China - Industrial Credit (China Investment Bank) Project

FILE COFY| Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3419-CHA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO $40.6 MILLION AND A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO $30.0 MILLION TO THE PEOPLE'S REPUBLIC OF CHINA FOR AN INDUSTRIAL CREDIT PROJECT November 29, 1982 This document has a restricted distribution and may be used by recipiens only In dte p.nma1 of their effici duties. Its contents way not otherwise be disciosed without Wd $ RWank ljdbpd2  CURRENCY EQUIVALENTS (November 1, 1982) Official Rate 1 Yuan (Y) = $0.50 Y 2.0 = $1.00 Internal Settlement Rate Y 1 = $0.36 Y 2.8 = $1.00 ABBREVIATIONS AND ACRONYMS BOC - Bank of China CIB - China Investment Bank CIECC - China International Engineering Consulting Corporation PBC People's Bank of China PCBC - People's Construction Bank of China SPC - State Planning Commission FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY CHINA INDUSTRIAL CREDIT PROJECT (CHINA INVESTMENT BANK) Loan/Credit Project Summary Borrower: People's Republic of China Beneficiary: China Investment Bank (CIB) Amount: $70.6 million ($40.6 million Bank, including capitalized front-end fee; $30.0 million equivalent IDA) Terms: Loan: 20 years, including 5 years grace; Standard variable interest rate. Credit: Standard Relending Terms: Loan and Credit: 20 years, including 5 years grace; fixed interest rate of 6.9% p.a., plus commitment fees equal to those under the loan and credit; Government would bear interest rate risk and the foreign exchange risk between the US dollar and (a) the currency pool for the Bank loan and (b) the SDR for the IDA credit. Subborrowers would bear the foreign exchange risk between the US dollar and the Yuan. Project Description: The project supports the establishment of a new institution, the China Investment Bank (CIB), which would provide investment loans for smalland medium-size light industrial projects needing foreign exchange. The project is part of the ongoing economic reforms in China. The objective would be to help raise investment efficiency through import of technology and the introduction of improved project design and selection methodology. Subborrowers would be state enterprises primarily in Shanghai, Tianjin and Jiangsu. The main project risks relate to the capacity of CIB, which is a new institution, to develop and implement suitable subproject selection, appraisal and supervision procedures and standards, and to the need for continued Government commitment to the process of economic reform. However, the project provides for training and technical assistance for CIB, and the process of economic reform is expected to continue. Bank FY 1983 1984 1985 1986 1987 ------ $ millions ----------- Estimated Annual 1.6 19.0 30.0 15.0 5.0 Disbursement: Cumulative 1.6 20.6 50.6 65.6 70.6 Staff Appraisal Report: No. 4009-CHA, dated November 23, 1982 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  I  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO THE PEOPLE'S REPUBLIC OF CHIINA FOR AN INDUSTRIAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan and credit to the People's Republic of China to help finance an industrial credit project. The loan, for $40.6 million, would have a term of 20 years, including 5 years of grace, with a variable interest rate initially at 11.43% p.a. The credit, for the amount of SDR 28.0 million ($30 million equivalent), would be on standard IDA terms. The loan and credit would be onlent to the China Investment Bank for 20 years, including 5 years of grace, with a fixed interest rate of 6.9% p.a. The grant element of the Bank Group's financing package, calculated on the basis of a 10% discount rate, would be 26%. PART I - THE ECONOMY 2. An introductory economic report, entitled "China: Socialist Economic Development" (No. 3391-CHA), was distributed to the Executive Directors on June 1, 1981. A Country Economic Memorandum, which updates the report, particularly on developments over the past two years, is under pre- paration. Country data are given in Annex I. Development Objectives and Performance 3. China's economic system combines an urban state economy modelled after that of Eastern European countries, with a rural commune economy based on the country's own traditions as well as its socialist ideology. The state economy is characterized by public ownership, centralization of economic decisions, strictly hierarchical control, and relatively little reliance on markets or prices. In the commune economy, land and most capital are owned collectively by production teams of 30-40 households, which generally corres- pond to traditional villages (or neighborhoods of larger villages). Each team is part of a brigade, each brigade part of a commune: these higher level units organize land improvement projects, run industrial and other enter- prises, and deliver education and health services. In both the urban and rural economy, extensive reform of the economic management system, aimed mainly at improving economic efficiency, has been instituted in the last few years (paras. 14-15). 4. Development efforts over the past three decades have consistently been directed toward two main objectives: first, industrialization, and in particular development of a heavy industrial base; second, elimination of the worst aspects of poverty. Chinese development strategy has also been shaped by two major constraints: first, an extreme shortage of cultivable land in relation to population; second, a high degree of international isolation.  5. These two constraints have sharpened the conflict between the two objectives. The prospective returns to investment in agriculture (the principal source of income for the poor) have been limited by land scarcity and by the fact that the easiest advances in intensive cultivation have already been made. Similarly the inevitable competition for capital and skilled manpower between industrialization and other means of poverty reduction was for a long period aggravated by reliance entirely on domestic resources and technology. 6. The Chinese response to this dilemma has been to approach the two objectives in two different ways. Following an initial phase of institutional change and property redistribution, poverty reduction - mainly through rural development and the provision of basic health and education services - has been based largely on local resources and initiative. Industrialization, by contrast, has been based mainly on a massive infusion of centrally mobilized resources, with little concern for cost effectiveness, and using largely Soviet technology of the 1950s. 7. Tension between these two approaches has contributed to sharp policy oscillations, as has a continuing debate on the role of political criteria in economic decisions and on the most appropriate degree of centralization. The country is only now recovering from the latest political upheavals - the Cultural Revolution (1966-76) - during which extreme leftist views often predominated, and egalitarianism and ideology were emphasized at the expense of economic efficiency. 8. Notwithstanding these policy swings, which have engendered some dramatic economic fluctuations, there has been substantial progress toward the two main objectives. Industrialization has been very rapid, largely as the result of an unusually high rate of investment, virtually all of which has been financed by domestic savings. The share of industry in GDP (around 44%) is currently similar to the average for middle-income developing countries. However, agriculture still accounts for 35% of GDP and over 70% of employment - similar to the average for low-income developing countries. Around 85% of the population still lives in rural areas. 9. Over the whole period 1949-81 the population expanded at a little under 2% a year. Despite the tightly constrained agricultural sector, rapid expansion of industrial output has caused national income per person to grow fairly fast. With adjustments for international comparability, per capita GNP appears to have grown at an annual rate of 2.0-2.5% in 1957-77 and (because of a spurt in recent years) 2.5-3.0% in 1957-81. Even the former rate is significantly above the average for other low-income developing countries (1.6% in 1960-78) - though the latter is still well below the average for middle-income developing countries (3.7%) and has not been high enough to pull China out of the low-income group.  3- Strengths and Weaknesses 10. China has clearly displayed an outstanding capacity to mobilize domestic resources - material, human and financial - in pursuit of compara- tively well-defined national objectives. Given the shortage of land and initially high yields, agricultural growth since 1949 has been quite impres- sive. Yields of the major crops are now among the highest in the world though labor productivity remains low. Agricultural growth, at about 3% a year, has, however, been eclipsed by industrial growth at an average rate of more than 10% per year. Although a large minority of the population (around 200 million people) remains very poor, low income groups in China have been made better off in terms of employment, nutrition, health and basic education than their counterparts in most other poor countries. Partly as a result, but also through an intensive political campaign in the 1970s, the population growth rate has been reduced in recent years to a remarkably low level (1.4% in 1981). Life expectancy - whose dependence on many other economic and social variables makes it probably the best single indicator of human welfare in a country - is (at 64 years) outstandingly high for a country at China's per capita income level. 11. The outstanding weakness of China's economy is inefficiency - in converting inputs into outputs, in matching supply with demand, and in invest- ment decision making. This is partly the result of technological backward- ness, caused by two decades of international isolation. But it also reflects the virtual absence of medium-term planning from 1958 until recently, the lack of economic criteria in investment analysis, and serious weaknesses in the economic system - in particular, inadequate contact between producers and users, insufficient use of markets and price incentives, inadequate linkage between effort and rewards, and an overstaffed and cumbersome bureaucracy. Recent Developments 12. Since 1977 there has been intense discussion within China concern- ing both the ends and the means of economic development. Though partly the result of political change, the debate has been fuelled by some important underlying economic considerations. Future growth will inevitably have to depend mainly on improving the efficiency of resource use. The benefits of technological isolation as a stimulus to improvisation have been overtaken by its costs in terms of backwardness and bottlenecks. And the remarkable progress made in industrialization and in meeting basic needs has not been matched by - and has created a demand for - a commensurately rapid rise in general living standards. Reform and Adjustment 13. In 1979, the Government initiated a program of reform and adjust- ment. Economic reform is aimed at improving the overall efficiency of the economic system. It involves: restoring and improving the quality of central planning and policy coordination; devolving more decisionr-making authority to lower level units in the economic system; establishing more  - 4 - direct links between incomes and the performance of economic units and indi- viduals; and placing more reliance on market mechanisms and economic instruments, less on administrative directives, to influence economic activity. Structural adjustment is aimed at speeding improvements in living standards and involves readjusting the relative shares of consumption and investment in national income, some sectoral and subsectoral readjustments, and more emphasis on foreign trade. 