China : IFC country impact review

2 Number OEG F I N D I N G S 35297 2005 China: IFC Country Impact Review About OEG distill lessons and help IFC pursue sustainable strategies and operating practices IFC's Operations Evaluation Group independently evaluates T his March 2004 Operations Evaluation Group (OEG) study evaluated IFC's investment and technical assistance operations in China during FY90-03 to in a country where its portfolio is expanding rapidly. Group IFC's investment and technical Main Message: Projects approved during FY90-99 had below-average development and assistance operations and reports investment outcomes, partly due to business climate issues, while projects within IFC's its findings to IFC's management two strategic priorities, the banking sector and frontier (inland) areas, achieved average Evaluation and Board of Directors. OEG is a resource for helping staff under- outcomes. IFC's current frontier region and sector strategy in China has been effec- stand what IFC has learned and tive and is aligned with the government's focus on better-balanced regional (i.e. rural how IFC can do better business in and urban) growth and further reforms in the financial sector. China's rapid economic Operations the future. growth and transition reform agenda pose opportunities and risks for IFC in improv- ing its investment and development outcomes. e success of new IFC projects will About Findings largely depend on: (a) the quality and pace of reforms, particularly in the corporation OEG Findings helps inform IFC and Bank Group managers law and financial markets; (b) IFC's project selectivity within strategic priority areas; and and staff about new evaluation (c) IFC's ability to use a wider range of financing instruments and more reliable equity findings and recommendations. exit avenues, both of which are constrained by existing regulations. IFC must pace its Findings is also available to the engagement to reforms and take well-researched, calculated risks in its near-term opera- public. e views expressed here tions. are those of OEG and should not be attributed to IFC or its affili- IFC's commitments grew rapidly had committed to 50 projects (Figure 2). China was ated organizations. in the 1990s, particularly in ranked 4th in new approvals among IFC's countries financial sector equity of operation for the FY01-03 period taking China to Online access China has the largest economy in the world, and in 6th in terms of total outstanding balances and 3rd in http://ifcln1.ifc.org/ifcext/oeg. recent years attracted the most foreign direct invest- held equity investments. Corporation nsf/Content/PubsFindings ment (FDI), among countries in which IFC operates IFC's investments were concentrated in financial (Figure 1). In 2002, China surpassed the U.S. as the sector equity. During FY90-03, IFC's net commit- top FDI destination country. China also achieved ments totaled nearly US$863 million (excluding Finance middle-income country status in 1999. B-Loans), of which about one-third were in the IFC's operations in China started slowly. e first form of equity, mostly committed FY00-03. About IFC project in China, a US$17 million loan, was ap- three-fourths of the equity investments were in the proved in FY84. During the following seven years financial sector. At the end of FY03, IFC's China- International (FY85-91), IFC supported only five projects for a held portfolio was 47 percent equity, 44 percent total commitment of nearly US$44 million without loans, and 7 percent quasi-equity. In contrast, IFC's any B-Loan participation, despite IFC's efforts to mo- global-held portfolio at the time was 20 percent eq- bilize some. uity, 68 percent loans, and 12 percent quasi-equity. International From 1992, IFC investment operations expand- Finance e high concentration of equity in the financial sec- Corporation ed,alongwithasubstantialriseinFDI.DuringFY92- tor is the result of IFC's strategic priorities and the World Bank Group 03, IFC approved 61 projects and by the end of FY03 limited opportunities for private sector investment  CHINA: IFC COUNTRY IMPACT REVIEW Figure 1: Since 1992, FDI flows to China grew rapidly IFC's strategies initially reflected market opportunities, but later were more pioneering China Brazil India IFC's strategies in China have been relevant and well-tailored to the Mexico Thailand Russia country. IFC investments initially followed the FDI flows into man- ufacturing projects in the coastal provinces. en after FY99, IFC 55 shifted its strategic priorities to pioneer foreign investments in less- 50 45 developed provinces and in the financial sector, utilizing significant snoillib$SUniIDF 40 TAAS resources to complement investments. ese projects collective- 35 ly supported several corporate and country strategic objectives, such 30 25 as: (a) improving environmental, safety, health, and social features; (b) 20 improving corporate governance; (c) developing the financial sector; 15 (d) extending IFC's reach to frontier areas; (e) supporting second tier 10 5 companies; and (f) supporting linkages to rural areas and small and 0 medium enterprises (Figure 4). 0991 1991 2991 3991 4991 5991 6991 7991 8991 9991 0002 1002 2002 3002 Mature projects had below-average outcomes in the infrastructure, extractive industries, and other non-manufacturing Project Outcomes. Despite China's large economy, above-average GDP sectors to date. growth rate, stable political environment, low sovereign risk rating, and IFC's technical assistance and advisory services (TAAS) operations substantialFDIflowssince1993,IFC'smatureChinaprojects(approved in China started late, in FY93, and modestly. Only 10 TAAS opera- FY90-99) show below-average development and investment outcomes. tions were carried out during the four years from FY93-96 at a total While the development outcome and investment outcome "high-high" cost of nearly US$1.25 million. Over the next seven years (FY97-03) success rate matches that of other transition countries, the proportion of there were 62TAAS operations amounting to US$9.71 million (Figure "low-low" outcomes for the China projects is substantially greater than 3). ese TAAS operations, about half in the financial sector, broadly for transition countries and IFC as a whole (Figure 5). However, within supported improvements in the business climate, assisted in preparing two of IFC's present strategic priorities