE .4 *- 46.0 40.8 50.6 MALS .. .. 25.0 21.9 44.- VOCATAL to oU ) .. .. 2.2 3.2 18.4 1011L-TEACE EATO 1RZKArf .. 33.0 25.0 38.0 30.4 SECEURAST .. 22.0 16.0 7.4 22.2 PASSENGER CARS/TSAND .. .. 0.2 lb 0.9 1O.l ADIO EEES/TOUSAUD .. 14.7 210.1 129. 172.9 TV UcErS/TMUMUD .. 0.6 35.3 19.8 58.5 NEIWADE ("DAn. CGBRAL DMir) CI XZ1oE 1P TINUSAND POPA .. .. 33.4 25.7 65.3 CN AIU C .. .. .. 6.0 3.4 TOA LABOR FOCE (TiWS) 321646.0 380555.0 470692.0 FlMlAL (1EEtIt) 35.3 38.0 37.3 33.2 33.6 AGEIOIZZUE (PRE) .. .. 68.9 69.6 52.2 IDUSTR CY ( zrC) .. .. 1.7 15.8 17.9 1AICZ?IIO LAT (14? TOTAL 46.R *5.0 "6.1 41.9 38.9 NALE 55.9 54.5 55.4 53.6 50.8 FEMaLE 37.0 35.0 35.1 29.1 26.8 SCO.CoIC DEPEND1C? ama 0.9 1.0 0.8 1.0 1.1 3EWDE DISTREINIU 1C45 OF PrVATE DIRH RECEIE S UCUST S5 Of II SLS .. .. 12.5 A - .. IICICES 2010F W-SOI .. .. 39.3 7i 48.U LoIe 20S OrEus S .. .. 6. 6.4 LOWEST 0 Of IILSX .. .. 18 .. 1 ro mC_ TLMSSOL PM I LEEL (us PER chuT DREAM .. .. .. 133.. ;AL .. .. .. 111.6 151.9 mm mzm IC LEELS (USSP CAPUTA) Dam . .. .. .. 77.9 iAL .. .. .. 61.7 164.7 CSTD POP.53BLO AASOLUT POVEr INCOME ism (I) URUII .. .. .. 43.8 23.5 AL .. .. .. 51.7 37.8 Nor AVAILAIE NVW APPLICABLE OTES 5 t Mm gromp ayrbu for each indLitor are populatin-nweipgtd artlemtlc _Ia. Coverage of Coot mog the liicetaru deped. On availabilty of date and la Got anfor. lb Ihlccr och r.. . noted. "Data for 1960" refer to an yer bituen 1959 end 1961; 'Date for 1970" between 1969 and 1971; and data for "Iet Recent utfcte" betwe_n 1981 and 1963. Ic 1964; fd 19355-5 vrqe; /a 1955-64 ezae; If Senior doctor of westarm _mdl-cie A Distribetlo of peopLe muked by hbmebo2W per capita LAcm. 3979 data lh 9l. JUE. 1985  - 27 - ~~~~~ANNEX I -27- ~~~~~~Page 3 of 6 mt- cth.etis.ic. am de it. =tr. Aecm. -L. Ict-w t.5-J .cllri.ttm alibi. iicet 1-h cci htstn mle m.nicc5 VWiih ituci ifW -yctti t, uiutt -tri aMop.1C mintimaci mettle 9 cim.it tefrmm bampi mean... igwo"M1 twet dwypo . cifmlcLms It tin imt.t"I"tiiam. it'b. tin t i.1 ctm 11o Wonihmemltcm attibmcmtc mccc. fio lf -umi as .medt sly 1.i OM ictyf-% -tin Oal tin -cccpl.c ic. tr tint -iiicmta - Lmcm it.1 ftricm o-k ittl-.. mac i- -Jtrtc ipmi -in nllitllc or Wic acto act Icm ..M.t aft. mint h ac9&Ci-c.mqi da.i.) ft-1-p- -r 4-- fitc - dt.lt.mi Utdtb miin ecft ptit-tlttm Roedo isits ti.. tm.tlmiinma ci -Pplim ileic by mcm ciA9d pittcl cue cmi ccii iccm.n inccrcccl is .-..-hoLU""o _ "tacit. mu-i -LcIa IF. ectc (card. IW d. iSt, dimi .. hat.1tac m"' pttymcca. fcbiibtchc-tc prm tmci pitcplpewtiittl ma.c - W stlitt 1it-R hcpiLctt. %..c.. 