14. Economic reforms have affected planning and management at both the central and local government levels. A major reorganization of the central government has strengthened the core planning and management agencies (especially the State Planning Commission and the State Economic Commission) and reduced the total number of commissions, ministries and agencies under the State Council from 98 to 52. Central-local government relations have been affected by a decentralization of fiscal and foreign trade management, and the legal rights and obligations of economic agents have been better defined. 15. Other reforms have affected the management and organization of the state enterprise and collective sectors. Management of state enterprises has been affected by changes and experiments aimed at improving incentives, including the introduction of profit retention schemes and more flexible payment and employment practices. There has also been experimentation with different types of state enterprise organization, a greater variety of marketing channels, some price flexibility, and greater autonomy for state enterprises in production decisions. In rural areas, more responsibility has been given to lower level collective units and to households, and incomes have been more directly linked to the output of groups and house- holds. There has been an increase in the number and types of rural markets at which households can freely trade commodities. In urban areas the scope for collective and individual economic activities has been expanded. Some of these reforms - especially those in rural areas - have already improved economic efficiency, while others will take longer to have an impact. 16. Progress in structural adjustment has been impressive. The share of investment in net material product (NMP) has declined from 37% in 1978 to 30% in 1981, and the share of agriculture in NMP has increased from 36% in 1978 to 40% in 1981. Emphasis on light industry, which accounted for 43% of industrial output value in 1978, was needed to provide more consumer goods to match higher incomes. The shift in emphasis from heavy to light industry, which began in 1979 and has become even more dramatic in the past two years, has led to a sharp increase in this proportion - reaching over 51% in 1981. In fact, in 1981, heavy industry output actually fell by 4.7% while light industry output grew by 14.1%. Stabilization Program 17. The implementation of adjustment and reform policies in recent years was accompanied by some macroeconomic instability in 1979 and 1980: there were large budget deficits, moderate inflation, rapid growth in the  - 5 - money supply, and a widening of the current account deficit from $0.7 billion in 1978 to $2.4 billion in 1980. Except for the budget deficit (5.1% of NMP in 1979 and 3.5% in 1980), the symptoms of instability were quite mild by international standards. They were, however, taken very seriously in a country accustomed to insignificant inflation rates during the last two decades. Accordingly, in 1981, the Government introduced a stabilization program, which included a moderation of currency and credit expansion, restoration of budgetary balance and sharp cuts in investment. 18. Monetary and Fiscal Policy. Restoration of price stability, the Government's major concern, has been largely achieved: retail prices increased by only 2.4% in 1981 compared with 6.0% in 1980. In rural areas shortages of consumer goods and repressed inflation remain, but in urban areas measures to restrict increases in nominal incomes in 1981 improved the demand-supply situation. Meanwhile the major changes in relative prices between urban and rural areas and within sectors continued through 1981. Some price flexibility has also been introduced: above-plan output can be sold at prices negotiated directly between buyers and sellers, and there is considerable downward price flexibility for goods in excess supply. 19. Strict price controls were one element of the stabilization pro- gram but fiscal policy has also played an important role. The Government reduced the budget deficit significantly in both 1980 and 1981, primarily through major cuts in capital construction: after rising by over 50% in 1978 and nearly 14% in 1979, budget expenditures on capital construction were reduced by 19% in 1980 and 22% in 1981. Moreover, the mode of deficit financing in 1981 was less inflationary than in previous years. Because of the Government's concern about open inflation, many of the increases in agricultural procurement prices have not been passed on to urban consumers but instead were financed by rapidly increasing subsidies (Y 8 billion in 1978 and Y 36 billion in 1981). Total domestic revenues have continued to increase but not as rapidly as NMP, due in part to the introduction of profit retention schemes and the shift in the composition of industrial output from heavy to light industry. On the other hand, extrabudgetary funds of enterprises and administrative organizations have grown rapidly and were about half as large as budgetary revenues in 1981. 20. Innovations like credit financing of investment and profit reten- 4 tion schemes mean that monetary policy potentially has a more important role to play in China. After rapid increases in 1979 and 1980, the growth rate of the money supply was reduced in 1981 as a result of strict control over currency expansion. The velocity of circulation of money fell in 1979-81, but this was to be expected during a time of major institutional and struc- tural changes, including the increased monetization of rural economic acti- vities and the proliferation of collective and individual commercial and service undertakings. Bank branches have been given more autonomy to mobilize and allocate resources, and efforts have been made to influence economic decision making at the micro level by increasing and rationalizing interest rates. The increase in interest rates is expected to attract savings and induce enterprises to economize on fixed investment and working capital. However, the allocation of investment resources in China continues to be made primarily administratively, rather than by interest rates.  - 6 - 21. Balance of Payments. The Government's current policy includes continued emphasis on foreign trade and on making more use of imported technology. The performance of merchandise exports has continued to be very impressive, with the real growth rate averaging about 20% p.a. during 1978-81, due mainly to rapid growth in manufactured exports. However, merchandise imports, which also grew rapidly in 1979 and 1980, fell by 4.5% in value and 8.6% in volume in 1981 due to the stabilization program, especially the sharp cutback in the investment program. As a result, the $2.4 billion deficit of 1980 was converted into a $2.0 billion current account surplus in 1981. 22. The strong export performance is due in part to institutional and policy changes. In January 1981, an internal settlement rate of Y 2.8 per US dollar (the official exchange rate was Y 1.6 per US dollar) was introduced for all trade. The central government has actively encouraged decentralization of foreign trade decision making and has introduced material incentives, primarily in the form of foreign exchange retention schemes. It appears, however, that some provinces and organizations may have striven to increase exports even if this meant undercutting exports of other provinces or units or exacerbating domestic supply shortages; greater access to foreign exchange has also stimulated a faster growth of imports than would have been permitted under a more centralized system. In the absence of price and other reforms the Government has felt obliged to deal with these problems by introducing export quotas for 78 commodities, levying export duties on other commodities, restricting some consumer goods imports, and raising import tariffs on others. 23. The Government's approach to foreign borrowing has remained very cautious. In 1980 and 1981 it cut back sharply on interbank borrowing and in 1981 took advantage of the unexpectedly strong current account position to repay commercial bank and other loans. In 1981, China's debt service ratio was 7.8%. Gross international reserves at the end of 1981 were sufficient to cover about five months of 1981 imports of goods and services. 24. Investment. In 1978, China's rate of investment was much higher than the average for other low-income or middle-income countries; moreover, the overall efficiency of investment was low and getting worse due to shortages of necessary materials and supplies, major transport constraints, and inappropriate and inefficient procedures for selecting and implementing investment projects. In these circumstances, the Government decided to cut back on the investment rate while introducing measures to improve investment efficiency and thereby protect future growth potential. The reduction in the investment rate has been achieved in spite of difficulties in cutting many investment components: the share of inventory accumulation in total investment has remained high; investment financed from retained earnings or local resources has grown sharply as a proportion of the total; and there has been rapid growth of nonproductive, particularly housing, investment. As a result, most of the cutbacks have had to be in large centrally financed projects, which will probably have an adverse effect on future growth.  - 7- Growth and Income Developments 25. The overall rate of economic growth in recent years has been impressive, averaging 5.6% p.a. between 1978 and 1981 - a much higher rate than in the first half of the 1970s. In 1981, however, the rate dropped to 3.0% as a result of the stabilization program. 26. The combination of structural adjustment, economic growth and a low population growth rate (1.3% p.a. between 1978 and 1981) has led to rapid increases in the general standard of living in recent years. In urban areas, general wage increases and higher bonuses have more than offset the increase in the cost of living index, and real per capita incomes increased by 4.9% p.a. between 1978 and 1981. The number of urban unemployed has been reduced dramatically and, with government encouragement, urban self-employment has grown rapidly. 27. Even more impressive, however, has been the increase in rural incomes. Information from several sources suggests that at current prices, per capita rural incomes increased by 16-18% p.a. between 1978 and 1981; and when account is taken of price changes, the increase in real per capita incomes has been 10-12% p.a. About 60% of this dramatic increase is due to increased rural production and the remainder to shifts in the terms of trade in favor of rural producers. While areas and households that were already relatively well off may have benefited the most, many poor areas and households have also enjoyed substantial income improvements. Sectoral Strategies 28. The rapid development of agriculture has been essential because 800 million people depend on agriculture for their livelihood; moreover, rising incomes elsewhere in the economy and the requirements of light indus- try have placed new demands on agriculture. Between 1978 and 1981, gross agricultural output at constant prices increased by 5.7% p.a.; despite poor weather in 1980 the growth rate was 2.7%, and in 1981 when China was again affected by severe droughts and floods, the growth rate rose to 5.7%. There has been a substantial diversification of the sector, with production of cash crops expanding rapidly and large increases in livestock and sideline production. Grain production has also increased since 1978 despite a decline in the grain area, but domestic grain requirements have increased more rapidly due to higher incomes and fast-growing requirements for live- stock feed. As a result, foodgrain imports have been expanding steadily. 29. The strong performance of agriculture in recent years is largely due to the combination of improved terms of trade for agriculture and other policy interventions and institutional changes that encourage local and institutional specialization according to comparative advantage. Of parti- cular importance have been the changes in the organization and management of rural collectives (para. 15).  - 8 - 30. Adjustment policy in industry has included increased emphasis on light and consumer goods industry rather than heavy industry (para. 16); stress on modernization of existing enterprises, particularly through importation of new technology; and energy conservation. Promotion of manufactured exports has also been necessary to pay for imported technology. These exports have been growing rapidly but still account for only 4% of gross industrial output, and imported equipment as a share of capital construction in industry has risen from 3% in 1978 to 26% in 1981. 31. Reforms in industry have focussed the attention of organizations and individuals on profits and efficiency (para. 15). Innovations have included profit retention schemes, piece rate wages, and bonuses, which for workers in state enterprises now average more than one month's pay. New types of industrial organization include foreign partnerships, joint ventures between urban state industrial enterprises and rural communes, and industrial corporations with authority over a group of enterprises producing similar output. Charges on the fixed assets and working capital of state enterprises are intended to encourage them to use capital more productively. However, these reform measures have not yet been backed by price reform and enterprises still do not bear full responsibility for losses. 32. Since 1979 when energy conservation became a major policy issue, energy consumption has stagnated or fallen while NIIP has grown by 10%. As a result, China has remained a net exporter of energy despite declines in energy production in 1980 and 1981. The fall in energy use per unit of output has been due in part to the changing structure of industry: heavy industry consumes about four times as much energy per unit of output as light industry, and heavy industry output grew very slowly in 1980 and declined in 1981. The Government has been stressing the importance of improved efficiency and energy savings within sectors and has been pursuing energy conservation through rationing and other administrative measures. 33. Market-oriented reforms and greater regional specialization call for expanded and more efficient domestic transportation and commercial systems. In the commercial sector, the real value of sales has risen rapidly and the role of markets in the allocation of resources has expanded. Collective and individual commercial activities have proliferated, filling gaps left by, and forcing improvements in, the state commercial system. Growth in the volume of freight transport slowed greatly in 1980, and there was virtual stagnation in 1981, indicating that bottlenecks in this sector remain severe. Development Issues and Prospects 34. Although changes in the system of economic management as well as in the structure of the economy will undoubtedly continue, a difficult period of transition lies ahead. After spending three decades pursuing a particular set of goals with particular instruments, the country will inevitably find it hard to switch to a path that is not only new for China, but also one that has been successfully followed by few other countries.  Reform of the economic system will be especially difficult. The measures described above, though diverse in form, have a unity of purpose, namely to make the economy more efficient in the sense of both cutting costs and matching supply more closely with demand. But the attempt to reform parts of the economic system without a coherent overall program has also had some adverse consequences. Bureaucratic reform has been initiated and the momentum of reform is being sustained in the rural collective sector, but economic reform on the scale envisaged will require careful management and coordination. 35. Constraints. China's efforts to improve its people's living standards will, in the coming decade, be subject to a tight set of interlocking constraints. Some of these are of long standing; they reflect the country's fundamental resource constraints, especially the shortage of agricultural land and the difficulty of increasing yields further, Others are of more recent origin, however, and largely reflect the price that the country must still pay for more than a decade of waste and economic mismanagement starting in the mid-1960s. They include shortages of trained manpower, energy, and financial resources for new investment. 36. The food problem facing China in the 1980s is likely to be similar to that in the past, but it may be exacerbated by growing demand for feed- grain to support increased meat production. Grain output will continue to be constrained because of the extreme shortage of new cultivable land and the limited opportunities that remain for increasing yields. Although sub- stantial gains will probably be possible in the short and medium term through improved policies and management, the foodgrain balance will remain precarious and substantial food imports will have to be maintained. Main- taining a low population growth rate is also crucial. 37. In both rural and urban areas, the country's effort to modernize the economy will be seriously constrained by the lack of trained manpower. Despite considerable progress in basic education, technical and higher education has been neglected and was severely disrupted during the Cultural Revolution. Current enrollment in both universities and technical and voca- tional schools is one quarter of the average for other developing countries. Many teachers in advanced education are underqualified, curricula are outdated, and scientific equipment is scarce. 38. The outlook for energy production has recently deteriorated. Oil output peaked in 1979 at 106 million tons, dropped to 101 million tons in 1981 and is likely at best to remain at about 95-100 million tons a year during the 1980s. Coal output (which contributes about 70X of total commer- cial energy) declined to 620 million tons in 1980 and remained at the same level in 1981. It is unlikely to exceed 700 million tons in 1985 and about 850 million tons in 1990, even if high priority is given to this subsector. Growth of total primary energy production in the 1980s will thus not exceed 37 per year - less than one quarter of the 1952-80 growth rate.  - 10 - 3q. The prospects for economic growth in the 1980s will thus depend critically on reducing energy use per unit of output. In particular, the availability of oil for use as an industrial raw material will fundamentally influence growth prospects. The potential for energy savings is very large, as China is now among the world's most inefficient users of energy. In addition to substantial new investment, however, conservation will require fundamental reform of energy allocation procedures, incentives for reduced consumption and changes in relative prices, and indeed, a total change of thinking at the enterprise level on the way energy is used - all of which will be difficult and slow to implement. 40. The energy sector is already absorbing over 40% of industrial investment and very large capital outlays would be required in the next several years to accelerate the growth of energy output in the second half of the 1980s. Competing claims for investments in other sectors are consid- erable, especially those for badly needed urban housing and for relieving transport bottlenecks. The attempt to modernize the huge industrial sector built upon outdated technology will also require enormous investment out- lays. Thus, notwithstanding the Government's effort to improve the alloca- tion and use of its financial resources, a high level of investment will need to be maintained in the 1980s to build a sound foundation for sustained growth over the longer term. However, investments in key sectors like energy and transport are presently caught between the Government's desire to reduce the saving rate (in order to accelerate the growth of consumption) and its loss of control over parts of the investment program as a result of decentralization and reform. 41. The Government's attempt to foster a much more open economy than in the past may be impeded by a shortage of foreign exchange. Domestic bottlenecks in the supply of certain agricultural and industrial materials, together with the need to purchase foreign technology (in the form of software as well as hardware), will make continued expansion of imports essential for growth and modernization. The rate of growth of export earnings depends critically on two uncertain parameters, namely the rate at which nontraditional manufactured exports can be increased and the degree of success in energy conservation. Even if energy conservation is fairly successful (growth in energy use at, say, three fourths of the GDP growth rate), oil exports will almost certainly disappear by the second half of the 1980s, and imports of energy may well be required, at least until new domestic production capacity is established. If the external economic environment improves, manufactured exports could grow, from a relatively small base, by 9-10% a year in constant prices during the decade. Nonetheless, declining energy exports will cause total foreign exchange earnings to grow by no more than about 2% a year in the first half of the 1980s and 8% a year in the second half. Thus the strong balance of payments situation in 1981, brought about mainly by restrictive measures (cutbacks in investment), masks serious medium-term constraints. 42. China's access to concessionary capital is limited: apart from what it might obtain from the Bank Group, concessionary capital is only  - 11 - likely to come from Japan and a few other bilateral donors and will likely average only $500-600 million a year during the 1980s. Quantitative projec- tions show that if China is to maintain reasonable growth and modernization and keep its debt service payments at a manageable level, then it needs to obtain the necessary foreign capita'l at an average interest rate substan- tially below the market rate. China also has a strong claim to concession- ary lending because it is still one of the poorer countries in the world. 43r For China, as for many other developing countries, the 1980s will be a difficult decade, and one whose problems will be compounded by errors made in the 1960s and early 1970s. But looking further ahead, China's econ- omic prospects appear favorable. By 1990, most new entrants to the labor force will have received some secondary education, and the skilled manpower deficit will have been reduced. Further progress will have been made in tapping China's large energy potential, and in using it more efficiently. Continuation of recent manufactured export trends should generate sufficient foreign exchange for the Government to have more confidence in using foreign capital and be less concerned about its terms. If the country's immense wealth of human talent, effort and discipline can be combined with policies that increase the efficiency of resource use, China will be able, within a generation or so, to achieve a substantial increase in the living standards of its people. Whether this potential can be realized, however, will depend crucially on the success of the Government's program of reform and adjustment in the 1980s. PART II - BANK GROUP OPERATIONS IN CHINA 44. In view of the particular circumstances of China and the economic transition now underway, the Bank's relationship with China should have several broad objectives. Firstly, the Bank should offer China its consid- erable development experience and institutional knowledge. Moreover, working with the Bank represents one means for China to re-establish its position in the world community after its lengthy isolation. Secondly, the Bank should assist China in removing the major constraints on development - the shortages of energy, transport infrastructure, skilled manpower and modern technology. Even more important, it can help the authorities to use these and other inputs more efficiently, by improving project analysis and investment control, as well as overall economic management and planning. Finally, the Bank should help the Government identify ways of reducing China's remaining poverty. Since the Government has been successful in meeting the basic needs of most of its people, these efforts should concentrate on increasing incomes in the poorest rural areas. 