Statement by Jannes Hutagalung at the Board meeting of March 18, 1997

CONFIDENTIAL International Bank for Reconstruction and Development International Development Association 87610 International Finance Corporation Multilateral Investment Guara.ntee Agency FOR OFFICIAL USE ONLY EDS97-77 March 17, 1997 Board Meeting of March 18, 1997 Statement by ]annes Hutagalung China: Country Assistance .Strategy At the outset, I would like to compliment the Government of China for its continuing success in managing the transition of its economy from a centrally-planned to a market- oriented one. In the last two years, the government was able to cool down the overheated economy without sacrificing the growth momentum. Inflation was brought down and GOP growth subdued to a more sustainable rate. Acceleration of payments of VAT rebates resulted in exports rebound turning around the trade balance from a deficit to surplus. FDI continued flowing into the country and government revenues are rising. Although the government faces tremendous development challenges ahead, on the overall the outlook for the Chinese economy is very promising. We welcome the opportunity of discussing this CAS and would like to commend staff for preparing a well written document which presents recent developments in China, the progress achieved over the last few years, the key challenges as well as the strategy to cope with them. Although we have a couple of observations to make, we support the general thrust of the CAS which aims to reduce poverty and foster social development in the country. Let me begin with the reasons why we are in concurrence with the CAS, and then I will convey our comments. First, we are glad to note that this CAS was formulated based on the set of priorities agreed by the Bank and the government. As such, the objectives and strategy of the CAS are fully in conformity with those of the government. Moreover, the five-key areas of concern to the government covered by this CAS: (a) macroeconomic growth and stability; (b) infrastructure; (c) human development; (d) agriculture and rural development; and (e) environmental protection; are basically the same with those of the 1995 CAS. As illustrated in Box 2 under the last CAS, the government has undertaken several new reform measures resulting in, among others, improved fiscal and monetary framework, lowered tariffs, more market-oriented banking sector, and increased government revenues. We believe, therefore, that continuing to pursue the CAS objectives under the same strategy would ensure consistent reform measures and enhance progress already made. This document has a restricted distribution and may be used by recipients only in the perfonnance of their official duties. It should not be distributed without the consent of the Executive Director concerned.  2 Second, we concur with the CAS's emphasis on macroeconomic and structural reforms, particularly the continuation of the reform for state-owned enterprises (SOEs), the financial sector and the public finance to facilitate macroeconomic management, increase efficiency and promote proper resource allocation. To face growing competition from domestic and foreign firms, SOEs should be corrected from their structural deficiencies and run professionally. The adoption of commercial banking practices and promotion of competition in the financial sector would encourage the establishment of a modem market-oriented framework. In fiscal refor~ improving tax administration and public investment process would enhance macroeconomic stability and government's financial management Third, in our opinion, the CAS lending program of $2.5-$3.0 billion a year for FY97-99, although large, is appropriate both in terms of China's enormous development needs and the new portfolio concentration policy. China's increased exposure caused by the FY97-99 IBRD lending plans is still within the risk limit and would not require an increase in IBRD's capital and reserves. This amount would enable the government to implement the reform agenda set out in the CAS. In view of emerging regional disparities, we strongly support the Bank's plan to increase lending in the interior, especially in the areas that have the potential to repay. We are also supportive of using lending to richer provinces as pilot innovative projects. This scheme would reduce potential costs resulting from the failure of similar projects to produce expected results in poorer regions. Fourth, we are glad to note that all of the Bank Group's affiliates are actively involved in Chinese economic development. The good collaboration and increasingly integrated approach maintained by IBRD, IFC, MIGA and EDI would support the attainment of each other's objective, hence, enhancing the Bank Group's aid effectiveness in China. We also welcome the Bank's cooperation with other donor agencies and hope that the Bank's activity is concentrated on its comparative advantage. Having said that, now I would like to express our observations. First, while we welcome the SOEs restructuring, we would like to caution the government for potential social problems arising from rapidly increasing levels of open unemployment in urban areas caused by the resulting layoffs. The elimination of social benefits may cause hardships to the people who have been used to the present social security system which may increase social unrest Therefore, we encourage a more gradual approach in SOEs reform. Second, we are concerned with the development imbalance between the coastal and interior regions which resulted in emerging income disparities in China. We would like to see more government and Bank effort to reduce the equity gap such as by providing loans for infrastructure development, price incentives and diffusion of information on business opportunities to encourage private investment in the interior regions. We also encourage the adoption of more Bank-assisted projects to promote rural development activity which involves broad community participation in the rural areas.