China - Fifth Industrial Credit Project

 Fifth industrial credit project Report No: ; Type: Report/Evaluation Memorandum ; Country: China; Region: East Asia And Pacific; Sector: Other Finance; Major Sector: Finance; ProjectID: P003510 China: Fifth Industrial Credit Project (Loan 3075-CHA) The Implementation Completion Report (ICR) for the China Fifth Industrial Credit project (Loan 3075-CHA, in the amount of US$300 million equivalent, approved in FY89, fully disbursed, and closed December 31, 1994, as scheduled) was prepared by the East Asia and Pacific Regional Office, with Appendix A contributed by the Borrower. This project was the fifth with the China Investment Bank (CIB). Its objectives were: (i) to continue to strengthen CIB in both its traditional and new activities and expand its resource base; (ii) to modernize and upgrade technology in light industry; and (iii) to improve financial intermediation practices. The project consisted of a line of credit (US$299 million equivalent) for small and medium sized restructuring projects in light industry; and technical assistance for an electronic data processing system and training of CIB's staff. The objectives of the loan were partially achieved. The project's main contribution was to strengthen CIB as a stateowned, but autonomous and increasingly market-oriented institution. CIB added new financial products, including working capital financing, equity investment, and equipment leasing; diversified its financial resources; provided new financial services; and, for the first time, lent some of its funds to non-state-owned enterprises. The relevance of this achievement, however, was limited because CIB remained a very small provider of long-term funds in China, and its impact on the industrial and financial sectors was minor. The improvements in financial intermediation were insufficient to increase the efficiency of resource allocation_China's investment allocation system remained substantially unchanged, limiting the role of financial intermediaries. Project implementation was poor, as onlending rates for some subprojects, which were supposed to reflect the foreign exchange risk, were revised downwards by CIB, without Bank approval or knowledge, well below the minimum level required by the legal agreements. The ICR concludes that the project fully met its objectives, as stated in the Staff Appraisal Report, through institution building of CIB and modernization of light industry. It rates project outcome as satisfactory, institutional development as partial, and sustainability as likely. Bank performance is rated as satisfactory. OED agrees with the ICR that sustainability is likely and the institutional impact (on CIB) is moderate. However, in light of the above, OED rates project outcome as marginally satisfactory and Bank performance as marginally unsatisfactory, because the fifth loan in a series should have had greater impact on financial intermediation and because of the failure of supervision to detect the violation of interest rate covenants. The main lessons from the project are that: (i) for the fifth in a series of operations, project design should have focused more on improving the quality of financial intermediation and resource allocation in China; and (ii) the Bank should have supervised CIB V operations more closely, especially as it was the first loan to CIB which allowed it to charge flexible interest rates. The ICR is unsatisfactory, because it fails to raise the issue of on-lending rates and its analysis of CIB's role and financial performance is weak. The audit of the Fourth and Fifth Industrial Credit projects addresses these issues.