45. Since China's change of representation in the Bank Group in May 1980, four projects involving lending of 8460 million have been approved. Two have been in education (TJniversity Development Project, FY81 and the Agricultural Education and Research Project, FY83), one in agriculture (North  - 12 - China Plain Agriculture Project, FY82) and one in transport (Three Ports Project, FY83). Annex II contains a summary statement on these loans and credits, as well as notes on the execution of ongoing projects as of September 30, 1982. Economic and Sector Work 46. The Bank's economic and sector work was initially designed to provide a basis of knowledge on the development and functioning of the Chinese economy. This work resulted in completion of a nine-volume introductory economic report in June 1981. A follow-up country economic memorandum analyzing developments over the past two years is now under preparation. In addition, the Bank has initiated studies in several areas important for our understanding of the Chinese system, including rural finance and urban planning and management in Shanghai. 47. Other economic work is designed to assist China in its present effort to promote efficient use of investment resources, and more generally to introduce new methods of economic management and planning. As preparation for the proposed project, an appraisal manual has been developed with Bank assistance by the new financial intermediary, the China Investment Bank (CIB). The Bank is now helping to develop a similar manual for the Agricultural Bank of China (ABC). A program of economic research on China's development problems, aimed at the application of advanced analytical techniques, has begun in collaboration with Chinese economic research institutions in the areas of enterprise incentives and the study of structural change. 48. Sector studies will help inter alia to identify and prepare future investments. Some have been included in Bank-financed projects, e.g., agricultural development in Shandong province under the North China Plain Project, containerization under the Three Ports Project, and agricultural manpower and research under the Agricultural Education and Research Project. A health sector review is reporting on rural health care delivery systems and health manpower development. Near-Term Lending 49. Work has begun on a range of projects, with emphasis on improved management and efficiency as well as on training. Several are in the key sectors of energy and transportation. In energy, the Bank's efforts will help to increase the supply of fuel and power. Petroleum projects would be onshore and emphasize training, field management and studies. One, at the country's largest and most productive field, Daqing, would help develop new reserves and introduce enhanced recovery techniques. Another, at the Zhongyuan field, would include both development and exploration. Other operations are proposed to support hydropower generation in south China and the development and management of large underground coal mines in Shanxi province. Support of transportation began through the modernization of container and coal handling at China's three major ports. The Bank plans to  - 13 - finance further projects, in ports and in railways where additional capacity is needed to transport coal from mines in Shanxi to the east coast. 50. In view of China's shortages of manpower with higher and/or tech- nical education, the Bank will continue its support of education, notably the TV university, a pilot program of basic colleges, and another university development project. Support of agriculture will also continue through projects to develop presently uncultivated land in Heilongjiang province for grain production, develop rubber cultivation in Guangdong province, and provide rural credit in two provinces with emphasis on improved project appraisal and institution-building. Besides the proposed project, it is expected that industry would be supported through further loans to CIB for light industrial firms for modernization and export projects. The Bank may also become involved in technical assistance and investment in support of energy conservation in industry. In health, a project would help improve rural health care services and medical education. PART III - THE INDUSTRIAL AND FINANCIAL SECTORS The Industrial Sector 51. Characteristics. China is one of the world's ten leading countries in total industrial production. In 1979, China produced the largest volume of cotton yarn and fabric, ranked third in cement and coal, fifth in steel and seventh in electric power. Manufacturing accounts for about 35% of GDP (compared to only 13% for all low-income countries, 25% for middle-income countries, and 27% for industrialized market economies) and 13% of total employment. Manufactured exports, while only 3.4% of gross industrial out- put, account for half of total merchandise exports, and grew by about 20% p.a. (in real terms) over 1977-81. 52. Growth. China has had one of the highest and most sustained industrial growth rates in the world, though it has fallen gradually in recent years. Gross industrial output grew at 18% p.a. during 1952-57 and at 10% p.a. over 1957-79, with heavy industry growing by 10.8% p.a. and light industry by 8.3% p.a. over the latter period. This rapid growth was r fueled by very high rates of capital accumulation, and was supported by a highly-diversified machine-building sector. But there have been periodic setbacks, followed by recovery, due to the disruptions of the Great Leap Forward (1958-60), the withdrawal of Soviet assistance (1960), and the Cultural Revolution (1966-76) whose effects are still being felt. 53. Organization. China's 355,000 industrial enterprises are owned either by the state or by urban or rural collectives. State enterprises comprise fewer than 25% by number, but account for over 80% of net output, 90% of fixed assets and 60% of employment. All state and collective industrial enterprises come under one of eleven central government ministries concerned  - 14 - with manufacturing. A few key state enterprises are under direct national control, but most are supervised by the ministries' provincial and county bureaus. In the past three years, many enterprises have been grouped into corporations, an intermediate layer below the bureau. 54. Production Planning. Because of disruptions and policy reversals, there has been almost no medium- or long-term planning since the First Five Year Plan ended in 1957, although a Sixth Five-Year Plan (1981-85) has now been prepared. The primary instrument of economic coordination is the annual plan, which sets aggregate production targets for key commodities, for elaboration at lower levels of administration. Less important goods are controlled by provincial plans or local purchase agreements. The annual plan is integrated with a consolidated budget and a credit plan. The plan which comes down to an enterprise contains targets for physical production (historically the most important targets), output value, profit, materials and energy use, employment, production cost and working capital. Frequently both the market outlets and input sources are specified. With mostly quantitative targets, fixed prices (para. 56), assured markets, and relatively little contact with users, enterprises have lacked incentive to improve product quality. 55. Investment Project Planning. The level of approval for an invest- ment project depends on its size, its location and whether import of tech- nology is involved. Large-scale projects must be approved by the SPC and those involving foreign licensing agreements by the Ministry of Foreign Economic Relations and Trade. Most subprojects under the proposed loan/credit would be approved at the provincial level. In all cases, many different agencies must "sign off" on a proposal before it is included in the annual plan, and thus eligible for allocation of construction material and equipment. Although extensive feasibility studies are generally called for, investment planning in China has several weaknesses: (a) investment proposals are frequently not made or evaluated in their sectoral or national context, in part because the necessary data may not be easily available; (b) projects may be poorly prepared technically, especially where imported technology is involved, due to lack of knowledge by the enterprises concerned and to reluctance to purchase foreign software of any kind; and (c) although economic criteria are supposed to be dominant in project selection, there is no formal cost/benefit analysis. Government is aware of these problems. The proposed project would be an important pilot effort for dealing with them (paras. 70-71). 56. Pricing System. As prices are set by central or provincial authori- ties on the basis of Government's social and economic objectives, rather than by supply and demand, and as most have remained essentially unchanged since the 1950s, relative prices do not reflect production costs or market scarcity. There are thus great variations in the profitability of different industries. The rate of return (profits and taxes) on investment in 1979 in light industry equalled 48% of fixed assets plus working capital, compared to only 19% in  - 15 - heavy industry, because manufactured consumer products on average are priced relatively high compared to basic industrial goods. The high overall profitability of industry reflects in part the generally low wages and low prices of agricultural goods used as inputs. 57. Problems. Although respectable rates of industrial growth are expected to continue, growth may be constrained by shortages of key inputs, especially energy, agricultural raw materials, foreign exchange and qualified managers, engineers and scientists. These constraints may become increasingly significant as growth of oil production slows, thus limiting foreign exchange earnings and energy supplies, and as the older generation of managers and technical experts retires. 58. Moreover, China's industrial sector has important structural weak- nesses. It is inefficient in its use of labor, capital and energy. Despite some technological advances, use of labor and capital has not become more efficient since the 1950s. Moreover, the ratio of energy consumption to GNP is three times the average for other developing countries or industrialized market economies. The reasons for these inefficiencies include problems with industrial management, prices and investment choices. Chinese industry has also remained technologically backward, due in large part to China's prolonged international isolation and sometimes excessive emphasis on self-sufficiency. China has often failed to make the best use of imported equipment because it lacked the necessary technical and managerial expertise. Finally, structural imbalances have arisen from overemphasis on heavy industry, and poor linkages between supply and demand. 59. Recent Reforms. Three aspects of the recent economic reforms (paras. 12-15) are particularly relevant to industry: (a) profit and foreign exchange retention; (b) a gradual shift from grant to loan finance; and (c) relative price changes. Most industrial enterprises may now retain 10-30% of incremental profits, for specified uses including minor investments. Enterprises' supervisory bodies can also retain a share of foreign exchange earnings. These measures help decentralize investment decisions and give incentives to increase profits and exports. 60. The shift to loan finance has induced both the People's Construction Bank of China (PCBC), which handles all capital construction grants and loans, and the borrowing enterprises to make greater efforts now to assure the financial profitability of investments and to reduce waste of resources. In the course of appraisal, PCBC can modify or even reject projects. In this transition stage, interest rates on local currency loans are still low (2.4-3.6% p.a. for capital construction; 5.8-6.5% p.a. for modernization). 