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We cttccs.y ccsmttcc c1ci ma -cctsc a cM pIca odt ;ica.l ci beIn at tie tin iti olmt dLm MMc. biot. .1 tinh mJmi pj cduacmlt ric fti pipetta c tind ycti tiui. stc - Ctac. -ik a Ial - Ieeci c tie.t -.es imicicc. sisuci c tt. cuictm ci pic1ct.cc jimect it wilm ptccldm tumd,oI odicitoimil m c cali l Wticetdta cit li. c=c.dc- tie OIL apcdtttlc scc a aicin -IttY. Th. dacirlty m ti itmt -n tisctc pmpIttla -i thi pipmtal.i tif.-I j, gii mhi ttthic tiitl, -d mini"s r cile vtAft imuiit isiicI0 iit. =m.ii-zccii act - mrimc atd ccmacic - Taci .scdcmc amLtii Ic ,i-c. . J-&Mi-p. Piemlficc P-? ct--ki.t-tisi Ci00 scmct.,timc mc afctcili hlp. tM It b ._d U iiccLtcccedt ircicic ceic.lcl- O.tii.c cC:; mci.) ..tt.a-mm Ct tyiiclcnht Wmt pipm.it.c fir ciii-tO. cime-PO a4 i'm-u. emit. mR.its. i tcM ctta All typi if a-l-mI. 1mm Oil. iam.tc_L_ c-Mat "i. Immt - AVbe - ttcca -Cct nc me e- bici .ema eci m hma pcuilatosc;iii tPiliCLe C., 10c-me. site-J"o, a iCc0-42. .et--mcm ncmcmi tc wmtCtcm cmi Ripn . 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Lhm asbt ctiepiimmcl cu c.-ti.L., b-cct sec,m cc-tlcmcc add ccci,..ii. r.cclc11 cAI-s espter. ith ap palice amc ci ici ci mia titti if-pipittta, aWtheic 5 pAttieiii aof .It _inill Iol tes -i.st, at lieda., lisle m;ecc;cXytcc psr.esi ptIlr. ii catisi tpti 0-id ic. -mtmt Tecci iiptiit P riiumtm hts qic iikc)-mcai ui at nyt -l cIi ci c.~ mm FSt &- ca tL P-oota -4 a.. A- ,mcm.UAft. - -cutt pctm. rpici opreot Punc,a m OpIrc-Id. ail..Isc icr all -ith fortlhe 'cy UL.c tw.dmi icc iriA m t.tMId aminlit.ddbl PMco,.. pctt -I. ahtmm II n 1 itati hi amcm .icmmtdm, Tacit sP-mytty ?cL- CL.iii ictcciit aeaci -itccitEta ic- tir; fits.mi site -a lo,, -c"ctcmttty dmMccc tIn plcm c-amisc ma-too ruq.ttie. mc ooz C=a . t , %-' ctf.mibtt, Chat fcc. s-i mits. ci i.. tu-ca) - m-ra ucc.ccipintct-i cm imsmtmL inlittc icis ie at(S-tt) - mik "Ii cmt - ciciccu icc iiisi 6 i tsr- .btablm; site. tm-i ." sm me.. p-eIctcea it.. "the mct. itt- hod Ii i-tttc f- ccc -. list eftc mij-mtc c'mi O bctotol mc It.. i ant mimi. htrt l; im si, sc tilt l dcci. pmit.dr otmn- or Sa"t Uccc- (rrii taittui- tct.schc C- .A sistetdOK --RLo mitt ,Wply (hekims- mctdi dMIca at.tm 9-antecihmtodec wtpek. at Pimjit-ts ipicce 1is . incao ar he mcathui -c Volt chili itetachl iccof tCt aS.i f tit Itmacht do ci ham C. mPmid iltpaprihaati prts ci C". ity l. imitci mi cttol&. -du ciic rt mct.imclcr.ltiiccii.mta)-iclint.a ch. colscccla a4 ilimac. itch Wi mit-Ct-c cici . .1 sea inst ad eccair by- cei-i cmot-c i W cm pic tttcs a  - 28 - ANNEM I Page of 6 Population 1.019 million (mid-1983) GNP per capita: 5300 (1963) CHEM - CcoxNOIc INDICA!OS Amont - 1984 Annual growth rates (2) (tdllion US$ at Actal Prolected lndicstor current prices)/b 1980 1981 198Z 1983 1984a 1983 1986 1987 198 1989 1990 NATIONAL ACCOUNTS /a gross domestic product 281,260 6.6 4.9 7.8 9.6 14.0 10.4 6.8 6.8 6.8 6.8 6.8 Agriculture 100,430 -1.7 6.4 11.2 9.0 13.9 6.0 4.9 