ASEM trust fund country strategy notes 2003

34088 ASEM Trust Fund Review Meeting Washington D.C., April 14, 2003 Country Strategy Notes China: ASEM Country Strategy Note March 2003 1. To date, China has benefited from grants totaling almost $10 million under the first and second ASEM Trust Funds, supporting 15 country-focused technical assistance (TA) projects. China has also been included in several multi-country studies. Together, these activities are helping the country deal with challenges such as government financial vulnerabilities, reform of state-owned enterprises (SOEs) and the financial sector, development of a national social security system, and protection of the poor and disadvantaged from the effects of economic restructuring. Due to China's size and the scale of these problems, no one donor is able to respond adequately to its needs. The country's development partners are therefore collaborating on key issues, as dictated by their comparative advantages. For China, ASEM offers the advantages of its focus on key reform areas and access to technical experts with appropriate experience. Background and Recent Developments Relating to ASEM-TF 2. Strong performance. Despite the weak global economy, China's economic performance in 2002 remained strong, with growth officially estimated at 8.0 percent. This reflects the impact of domestic demand, expanding exports and increasing foreign direct investment (FDI) in driving the country's aggregate economic performance. The Government's ongoing fiscal stimulus program, especially the rise in fixed asset investment, aided domestic consumption and investment growth. In addition, FDI in China reached $53 billion last year, the largest FDI inflow to one country in the world. 3. But difficult challenges. Though macroeconomic growth has been sustained, the Government's medium-term financial position needs to be strengthened. Not only has recorded government debt increased, but contingent liabilities, too, have risen as a result of non- performing loans in the banking system, under-funded pensions, enterprise arrears and other liabilities. Informed estimates indicate that, under various assumptions, total public debt could account for a large proportion of GDP. Concerns about this problem existed even before the start of the latest round of macroeconomic stimulus, but the recent increase in government spending has deepened concerns and stimulated calls for fiscal consolidation and a reappraisal of the efficiency of government expenditures. 1  4. In the corporate sector, the reform of China's state enterprise sector has accelerated of the past three to four years and has some qualitatively new features. First, the scale of change has expanded to affect almost every kind of SOE