61. The shifts toward decentralized investment decision-making using loan- and self-finance increase the importance of continuing the rationali- zation of prices to bring financial returns more into line with economic returns. The use of shadow prices, while now essential for proper investment  - 16 - appraisal (para. 71), is only a partial solution. Government apparently intends to make relative prices more rational; however, while some prices (mainly for agricultural goods and coal) have already been altered, fundamental change will necessarily be complicated and slow because of the income distribution and budgetary implications of price changes, fear of inflation and the inherent complexity of the adjustment process. The Financial Sector 62. Objectives. As in other socialist countries, China's financial system has served mainly to channel government budgetary funds for approved purposes and to help control state-owned and collective enterprises. More recently, increasing attention has been paid to using the banks to mobilize savings and increase investment efficiency. 63. Institutional Framework. China now has five state banks. The People's Bank of China (PBC) has ministry-level status as a multi-purpose central and commercial bank, as well as the administrative organ for govern- ment financial management. It also supervises the Agricultural Bank of China, which is in charge of banking and financial administration in rural areas nationwide, and the Bank of China (BOC), which handles most international transactions, including foreign currency deposits and loans (para. 65). The People's Construction Bank of China (PCBC), which is supervised primarily by the Ministry of Finance, has the main financial responsibility for apprais- ing and disbursing for investment in fixed assets, in both industry and physical infrastructure, through both grants and loans. PCBC also manages the financial affairs of state construction enterprises. In all of its programs, PCBC lends local currency only. The newly created China Investment Bank (CIB) (paras. 72-82), which will implement this project, is the offshoot of PCBC for foreign exchange lending. 64. Industrial Finance. Annual capital construction in industry remained about Y 28-30 billion over 1978-80, but fell to Y 20 billion in 1981. Over the same period, light industry's share of this rose from 10% to 20% and energy's share climbed from 42% to 50%, while the portion of other heavy industry dropped from 48% to 30%. All capital construction funds pass through PCBC. The finance comes from the central, provincial and local budgets, enterprise retained earnings, PCBC deposits and a variety of other funds at the local level. By 1981, some 15% of capital construction was loan-financed, mostly in light industry, energy and mining. In addition to capital construction, PCBC and PBC each lent about Y 2 billion for industrial modernization in 1981. 65. China's import of machinery and equipment, excluding vehicles, jumped from an average of $1.0 billion during 1975-78 to $2.5 billion in 1979 and $3.9 billion in 1980. Many high priority projects get permission to buy foreign exchange to import equipment and technology, using grant or loan funds  - 17 - or retained earnings. Other projects, especially those which would earn foreign exchange and which might need assistance in management, technology or export marketing, might be proposed for joint ventures, co-production (similar to joint ventures, but with no Chinese capital), compensation trade (where the equipment supplier accepts Chinese exports as payment), or assembly and processing of imported parts/materials for export. Export-oriented projects that need to import only relatively small items of equipment can obtain direct BOC loans. This type of BOC lending dropped almost to zero in 1980-81 when the interest rate was raised from 7% p.a. to 14-17% p.a. BOC also handles bilateral buyers' credit arrangements, whereby subsidized funds (now about 10% p.a.) are provided by foreign banks for purchase of equipment, usually in the financing country. Suppliers' credits are also available from several countries. Although about $17 billion of credit lines have been negotiated since 1978, only a small fraction has been used so far, due to both the investment slowdown during readjustment and China's general reluctance to incur foreign debt. 66. Despite this variety of foreign exchange sources, it has remained quite difficult for many enterprises to obtain foreign exchange for invest- ment, because of tight Government restrictions on its use and because many of these sources did not address the need for complete projects integrating imported equipment with local equipment and civil works. But two recent developments are changing this. First, starting in 1982, BOC has begun using more heavily the available buyers' credit lines and supplementing these, as necessary, with its own foreign exchange. Secondly, CIB has now been established, and will begin operations using the proposed loan and credit, bringing to bear PCBC experience in investment finance, as well as new approaches to project appraisal and technology transfer. Bank Group Industrial Lending Strategy 67. This is expected to be the first of a series of projects with CIB, aimed at building up this new institution as an important part of China's economic reform program. While this first project will cover a wide range of light industries, subsequent loans may include some concentration on specific subsectors. The Bank Group is also exploring with Government the possibility of financing energy conservation investments in the industrial sector. However, it and the Government are still in the process of developing a longer-term strategy for Bank Group industrial lending in China.  - 18 - PART IV - THE PROJECT History 68. The need for a financial intermediary for industrial lending involving import of equipment and technology was identified by the Bank Group's first economic mission to China in November 1980. Specific proposals were developed in the course of 1981 (para. 72). The project was appraised in April 1982 and negotiated in Washington in October 1982. The Government was represented by Mr. Luo Qing and CIB by Mr. Geng Gengshan. A Staff Appraisal Report (No. 4009-CHA, dated November 23) is being distributed separately to the Executive Directors. Supplementary data are in Annex III. Objectives 69. CIB and the proposed loan/credit would both help fill a gap in foreign exchange industrial finance and address some of the central issues in improving industrial investment efficiency by (a) helping to organize transfer of foreign technology to investing enterprises, and (b) improving project design and selection criteria. CIB's focus on modernization of existing light industrial enterprises also fits in well with Government's readjustment strategies (para. 30). 70. Technology Import. Chinese light industries have failed to keep pace with foreign technology, largely because of China's relative isolation. Technology import is, of course, a complicated process. CIB's contribution would be in: (a) financing hardware and software imports; (b) appraising the economics of alternative technologies; and (c) serving as a channel for locating and utilizing international experts, and sending local engineers to visit factories abroad. 71. Improved Project Appraisal. Investment projects in China are subject to feasibility studies covering technical, financial and certain economic aspects. However, these often do not form an adequate basis for proper project design and selection (para. 55). Government has therefore selected CIB to be a pilot institution for improving appraisal methodology. CIB staff and other Chinese officials and researchers, with advice from Bank staff, have drafted CIB's project appraisal manual. One important objective of the manual is to make appraisal more comprehensive and systematic, especially by examining projects in their sectoral and technological context. The second and more innovative objective is to supplement present Chinese methods of economic evaluation (essentially by reference to plan targets) with cost/benefit analysis based on shadow prices. The use of shadow prices is important because actual Chinese prices do not provide good measures of economic costs and benefits (para. 56). The need for improved methods of economic evaluation of projects is becoming more widely accepted in China. CIB, by developing and using its appraisal manual, will provide experience in adapting new methods of appraisal to Chinese circumstances. CIB has  - 19 - already begun to use the draft manual to appraise its initial subprojects. Formal issuance of an appraisal manual and instructions satisfactory to the Bank/Association, for experimental use by CIB's branches, will be a condi- tion of effectiveness (Development Credit Agreement, Section 5.01(c) and Loan Agreement, Section 5.01(b)). The use of the manual, after revision based on initial experience and agreed with the Bank/Association, will become mandatory within six months after the initial issuance (Project Agreement, Section 2.09(a)). The China Investment Bank (CIB) 72. Establishment. PCBC, under Ministry of Finance guidance, played the major role in setting up CIB, with advice from several Bank missions. In December 1981, CIB's Charter was approved by the State Council, and CIB's Board of Directors held its first meeting. Although autonomous, CIB is administratively under the leadership primarily of the Ministry of Finance and secondarily of PCBC, whose help it will continue to need in obtaining staff, facilities and entree to PCBC clients. PCBC/CIB have made consider- able progress, in a relatively short period, in preparing CIB's basic documents, recruiting and training a core of staff (primarily from PCBC), establishing branches, and identifying a subproject pipeline. 73. Management. CIB's 29-person Board of Directors, consisting of senior officials of PCBC and other agencies, will meet at least once a year. The Board reviews and decides on CIB's annual plan, major policies, finan- cial and operational performance, proposed borrowings of $50 million equiva- lent or more, and any proposed Charter amendments. A Managing Committee consisting of the Board Chairman, three Deputy Chairmen and seven Managing Directors will meet from time to time to deal with all other important matters, including loan approvals of Y 10 million or more, borrowings below $50 million and appointment of senior officials below Vice President. The President of CIB is a Deputy Chairman of the Board, and also retains his post as First Vice President of PCBC. The appointment by the Government of a CIB Vice President will be a condition of effectiveness (Development Credit Agreement, Section 5.01(g)); the candidate has already been nominated by CIB's Board of Directors and is on the job. A second Vice President is being sought; CIB intends to have him/her nominated by its Board and on the job by March 31, 1983. 74. Organization, Staffing and Consultancy. The head office has five departments: Project Lending; Finance and Accounting; Survey and Research; Coordination and Planning; and General Affairs and Administration. An internal audit unit is directly responsible to the Managing Committee. CIB intends to soon have a suitable engineer in each branch, in addition to more financial and economic staff. CIB will also hire, as a condition of effec- tiveness- a full-time qualified and experienced senior economic advisor to direct and review its economic work (Development Credit Agreement, Section 5.01(e) and Loan Agreement, Section 5.01(b)). Also as a condition of effec- tiveness, CIB is to conclude a contract, satisfactory to the Bank/Association,  w- 20) for provision of engineering services to CIB (Development Credit Agreement, Section 5.01(d) and Loan Agreement, Section 5.01(b)). CIR intends to contract with the China International Engineering Consulting Corporation (CIECC), an umbrella organization of the 17 newly-established industry-specific engineering consulting firms created from the design institutes in various ministries. CIB intends to submit all subprojects under the loan/credit to CIECC or other experts for technical review. A CIECC Deputy General Manager will be CIB's part-time senior engineering advisor, and will help arrange and oversee the work of short-term consultants. Where suitable local experts are not available, as when the subproject involves specialized technology not well-known in China, short-term foreign consultants will be recruited to advise CIB on its appraisal work. 75. Branches. CIB has established branches in Shanghai, Tianjin and Jiangsu province (Nanjing), which together account for 8% of China's population and 25% of its gross industrial output. As its experience, staff trained in project appraisal, and financial resources increase, CIB will open about one additional branch per year, with initial priority given to the northern and central coastal provinces where export prospects are best. The branches will appraise all projects, subject to head office approval. 