4.g 4.9 4.9 4.9 Industry 125,010 12.3 2.3 7.3 11.4 16.6 14.0 7.7 7.7 7.7 7.7 7.7 Services 55,620 8.2 8.9 3.3 6.5 7.7 10.0 7.9 7.9 7.9 7.9 7.9 Conamption 198,190 9.1 5.2 5.9 9.0 12.5 12.5 8.9 7.4 7.4 7.4 7.1 Cross inveatment 83,100 1.3 -1.8 10.9 15.2 20.7 11.0 2.3 4.8 4.8 5.1 5.7 Exports of CNYS /a 26,720 17.8 16.7 0.6 9.5 13.0 3.0 8.9 8.8 3.8 8.8 8.8 Imports of WS7ar 26.750 16.1 -6.7 -5.7 26.1 25.9 43.1 0.0 5.8 5.9 6.0 6.2 Gross national saving. 85.870 -0.2 3.6 17.0 12.0 17.0 5.0 2.4 5.1 5.1 5.6 6.2 PRICES CDP deflator (1980 - 100) 100.0 101.8 101.7 102.9 107.6 113.1 118.7 124.7 131.0 137.5 144.4 Excbange rate (TUan/US$) 1.50 1.70 1.89 1.98 2.32 2.84 2.84 2.84 2.84 2.84 2.84 Share of CDP at market prices (Z) Average annual increase (2) (et current prices) (at constant 1981 prim) 1960 L970 1975 1980 1985 1990 1960-70 1970-75 1975-80 1980-86 1984-89 1989-94 Grosa domestic product /a 100.0 100.0 100.0 100.0 100.0 100.0 6.1 5.2 6.6 9.0 7.3 6.6 Agriculture 23.0 35.0 32.8 32.0 34.2 31.3 6.7 3.4 3.3 10.1 5.0 4.8 Industry 48.0 41.0 45.8 48.0 47.9 49.9 7.8 7.5 9.9 9.4 8.6 7.4 Services 29.0 24.0 21.4 20.0 17.9 18.8 3.4 4.5 5.4 6.6 8.2 7.5 Consimption 62.4 70.8 69.1 71.3 66.7 69.3 6.1 4.7 6.4 8.1 8.4 6.8 Gross Invesnment 37.8 Z9.2 31.1 30.0 34.4 30.9 9.5 6.9 9.7 11.3 5.1 6.1 Exports of CNFS 4.8 2.8 5.3 7.1 7.7 8.5 -1.5 10.8 5.7 12.3 8.0 7.7 Imports of chrS 5.0 2.7 5.5 8.4 8.8 8.6 1.2 13.9 13.0 12.2 8.4 7.4 Gross national savings 37.7 29.2 30.9 28.9 33.6 30.7 9.1 6.7 7.2 14.D 4.8 6.2 As 2 of CDP 1957 1970 1980 1983 N198 PUnLIC FDIAEC Current revenues 28.7 29.6 30.6 27.8 26.7 Current expenditures 15.1 29.0 34.0 29.4 28.3 Surplus (+) or deficit (-) +13.6 +0.6 -3.4 -1.6 -1.6 Capital expenditure 13.7 13.3 11.0 7.8 7.3 Foreign financing 0.7 U.S. 0.5 0.2 0.3 1960-70 1970-75 1975-80 1980-84 1984-89 1989-f9 OTHER INDICATOMS CNP grovth rate (Z) 6.1 5.1 6.4 9.2 7.2 6.6 CUP per capita growth rate (1) 3.5 2.9 5.2 7.9 6.1 5.5 Energy consUmption growth rate (2) -0.3 9.2 5.8 4.1 5.3 4.8 ICOR 3.3 4.7 5.1 3.8 4.0 4.6 Marginal savings rate 0.4 0.4 0.3 0.3 0.2 0.3 Import elasticity 0.2 2.7 2.0 1.4 1.1 1.2 /s Data for 1981 and 1982 are from different sources; data for 1982 exclude re-exports. East Asia and Pacific Regional Office Novetber 22, 1985  - 29 - ANNEX I Pge 5 of 6 Population 1.019 tt.IlLn (mid-1983) GNP per capita: S300 (1983) CHINA - EXTERNAL TRADE Amount - 1984 Annual growth races (Z) (ar conscmnr prlei (milllon US$ at Attual Protlected current prices) 1980 1981 1982 1983 1984 1985 1990 EXTERNAL TRADE /a _ Merchandise exports 25,020 14.8 17.3 5.5 10.1 10.4 2.8 8.7 Primary 11,410 1.5 -1.4 3.9 14.6 9.6 3.3 6.8 Manufactures 13,610 32.2 36.2 6.6 7.n 11.1 2.4 10.4 Merchandise imports 26,740 6.8 7.2 0.2 29.7 22.3 47.1 6.2 Food 2,330 9.1 68.3 42.9 -30.9 -24.9 14.4 7.1 Petroleusm 130 52.6 -65.5 130.0 -43.5 30.8 0.0 35.5 Machinery and equipment 8,420 16.4 19.0 -41.7 34.7 82.3 58.2 5.1 Others 15,860 0.9 -13.5 7.1 71.7 16.8 19.9 6.3 PRICES Export price Index (1980-100) 100.0 102.7 98.7 86.8 90.5 86.0 126.0 Import price Index (1980-100) 100.0 104.5 89.2 76.7 78.4 77.3 112.0 Temrs of trade index (1980-100) 100.0 98.3 110.7 115.8 115.4 113.8 112.5 Composition of merchandise trade (S) Average annual increase (2) (at current prices) (at constant prices) 1978 1981 1984 1990 1980-84 1984-89 1989-94 Exports 100.0 100.0 100.0 100.0 10.8 7.9 7.6 Primary 53.4 46.6 45.6 42.1 6.7 6.4 6.1 Manufactures 46.6 53.4 54.4 57.9 15.2 9.4 S.e Imports 100.0 100.0 100.0 100.0 14.9 8.5 7.5 Food 12.8 17.4 8.7 9.7 13.9 8.9 S.5 Fetroleum 0.5 0.4 0.5 0.9 13.0 17.2 16.1 Machinery and equipment 18.9 29.2 31.5 33.3 23.6 12.0 6.8 Others 67.9 53.0 59.3 56.1 20.5 6.7 7.5 Share of trade with Share of trade with Share of trade with industrial developing the USSR and countries () countries (Z) EasLern Europe (C) 1977 1980 1983 1977 1980 1983 1977 1980 1983 DIRECTION OF TRADE Exports 36.4 44.7 42.1 46.8 48.7 53.2 16.8 6.6 4.7 Imports 63.1 73.6 69.P 20.7 19.7 24.5 16.2 6.7 6.5 /a Based on gu6tuma statistics. Exports, f.o.b., imports, c.i.f. East Asia and Pacific Regional Office November 22, 1985  -30 - ANNEX I iage w t Population : 1,019 million (mid-1983) GNP per capita: $300 (1983) CHINA - ALANCE OF PAYNENTS, EXTERNAL CAPITAL AND DEBT (Ollions of US$ at current prices) Actual Projected Indicator 1978 1979 1980 1981 1982 1983 1984 1985 1990 BALANCE OF PAYMENTS Exports of goods and nonfactor services 10,370 14,983 20,324 24,423 23,637 23,186 26,716 26,840 58,590 Of which: Merchandise f.o.b. /a 9,607 13,658 18,492 22,027 21,125 20,707 23,905 23,900 52,130 Imports of goods and nonfactor services 11,668 17,759 24,058 23,446 18,900 20,711 26,748 38,290 .63,180 Of which: Merchandise f.o.b. /a 10,745 16,212 22,049 21,047 16.876 18,717 23,890 35,150 56,950 Net factor income freu abroad -8 -77 -117 -200 452 1,253 1,620 1.140 -850 Net transfers 597 656 640 464 530 436 304 300 300 Current account balance -709 -2,197 -3,211 1,241 5,719 4,164 1,892 -10,010 -5,140 Private direct investment (net) - - 57 265 430 636 1,100 1,650 1,95' Official grant aid (net) - - 21 156 -44 75 137 140 140 MLT loans (net) 549 3,815 1,069 310 301 927 -145 0 4.450 Disbursements 549 3,895 1,670 1,659 2,481 1,600 718 950 6.390 Amortization - 80 601 1,348 2,180 673 863 950 1.940 Other capitat /b -628 -1,021 2,455 -47 -115 -1.672 -2.889 2,330 - Change Ln reserves ("-" indicating increase) 788 -597 -391 -1,925 -6,291 -4,130 -95 5,890 -1,400 International reserves 6,677 7,274 7,665 9,590 15,881 20,011 00,106 14,220 21,YUu Of which: Gold /c 5,120 5,120 5,120 