76. Training. While most CIB staff have had many years of experience in PCBC, they need special training in all aspects of development banking, as well as international exposure. As arranged through the Bank and financed by UNDP, CIB staff are making study tours to well-managed development finance companies in other countries. The Economic Development Institute (EDI) gave a five-week development banking course in Shanghai in April/May 1982 mainly for CIB and PCBC, and plans a similar course in 1983. CIB is also planning in-house seminars, especially on project appraisal. CIB's overall training program for 1983 was agreed upon. 77. Operating Policies. CIB will lend primarily for small- and medium- size fixed investments in state enterprises, with emphasis on technical modernization and export-oriented projects. CIB will obtain foreign exchange from international institutions (and eventually, perhaps, from international capital markets) and local currency from the Government as share capital. It will lend local currency only in conjunction with foreign exchange. Loans will be for capital expenditures only; PBC, which already has working capital accounts for virtually all enterprises, will provide the complementary working capital, as it normally does for all approved investments. CIB's major operational and financial policies, within the framework of its Charter and the national economic plans are outlined in the Policy Statement, and the specific areas of emphasis over the next two years in its Development Strategy Statement. CIB will exchange views with the Bank/Association on any proposed change in its Charter, Supplemental Regulations, Policy Statement, Development Strategy Statement or Lending Regulations (Project Agreement, Section 2.08). 78. Procedures. Loan applicants, after obtaining preliminary clearance from CIB and other agencies based on project proposals, will prepare feasi- bility studies. CIB will then appraise the projects, and make loans to those which meet its technical, financial and economic standards. These procedures  - 21 - will be spelled out in CIB's Lending Regulations, whose issuance, satisfactory to the Bank/Association, is a condition of effectiveness (Development Credit Agreement, Section 5.01(f) and Loan Agreement, Section 5.01(b)). Projects approved by CIB, up to the limits of its annual disbursement program approved by the SPC as part of the annual national plan, will be eligible for construction materials and other inputs. CIB will supervise its loans until they are fully repaid. It will issue project supervision instructions to its branches by June 30, 1983 (Project Agreement, Section 2.09(b)). 79. Interest Rates. CIB will initially lend local currency at 3.6% p.a., the national rate for capital construction projects in light industry. The Government recognizes that this rate is low; however, it is already a vast improvement over the total dependence on grants until 1979. CIB will be able to charge a higher rate for lending foreign exchange, due to its scarcity in China and the current high international interest rates. However, it faces competition from BOC which is lending foreign exchange at or slightly above 10% p.a. (paras. 65-66). Since CIB will be making more extensive subproject appraisals than BOC, requiring more data and time, enterprises will be reluctant to submit to these procedures unless there is some incentive. Furthermore, they may be reluctant to accept project design alternatives that give higher economic, but lower financial returns. CIB's management has strongly indicated that it will not be possible for them now to charge more than 8% p.a. In addition, given the divergence between economic and financial prices in China (para. 56), it is economically more efficient for cost/benefit analysis (para. 71), rather than interest rates, to be the main determinant of loan application by CIB. Agreements were reached that (a) CIB will onlend the loan/credit at not less than 8% p.a.; (b) CIB will inform the Bank/ Association in advance of any plans to change its interest rates; and (c) from time to time, at the request of either party, CIB would review its lending rates with the Bank/Association in the light of its cost of funds and profitability, and of movements in interest rates and inflation in China (Project Agreement, Sections 2.03(a) and 2.10 and Schedule (Part A.1). As inflation in China for the past three years has averaged about 3.5% p.a., and no major increase is anticipated, CIB's 8% p.a. onlending rate is expected to be a positive real rate. 80. Loan Repayments. The maturity of CIB's loans will normally not exceed seven years, and in any case will not exceed twelve years (Project Agreement Section 2.03(a) and Schedule (Part A.3). Enterprises will service their loans from incremental profits and depreciation allowances. Enterprises will be allowed to obtain as much foreign exchange as needed for payments to CIB on their foreign exchange loans (Development Credit Agreement, Section 3.01(b) (ii)) . 81. Resources, Financial Structure and Projections. The Government is CIB's sole shareholder. CIB's authorized capital is Y 4 billion ($1.43 bil- lion, at the internal settlement rate of Y 2.8 = $1) of which Y 400 million was paid in early 1982 to ensure that CIB had the local currency needed for its initial loans. The Government will also make available $10 million in foreign exchange as a revolving fund to bridge the time gap before reimburse- ments from the loan/credit. On the basis of the present CIB subproject pipeline, the suppressed demand in China for foreign equipment and technology,  - 22 - and CIB's expected branch network expansion, CIB loan approvals are projected to grow by about 40% p.a. over 1983-87, to total $680 million over five years in foreign exchange, and Y 680 million ($240 million) in local currency. In its early years CIB hopes to get most of the foreign currency from the Bank Group, but expects to raise funds from other foreign sources as well. The proposed loan/credit of $70 million is expected to meet CIB's foreign exchange commitments up to the latter half of 1984, although this is difficult to predict accurately as CIB is a new institution. CIB is expected to be profitable from the start, initially due to interest earned on its paid-in capital. Its 3.6% local currency spread and 0.6% foreign currency spread (para. 84) will give it an overall 1.4% spread, which will be sufficient given its low overhead costs (only 0.2% of average total assets by 1986-87) and low default risk (loans would be guaranteed by borrowers' supervisory bodies), and the fact that the Government does not wish to receive any dividends from CIB. The maximum CIB long-term debt/equity ratio of 5:1 (Project Agreement, Section 3.03) is unlikely to become a constraint because all local currency lending will be from equity. 82. Accounts and Audit. CIB will maintain accounting records adequate to reflect its operations and financial position in accordance with generally accepted accounting principles and standards (Project Agreement, Section 3.01). CIB's accounts will be audited annually by independent auditors acceptable to the Bank/Association, and the accounts and audit report will be submitted to the Bank/Association within six months after the end of each financial year (Project Agreement, Section 3.02). The Government has proposed that the newly established China Consultants of Accounting and Financial Management (CCAFM) audit CIB. The first CIB accounts to be audited will be those for calendar 1983. After CCAFM carries out some other audits, the Bank/Association will evaluate its performance before approving it to audit CIBGs accounts. The Proposed Bank Loan and IDA Credit 83. Amount and Maturity. The proposed Bank loan of $40.6 million (including the capitalized front-end fee) and IDA credit of $30 million equivalent will be made to the People's Republic of China. They will provide CIB with its first significant foreign exchange resources. $68.7 million equivalent is expected to be committed as investment subloans to some 30-40 subprojects; the terminal date for submission of subloans will be March 31, 1985 (Project Agreement, Section 2.02(e)). Back-to-back repayment of the subloans and Bank loan is not appropriate because the subloans would have unusually short maturities, averaging about 5-6 years. Therefore, the Bank loan will be of fixed maturity on the standard country terms for China, which are 20 years, including 5 years of grace. 84. Onlending. The Government will onlend both the loan and the credit to CIB for 20 years, including 5 years of grace, with CIB allowed to roll over the funds, under a Subsidiary Loan Agreement. The signing of such an agree- ment satisfactory to the Bank/Association is a condition of loan/credit effectiveness (Loan Agreement, Section 5.01(b); Development Credit Agreement, Sections 3.02(a) and 5.01(b)). The Government will charge CIB a fixed  - 23 - interest rate of 6.9% p.a. (a weighted average of the present Bank interest rate and IDA service charge) plus the Bank and IDA commitment fees. The Government will thus bear the risk from the variable Bank interest rate. Including the front-end and commitment fees, the total cost of these Bank/IDA - funds to CIB will be about 7.4% p.a. compared to its onlending rate of 8% p.a. The Government will bear the foreign exchange risks between the US dollar and (a) the currency pool index (for the Bank loan portion) and (b) the SDR (for * the IDA credit portion) by onlending to CIB denominated in US dollars valued at the date of withdrawal (Development Credit Agreement, Section 3.02(a)). The above arrangements have been made because it would be too complicated and burdensome for CIB to pass these interest rate and foreign exchange risks on to its subborrowers, most of whom have no experience with foreign borrowings. However, subloans would be denominated in US dollars so that subborrowers will take any foreign exchange risk between the US dollar and the Yuan (Project Agreement, Section 2.03 (a) and Schedule (Part A.4). This risk will be small, as most subborrowers will earn foreign exchange which they will use for repayment without needing to convert into Yuan. 85. Preparation Subloans. In preparing their feasibility studies, some potential subborrowers will need foreign exchange for the costs of (a) expatriate technical consultants, and (b) overseas technical visits. Under the project, $1.0 million of the IDA credit will be allocated for preparation subloans by CIB; this should cover up to 20 subprojects being prepared for financing under this loan/credit or future borrowings. 86. Training and Technical Assistance Component. About $0.3 million of the credit will be allocated to finance, over two years, the foreign exchange costs of: (a) study tours by CIB staff to other development finance institu- tions (para. 76) and overseas technical visits by CIB staff as agreed with the Bank/Association (Project Agreement, Section 2.04(b)); and (b) short-term visits by technical experts to assist CIB in the development of its oper- ations, especially its appraisal work. About 7 man-months of consultant services are provided for at an average manmonth cost, including fees, overhead, international travel and subsistence, of about $13,000. 87. Maximum Subloan Size. CIB will be allowed to onlend for individual subprojects up to $8 million in foreign exchange (Project Agreement, Section 2.03 (a) and Schedule (Part A.2). This high limit reflects the fact that: (a) 4 CIB will be taking virtually no financial risk; and (b) in general it is for the larger projects that CIB's appraisal is most valuable, because these projects are more likely to involve major technology import, to serve nationwide or international markets which must be studied, and to have many linkages to other industries. 88. Free Limit. CIB is a new institution, and careful review of both the technical and economic aspects of its subproject appraisals will be essential at this early stage, especially as cost/benefit methodology is new  - 24 - to China. The free limit for investment subloans is therefore set at $1.0 million, and the aggregate free limit for them at $20 million; in addition, the first three investment subloans from each branch, regardless of size, will be subject to Bank/Association approval (Development Credit Agreement, Section 2.02(b)). An estimated 60% of the subprojects by number and 80% by amount would be above the free limit. The free limit would be kept under review, and might be increased somewhat during implementation if the quality of CIB appraisals justified this. 89. Procurement. Individual contracts of at least $3 million equivalent will be awarded after international competitive bidding including prior Bank/ Association review of bid documents. A preference equal to 15% of the c.i.f. cost or the customs duty, whichever is lower, will be extended to local manu- facturers in the evaluation of bids. All contracts below $3 million will be awarded after evaluation and comparison of quotations solicited from at least three qualified suppliers. All contracts of $1-3 million will be subject to post-review by the Bank/Association (Project Agreement, Section 2.03(a)(ii) (A) and Part B of the Schedule). The Government has authorized the China National Technical Import Corporation (CNTIC) to handle imports under the project (Development Credit Agreement, Section 3.01(b) (iii)). The existence of adequate competition to help ensure reasonable prices will be examined as part of the review of all subprojects above the free limit. Consultants for CIB or under preparation subloans will be selected in accordance with the Bank's Guidelines on the Use of Consultants, and will have qualifications, experience, and terms and conditions of employment satisfactory to the Bank/Association (Project Agreement, Section 2.04(a)). 90. Disbursement. Disbursements will be made against full documentation for (a) 100% of the foreign expenditures on directly imported equipment, (b) 90% of the ex-factory price of locally manufactured equipment procured under ICB, and (c) 100% of the foreign exchange cost of technology, technical assistance and overseas training. They are to be completed by December 31, 1987 (Development Credit Agreement, Section 2.04 and Loan Agreement, Section 2.03). The disbursement projections are based on the disbursement profile of industrial development and finance lending in the East Asia and Pacific Region, taking into account that CIB already has a substantial subproject pipeline under preparation. 91. Benefits and Risks. This project would involve considerable innova- tion in the Chinese context. It therefore offers potentially great benefits, but also faces significant risks. The main benefits would be much needed improvements in industrial efficiency through technology transfer and better project design and selection, and development of a new bank that would 4 institutionalize these approaches and help fill a gap in Chinese industrial finance. While starting relatively small with this project, CIB is expected to become a major national bank. The success of CIB and the project would give further impetus to China's economic reform movement. The approaches to project appraisal and financing to be pioneered by CIB are expected to be replicable in other financial institutions in China; interest in CIB's  - 25 - project appraisal manual is already being shown by the Bank of China and the Agricultural Bank of China. 92. une major project risk also stems from close association with China's economic reforms. Should economic reform be reversed in China (e.g. increased emphasis on technological self-sufficiency or less reliance on economic opportunity costs in making investment decisions), CIB's role could be undercut. But most indications are that economic reform will proceed, although at a cautious pace. The other major risk is that CIB will not prove able to meet adequately the major challenges facing it. While CIB is obtain- ing quite experienced staff from PCBC, most have had virtually no exposure to foreign technology, economic cost/benefit analysis or international finance. Furthermore, CIB is still only partially staffed. The recruitment, training and technical assistance arrangements under the project reduce this risk to an acceptable level. PART V - LEGAL INSTRUMENTS AND AUTHORITY 93. The draft Development Credit Agreement between the People's Republic of China and the Association, the draft Loan Agreement between the People's Republic of China and the Bank, the draft Project Agreement among the Association, the Bank and the China Investment Bank, the Report of the Committee provided for in Article III, Section 4 (iii), of the Articles of Agreement of the Bank and the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 94. Special conditions of the project are listed in Section III of Annex III. Additional conditions of effectiveness (Development Credit and Loan Agreements, Section 5.01) include: (a) approval by the State Council of the Development Credit and Loan Agreements; (b) signature of a Subsidiary Loan Agreement between the Borrower and CIB satisfactory to the Bank/Association; (c) appointment of a CIB Vice President; r (d) appointment by CIB of a full-time qualified and experienced senior economic advisor; (e) conclusion of a contract satisfactory to the Bank/Association for provision of engineering services to CIB; (f) issuance by CIB of Lending Regulations satisfactory to the Bank/Association; and  - 26 - (g) issuance by CIB to its branches of a project appraisal manual together with instructions for its experimental use, both satisfactory to the Bank/Association. 95. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and the Articles of Agreement of the Association, respectively. PART VI - RECOMMENDATION 96. I recommend that the Executive Directors approve the proposed loan and credit. A. W. Clausen President Attachments November 29, 1982 Washington, D.C.  ANNEX I Page 1 of 6 CHINA, PEOPLES REP. OF - SOCIAL INDICATORS DATA SHEET CHINA * REFRRENCE GROUPS (WEIGHTED AVERACES LANM AREA (THOUSAND SQ. E.) - MOST RECENT ESTIMATE)- TOTAL 9561.0 MOST RECENT 115 INCOME MIDDLE INC0M- AGRICULTURAL 3184.0 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC GNP PER CAPITA (US9) .. .. 290.0 261.4 890.1 ENERGY CONSUMPTION PER CAPITA (XILOGRAMS O COAL EQUIVALENT) 559.9 434.9 733.6/c 448.7 701.7 POPULATION AND VITAL STATISTICS POPULATION, MlD-YEAA (THOUSANDS) 672865.0 815253.0 976735.0 URBAN POPULATION (PERCENT OF TOTAL) .. 12.0 13.2 17.3 32.4 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 1245.2 STATIONARY POPULATION (MILLIONS) 1570.2 YEAR STATIONARY POPULATION IS REACHED 2070 POPULATION DENSITY PER SQ. KM. 70.4 85.3 100.9 158.1 255.9 PER SQ. I0. AGRICULTURAL LAND 211.8 253.7 302.9 355.9 1748.0 POPULATION AGE STRUCTURE (PERCENT) 0-14 YnS. .. .. 32.3 36.8 39.9 15-64 YRS. .. .. 63.7 59.7 56.8 65 YRS. AND ABovE .. .. 4.0 3.5 3.3 POPULATION GRLOM RATE (PERCENT) TOTAL 2.0 1.9 1.8/d 2.0 2.3 URBAN .. .. 2.8 3.3 3.9 CRUDE BIRTH RATE (PER THOUSAND) 40.1/1 39.6/j 21.1/ 29.3 31.8 CRUDE DEATH RATE (PER THOUSAND) 13.6 9.6Z 7.87 11.0 9.8 GROSS REPRODUCTION RATZ .. .. 1.4 2.0 2.0 FAMILY PLANNInfC ACCEPTORS. ANNUAL (THOUSANDS) .. USERS (PERCENT OF 4ARRIED WOMEN) .. .. .. 19.3 36.3 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) .. 100.0 117.0 108.1 115.6 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 86.0/e *- 103.0 97.3 106.4 PROTEINS (GRAMS PER DAy) 58.07 .. 62.6 56.9 54.4 OF WHICH ANIMAL AND PULSE .. .. 26.0 20.0 13.9 CHILD (AGES 1-4) MORTALITY RATE .. .. 4.5/h 10.9 6.7 HEALTH MM EXPECTANCY AT BIRTH (YEARS) .. .. 64.0/h 57.8 59.8 INFANT NORTALITY RATE (PER THOUSAND) .. .. 56.0/h 89.1 63.7 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. .. .. 32.9 32.0 URBAN *. * ** 70.7 51.9 RURAL .. .. .. 22.2 20.5 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. .. 18.1 37.7 URBAN .. .. .. 72.7 65.7 RURAL .. .. .. 4.7 24.0 POPULATION PER PHYSICIAN 3009.8/o i 1709.1/i 1096.2/1 3297.8 8540.4 POPULATION PER NURSING PERSON 2847.1/e.f 538.8/f 483.2/f 14929.3 4829.4 POPULATION PER HOSPITAL BED TOTAL 2142.5/e 737.8 492.8 1100.4 1047.5 URBAN I. .. 172.1 301.3 651.6 RURAL .. .. 702.3 5815.7 2597.6 ADMISSIONS PER HOSPITAL BED .. .. .. .. 27.0 HOUSINC AVERAGE SIZE OF HOUSEHOLD TOTAL .. .. URBAN .. .. RURAL .. .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. URBAN .. .. RURAL .. .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINCS) TOTAL .. .. URBAN RURAL  ANNEX I Page 2 of 6 CHINA, PEOPLE-S REP. OF - SOCIAL INDICATORS DATA SHEET CHINA * REFERENCE GROUPS (WEIGTED AlEj ES - MDST RECENT ESTIMATE)- MOST RECENT LOW INCOHE MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 102.0 103.0 118.0 97.4 96.2 MALE .. .. 111.0/k 101.0 99.8 FEMALE .. .. 114. 7iT 87.8 92.1 SECONDARY: TOTAL .. .. 79.0 53.0 37.6 MALE .. .. 92.0 63.8 41.1 FEMALE .. .. 65.0 41.3 34.1 VOCATIONAL ENROL. (S OF SECONDARY) .. .. 2.4 1.7 20.8 PUPIL-TEACHER RATIO PRIMARY ....27.0 37.7 35.5 SECONDARY .. .. 19.0 20.2 25.0 ADULT LITERACY RATE (PERCENT) .. .. 66.0 52.1 73.1 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION .. .. .. 1.5 9.8 RADIO RECEIVERS PER THOUSAND POPULATION .. .. .. 35.4 116.5 TV RECEIVERS PER THOUSAND POPULATION .. .. .. 3.2 37.6 NEWSPAPER (-DAILY CENERAL INTEREST-) CIRCULATION PER THOUSAND POPULATION .. .. .. 16.4 53.7 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 3.6 2.8 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 234602.4/e. 339960.5ja 403163.1/. FEMALE (PERCENT) .. .. .. 29.5 33.6 AGRICULTURE (PERCENT) .. .. 71.0 70.0 52.2 INDUSTRY (PERCENT) .. .. 17.0 15.0 17.9 PARTICIPATION RATE (PERCENT) TOTAL 37.0/e 41.7 41.8 40.0 38.5 MALE .. .. .. 51.8 50.5 FEMALE .. .. .. 23.8 26.6 ECONOltIC DEPENDENCY RATIO .. .. 0.9 1.0 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCKIE RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. .. HIGHEST 20 PERCENT OF HOUSEHOLDS .. .. LOWEST 20 PERCENT OF HOUSEHOLDS LOWEST 40 PERCENT OF HOUSEHOLDS .. .. POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. 133.8 194.7 RURAL .. .. .. 111.5 155.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. .. 178.2 RURAL .. .. .. .. 164.9 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. .. 43.8 24.4 RURAL .. .. .. 51.7 41.1 Not available. Not applicable. NOTES * All data exclude Taiwan Chloa. /a The group averages or each indicator are population-wighted arittnetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless othervie noted, data for 1960 refar to any year betwen 1959 and 1961; for 1970, between 1969 and 1971; and for Nost Recent Estimte, between 1978 and 1980. /c Couatry estimate is 644 kilogram of coal equivalent. 7i Latest estslate of annual growth of population is 1.2S. /e 1957; /f Including barefoot doctors; /j Bank crude birth and death rate estiates for 1979 vere higher than th official data. The official rates have been adjusted accordingly; /h Bank dmographic anlyses utilize a higher estimate of the crude mortality rate than the 6.2 that is officially given. The values of infant and child mortality shown here, based on the Bsnks analyses, are thus higher than use of the official figures would indicate; and the estimate here of life expectancy is lower than the official figure of 68.2 years; /i Excluding traditional mdical doctors. /j Including military personnal and those siting permanent jobs, most of whom are in teporary jobs; /k 1977. May, 1982  ANNEX I Page 3 of 6 OtFO9ITTO55S OF SOCIAL :MOECATOIS Noe.Although tha decent1 drone fro source I. getereLy )udend th et oothorctotit. tad relanbie, It enoulO a.o be notd i hey stY bo.t ite-- thls,...f.1 to describe uIds- of -ngsltae, Indicet. trend.. ord cherate Ire. cetoos -o dflferce ttonottc oftesejr foustry exce thfo 'Igh 1 locos Oil1 in.rer so pIenersNoole oie tortS dice Io idl c. h odt'-., o-e trut of- toy eetoo-oitura etftactae). St th reference hro,pSoa .tienrgear pooatoohgrs rct.o en Ifo taot. d.::dtc,o on non oloe edis r nos eca osh arle trlca e_ egtaf Ion trecceco to ethter Thes ee. eeor ot- ueult coprngteoeit of To-l - To teL eortsce area -oriebg lead treeA ed asters; 1979 ant. ,tn Orrl ulobden hy tftel -epetcenota fh SoeIta beds Allr.1oatrtl -E tei-te of oroltaa rso ased nearrlyo yerestly _nolhi L t pebLit end prli-te eeo. nhpcebodSelt t e feror Pe.pttrenrtet eta kitchet gerMan on to tie toIlet; 1979 doce. tetltroetones.dertl erI'lll.inn perastotlstf1fo org Ff2 CAPITA SUbS) - CNP yen tapite eaiceea reterker p,ines. tel- dia l.tre ore not ;oldrd. frel. hoepitela..nene.lolde Xr.t tuloted by sea --onerIo senioe .s Werd Seek Anise 51978-O beuie); 1960, on edilcotr no-erroltofrdiveroat.Satb 1970, 05d 1990 den.eetioeeeb,nreto if.cc. anth offnr taynttt- O dettor oad prov Ide, Iicaceorage of -dit Sonfiitoe. Pox eteti tfIlt CgO9UflOg Pi CAPITA - ooaea caettof o-arcia tangy ScoelP.".e . pupeeoh_ hoaplfel tooLoosA00 rcoidpolltaereI heree end ligelte Idraee, tiraI gee end hydrr-. oacte an gea&t Lre'istr an 1ua ho-pitl.1 boot or tud- oe1 tl an-dical ea eatrity tr itin) La lilagres of .ot..a1 een peroPte. 