5,120 5,120 5,120 5,120 5,120 5,120 Reserves as months of imports 6.2 4.5 3.5 4.8 10.1 11.7 9.1 4.5 4.2 EXTERNAL CAPITAL AND DEBT id Cross disbursement .. .. .. .. Official grants .. .. .. .. Concessional loans .. .. .. Other .. .. .. .. Nonconcessional loans .. .. .. .. Official export credits .. .. .. .. Other multilateral .. .. .. .. .. Private .. .. .. .. .. .. External debt Debt outstanding and disbursed 549 4.364 5,433 5,261 5.562 6,397 6,340 Official .. .. .. .. Private . . . .. .. LUdisbursed debt .. Debt service Total service payments .. .. Interest . . .. Payments as Z of exports 0.4 2.7 6.3 9.0 11.4 4.4 5.0 Average interest rate of new loans (2) - - - - - - - Average maturity of new loans (years) - T /a Data for 1978-81 are not comparable with those of 1982-85 because of a difference to their sou-ces. The laLter e&.lude re-exports. /b Includes net use of DMF credit and net flov of short-teru capital. T7- Valued at US$402/troy ounce. Td Excludes short-term loans (one year or less). East Asia and Pacific Regional Office November 22, 1985  ANNEX 11 - 31 - STATUS OF DANK CROUP OPERATIONS IN THE PEOPLE'S REPUBLIC OF CHINA A. STATEMENT OF SANK LOANS AND IDA CREDITS (as of September 30. 1985) Loan or US$ million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed 2021/1167 1981 People's Republic of China Universit) Development 100.0 100.0 24.6 1261 1982 People's Republic of Ctina North China Plain Agriculture - 60.0 16.8 2207 1932 People's Republic of China Tnree Ports 69.0 - 44.0 1297 1982 People's Republi- of China Agric. Education & Researcb - 75.4 18.1 2226/1313 1982 People's Republic of Ch'na Industrial Credit 40.6 30.0 37.8 2231 1983 People's Republic of C0ina Daqing Petrolem 162.4 - 91.8 2252 1983 People's Republic of China Zhongyuan-Uenliu Petroleum 100.8 - 79.1 2261/1347 1983 People's Republic of China Heilongjiang Lead Reclamation 25.3 45.0 30.8 1411 1983 People's Republic of China Polytechnic/TV University - 85.0 76.9 1412 1983 People's Republic of China Technecal Cooperation - 10.0 7.5 1417 1984 People's Republic of China Rubber Development - 100.0 52.8 2382 1984 People's Republic of China Lubuge Hydroelectric 145.4 - 139.4 2394 1984 People's Republic of China Railway 220.0 - 12b.1 1462 1984 People's Republic of China Rural Credit - 50.0 34.2 1472 1984 People's Republic of China Rural Health & Nedical Edur. - 85.0 67.1 2426 1984 People's Republic of China Kara ay Petroleum 100.3 - 95.4 2434/1491 1984 People's Republic of China Second Industrial Credit 105.0 70.0 158.7 24b4/1500 1984 People's Republic of China Second Agricultural Education 45.3 23.5 54.6 1516 1984 People's Republic of China Second Agricultural Research - 25.0 19.2 1551 1985 People's Republic of China Second University Development - 145.0 140.3 2493 1985 People's Republic of China Second Power 117.0 - 117.0 2501/a 1985 People's Republic of China Changcun (Luan) Coal Mining 126.0 - 126.0 1557W 1985 People's Republic of China Seeds - 40.0 40.0 1558/c 1985 People's Republic of China Rural Water Supply - 80.0 80.0 2539115947W 1985 People's Republic of China Highway 42.6 30.0 72.6 2540Wc 19d5 People's Republic of China Second Railway 235.0 - 235.0 25417c 1985 People's Republic of China Fertilizer Rehabilitation and 97.0 - 97.0 Energy Saving 1605/c 1985 People's Republic of China Forestry Development - 47.3 47.3 2579/1606W 1985 People's Republic of China Pishihang-Chsohu Area Development 17.0 75.0 92.0 25807 1985 People's Republic of China Weiyuan Gas Field Technical 25.0 - 25.0 Assistance Total 1,773.7 1,176.2 2,247.1 Total now held by Bank and IDA 1,773.7 1,176.2 Total Undisbursed 1,453.1 794.0 B. STATEENT OF IFC INVESTMENTS (as of September 30, 1985) Amount tn US$ million Year Obligor Type of business Loan Equity Total 1985/d Cuangzhou and Peugeot Autombile Co. Automobile 15.0 2.0 17.0 Total Gross Commitments 15.0 2.0 17.0 Less cancellations, terminations, repayment and sales - - - Total Commitments now held by IFC 15.0 2.0 17.0 Total Undisbursed 15.0 2.0 17.t) /a Became effective on October 31, 1985. Rb- Became effective on October 24, 1985. 7W Not yet effective. /d Signed on October 16. 1985. Notes: The status of the projects listed in Part A is described in a separate report on all Bank/IDA finan- cial projects in execution, which is updated ntice yearly and circulated to the Executive Directors on April 30 and October 31.  - 32 - ANNEX III CHINA RURAL CREDIT II PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare project: Six months (b) Project prepared by: Agricultural Bank of China (ABC) (c) First mission: October 1984 (d) First presentation to IDA: October 1984 (e) Departure of appraisal mission: April 1985 (f) Completion of negotiations: November 1985 (g) Planned date of effectiveness: March 1986 Section II: Special Bank Implementation Actions None. Section III: Special Conditions (a) Training of ABC staff would be carried out in accordance with a program agreed between IDA and ABC (para. 65); (b) The Project Management Committee would be maintained; the Project Offices would be maintained and would have a core staff acceptable to IDA; and a Project Unit would be established in each of ABC's county offices participating in the project (para. 75); and (c) The Government would take steps necessary to enable ABC to achieve at least a 2Z spread between the cost to ABC of the project funds and the project lending rates (para. 77).  HUBEI <^ CHINA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~il 87 RURAL CREDIT Ii PROJECT ANHUI ~-No= Novo, ZHEJIANG JULY 1965