90 :970, -eo 1979 Senre PscbIld L: ueopicalt ar. root oly nder toal. date. ad.lson ..per doerota1 Ood - Total otfrf dseca tb or ditecnerge fot. h...piteie divided by rhe nonde of Stdo. POPOlAlOg09WVOTL TATISTOCO Totol Ponlatlat. id-ve toaodf-ao oy 1960. 1970,. od 1990 btSING Ones Pora1axiot Inreaof noel -. tettoI of odin ta tacol ropolencue; A !hoos-old conoes f aStopo oitocaaoscr lO~qetr dlfre "eititn ofug.ers e efec t-eanbiliny of doood theor sofa ee.i. b ba-d-er 0 odger tey or esy ot he iorltoded La e..goae ....;190 197, ad lt don. lb. nounhld for eelcctpurp-es. Pnr,alaios Profe-boa Ayr-gf oote of d.rson rorobcual rga se rura - enxn5e ba. rorlegne o eer000 -Correec epode.tio projeotoa cc. he-d en190 ero yro., Fa cone i.o" all uphe d .vA rur l o pied vnetoa tane 0 oploni byh ea a tsd nhebn sreiy end fertility rents dreelgs repectively. elog xccloddo o-aax etcae add Pr3n xpePeate " for _n_aliy rae L-strs of tineI.-I.l ets tnrptdrrs tog life aptnecyetirth itoesta nitZ o ty , e capita incoe orrreo iEltrnir it, pecnofd-xlllnte) to l,cohe cede rura lenel, tad rsale lIfe naectesoy etoililta at. 77.5 years. The Para- Co-nxociol deailog im lcpclyt ltg unaatepret Inne. for fertility ret. et.o hens thres leI.-I. aa declie . t of tanel. onto on -rre daatlicntrep-one- y fertifly _coding ta Itoo leel and poet fondly plaeta prnrate E.too oary le the. esogsd ot f theed tecoioa of Entlly 0U07CATC e.d fertility treado n praj tnbo Lapes dacd ooitttto Statioery pnaletio - Ine rnattsery opele lenb.. is . gre-h stoos Pneor school - catet eels and0 eselo - Groas toal el end fatl. nh Ith oar. i toeln he deen rae.en obo the egSeyoa re- ennlstof oll ges at the PoIaI - rol- prnn-1e of raepa-tin _ite ooe_n_s. This is oohie-d nely after flSiUty rate decline Ic prlsry shal-egppaataa; orsily Llclode olhldfree sed A-li the replooses leve of am. Itn rnnrdaonlos rat..es sn lgetna Y-ar hot edjoened for diffa..... tananbe of pniser edaceola; for of tat epbaseItslf -teanl. The.ealxt popalno. l senata his -i,alnrsol edoction tarle t tootd 100pserot ssnnes o th betofa the prnjecntd oeetroisof nbs parlaa ic ooparsoehlno bv ttofut aole It the year 2000. esd the rate af decibe of C senilty rota to replac-.endrytho - tonal. ale end feale - coo9ated a shov; astadacy ant lena. sanitoqirsa on i_t fact Yaers of cryro_n prturyi" nenia Tter -tenosr --nl-it its rtobed - The ys.. ebs eetie-ery ropolettut prvdstsrl notoc.o eahrtana fonatuotle for prila siss ill he reePe. usallyof I to 17 Ye.. of oe I=reoadta ort era greraly pnvatetion Seneity claded. Per eq. ha. -Kid-Yeer perltieto per pecans klle.sn (119 h..gnes) of V'o-atbcal eco-lstSntar o ectodar) - Voceti-sa faetitatla total ap.; 1960, 170 etA 1979 data. taciade tetato,fdotriel. or other prngrra boSh ape..ats indept- Per e. he.eeniolccoa lead- ..oeAt as abon ftc agranlncoal todi _,ny or eedear Ist of -ccdary itoet.itotn. ocly; 1960. 1900 esd 1979 dona. ~~Ppil-tx...hsr trino - -"or. and sstodoa - T-teI tto Saute eollad in Pentist1ot Ass tnr t.tao Spartn) Childr.- SO-it Ypeers). neplting-g 115- pinr-7 end seondary I.-I. dinided hr oifr f ceahne to rho hA yeas) ate etird 56 yuan ss enr) so pe- -aagS of 10-,ear papa-cot adn lvl. loion; 160 970, et 9in0 dat.- Odcl Ltocyrn Ste...enf - Lit...ste edolt (able to mad no e-itt) ?Pora-tbo tGen gate (Peroat) - ttal-ceA"si grax cant of totel sod- errc nssof Itota adul rpusio s 15 year. r ad ovr. yapr popnulaia for15-0 907 ad 1970-on. Gatero ranh tens _neron- Lonbe. A-Id a gresh ronee of arba papa- C99gStOTIOr 1latlots for 1950460,160 w0 atd 19 70-op P"2etne CaeSaI rosaPontcal - Feeeea care coeri- ao Trade Birth Ren Spe abthesed) - e--tL flve hillhe Pxr nhaaad at nOd-yer ocr setoglest then ethic pPdrooa .. tocldeeedn no hoorsaco PoPaLettoto 1960. 1970. and 1990 dane. sttcyceols Croos teeth sate Sner ehocoe - oAete.l de-ths Per theasetd of en-ertdiot.Iier ee ooo d ooyaLtlot ) - All type of recira for radio pnpcletaon; 1960. 1970 a 1990 done. hrnad...stet.gee i publi prth-otesd ofpoaoaoecudet- Irs ernato as -Avrage .,.er at dengbnte. a all beer in Iie ee..dL.onnrsI -otios and in yers ofs reI.Strina of n.dI. herSete neroatn period 9f she.ae-tt p-eee eg-tp-iflo tsp- ta -e to offtent; dots top r-es years ty ott he coeroobl emit tcllny rota; aoolip fiv-yeer -nnSdd ending to 1960. 1970. end 1990. met c_otriteeholihit Ic sint.S Fesily Planing - docooare.l datoo Scetea.de) - dnetea etfer of -ccptors TV teceLoEe Step thoo-sd popatattor) - TV -eci-n for broodros ta of hlrti-toanp danita aedec -.pio.e at atiosat. f..ily pleaxltg prae..- osare puoop tbo" -dpopa.lonto; ...uda I. t Ioe.s TV re.eivre Folrplnter -OrsSprcn O erid nof Prsega a ariditnon ris a n ar oenretnrtio f V ae nSn tfrt F.so hl-hebgee(5- yes b cehrbotr-idacea neees ioootolZ hona ooata hv heeegacc isenceetopyer ese.fendtiscet nier get S.g egane. Pn antis . utite. i ilto te t de) grgeepaego fsebcotyi eso totS S'Oet iftt-p... atao nF-e rred cprc wegt; Ol fS 90 sad199 d.eo. -- otet _Io oo ieendf-Oot cl aY in thran. including Per caita sorly o celotos Ipro dt t res l Less tef - WC -etd foe-rsfre ndotpon u ooc.odloj .o.a.ee eto dt ste. a.1,- Idary oeqinsle. fof e fodisoping evet;"labeI oeo e eln aetgpplra f det. Ototoeinnroeco r per ifey A v- la . s Pro --p p rise ca er s domeht to pra nt9 ox. - 4 orn0 dlten atl t op r ei e I 0 0 1970- ar) 190 deco.-i " viny a helt Laelstn eerne idrnae bafy nigts ager londaryo IPencetl toot o ne1 It efilaita. coaIrurIo. caOcra horoehad. ja.1 1961I 5 190 s 97 deta. 1960d. ~-1..o . 1970 ... od 1960170I1980 dece. Per tenit sadl atrnIn ea eIe)-Peeto.eno e c.pinFPe-Ic.na (pr.ir -nentet)b- nnl fshe. a tas-Prii no o-titats fa aLl fontid ..teLlShe by 0506 yaIdsbfo Rildoir Peteneeeo tne. tat od xal otoef o fe I_aer et alovss.o MO gratf of tAOno pb nei- pen dey en..d 00gd fof - tisl ed16.17,ed19 oe hs p b ees un60 1970's .nopd W'rents pales_ prni. o ho 0 raheldh a p bodyto Thes too- nletnggs-e Lcoor of- ott popalan.o.. cad tbagI -iantad. A arde e- tosrss thee chatof 1 statl of1 a11-el panin endr I 2ors of. fe tsttstter cre f9.rat dg. onboelsorrs.-IS fIt1l- r Panid tro~~~~~-bd Io.-I; 1961-65, 1970 seA i977 dote. notecoc yaooSrc tsr celto rotei eapr s tro ent lyedrala Prassin. eapply of tro de-l.-PIflptido rIve f:il caba. a raee in. gra Ie e;_ 1I1f, 90 ad 97 dt. tiegltTttSf_f Chil Sega i-A Death tat Str tes d - ioea dfaths pe.heedI.eraeeo ron tacoseSooth 0 coebI00 md - ttrnivtd by Frtnse ag gOw1= yre t cfidre- In this bge USnA; P-id foen deeoingcot parcent,. ofcee 00prcn. roocero S pacof. cdrore 0 xo trt en otvdfe it .. taI e 1960.. 19. d79eA10dt, of6 b 9ooIdhoids. tOALTS r=h'ovol id.Th.TAgd OfTd igof1yt irfe _oenac atI lth" Speof S-rrg nofler ofl yxero t of life 2 eabeins Th folaig ecc are ospy .. rotsttasursof...ry..n at hirn; 1960. 197%t 19,05 ea 55 hol elotpendacSutbd ocuto ofiged eni haer t lice births; 1960,651970Msad 1977 dens. 0601r DI orI erTy ar ee ethnccalniab totean Motes no etsdetr Seoeto, ptlain - tonsl, urbe., and rural. -d P ..- natrit.orIty adeoute dit piu tr dccol orSod) nqulentc to tot he tfpopl tn, ahe,en url ain Rreaaea_hide 1W ecceescotefe aff20r40bPe Leill toge athIr lreepeYtti.. ppti ote.Snaur- efrteepahli. ilit TMrsaoitI00rf h -onry. Ih te sdrcdOe h at funcd o eadpetlceeda ae ha 00sees cs ie. ayh lax tc ab ete for P'ha .venv..l. tt lvoreoat cosierdaobengtthn eaoebe ccs o tenhos. n9ualcrs rottated Popaetbo -Seori Ofeiteh aoo nootnlSnco ta penenneats of their crepectoos -popat thins tocrbl d ci..aee o ar facfludsl. oateiatr .tore..e I.r... - Popaoion iti- by nrebfr of . 7 bJ- -t j.-I -h4. prealej- Ma 1992o ale sadlfeats gredtae psyarsh.rcebth n tortes, preacical ofrsa. etA . -1~-_~d II h onte atitartee.. -o t." I -tl, h po"  ANNEX I Page 4 of 6 Population: 977 million (mid-1980) GNP per capita: US$290 (1980) CHINA - ECONOMIC INDICATORS Annual Growth (%) at Constant Prices 1957-70 1970-77 1978 1979 1980 1981 Production Gross Output Agriculture 2.2 3.4 9.0 8.6 2.7 5.7 Light industry 8.3 7.8 10.8 9.6 18.4 14.1 Heavy industry 11.6 9.3 15.6 7.7 1.4 -4.7 Net Material Product (NMP) 5.2 4.8 12.4 7.0 6.9 3.0 1957 1970 1977 1978 1979 1980 1981 Prices Retail price index (1970=100) 92.2 100.0 102.7 103.3 105.4 111.7 114.4 NMP deflator (1970=100) 90.7 100.0 99.6 100.4 105.1 106.5 109.6 Exchange rate (Y/US$) 2.46 2.46 1.83 1.66 1.54 1.50 1.71 Amount 1981 Shares of GDP (%) Average Annual Growth (%) at Constant Prices National Accounts ($ billion) 1957 1979 1981 1985 1990 1957-70 1970-79 1979-81 1981-85 1985-90 /a /a /a GDP 263.2 100.0 100.0 100.0 100.0 100.0 5.8 5.8 4.9 4.1 4.2 Agriculture 91.4 .. 31.4 34.7 33.3 31.4 1.6 3.2 4.2 3.0 3.0 Industry 115.5 .. 43.7 43.9 44.9 46.6 12.1 8.9 7.7 4.6 5.0 Other 56.3 .. 25.0 21.4 21.8 22.0 3.5 4.3 -3.1 4.5 4.5 Consumption 185.0 76.4 69.8 70.3 73.8 76.2 2.7 5.4 5.0 5.3 4.9 Investment 76.5 23.2 31.1 29.1 27.5 25.0 9.8 6.8 2.1 2.6 2.3 Exports GNFS 24.4 3.7/b 6.0/b 9.2 8.5 10.0 1.6/b 8.0/b 23.1 1.7 7.8 Imports GNFS 22.7 3.5Th 7.0/b 8.6 9.8 11.2 2.3/b 9.47Tf 9.3 7.3 7.1 National savings 78.5 23.6/c 31.5 29.8 26.3 24.3 .. ... 3.9 0.9 2.6 As % of GDP Public Finance 1957 1979 1981 Current revenues (excluding foreign 28.7 27.3 21.J borrowing) Current expenditures 15.1 17.0 15.6 Surplus (+) or deficit (-) +13.6 +10.3 +6.1 Capital expenditures 13.7 15.6 8.5 Foreign borrowing 0.7 0.9 1.8 Other Indicators 1957-79 1979-81 1981-85 1985-90 GDP growth rate (%) 5.4/d 4.9/d 4.1 4.2 GDP per capita growth rate (%) 3.5/d 3.6/d 2.8 3.0 Energy consumption growth rate (%) 8.3 .. ICOR 5.4 .. 6.3 6.2 Marginal savings rate 0.42 0.17 0.17 Import elasticity 0.95 1.90 1.78 1.69 /a NMP basis. /b Goods only. /c GUS. /d Based on the official real NMP index (as are all figures for past NMP and GDP growth in this data sheet). At Indian prices, GNP is estimated to have grown at 4.6% and GNP per capita at 2.7% during 1957-79.  ANNEX I Page 5 of 6 Population: 977 million (mid-1980) GNP per capita: US$290 (1980) CHINA - EXTERNAL TRADE Amount Annual Growthl Rates (%) (million US$ at (at constant 1980 prices) Indicator current prices) Actual Projected 1981 1978 1979 1980 1981 1982 1983 1984 1985 1986 External Trade Merchandise exports 22,027 10.1 25.5 16.8 15.9 -3.9 -0.8 1.7 6.9 7.7 Energy 5,054 .. .. .. .. -45.2 -51.4 -86.7 -100.0 0 Other primary 5,306 .. .. .. .. 6.5 1.6 4.0 4.0 5.0 Manufactares 10,533 .. .. .. .. 9.7 9.7 9.7 9.7 9.0 Other 1,134 .. .. .. .. 5.0 5.0 5.0 5.0 5.0 Merchandise imports 20,292 32.6 21.7 16.7 -8.6 3.2 15.1 4.3 4.2 7.9 Food 5,340 .. .. .. .. 3.0 7.0 5.0 5.0 5.0 PetroleuLm 0 .. .. .. .. 0 0 0 -/a 107.6 Machinery and equipment 5,317 .. .. .. .. 7.8 9.9 4.0 4.0 4.0 Other 9,635 .. .. .. .. 3.3 22.5 4.1 4.1 4.1 Prices Export price index (1978=100) .. 100.0 113.3 131.3 134.9 137.6 146.7 158.7 171.7 185.5 Import price index (1978=100) .. 100.0 119.4 139.2 145.5 149.4 158.8 170.4 182.6 195.1 Terms of trade index (1978=100) .. 100.0 95.2 94.3 92.7 92.1 92.4 93.1 94.0 95.0 Composition of Merchandise Trade (%) Average Annual Increase (%) (at current prices) (at constant prices) 1978 1979 1980 1981 1985 1990 1957-70 1970-79 1979-81 1981-85 1985-90 Exports 100.0 100.0 100.0 100.0 100.0 100.0 1.6 8.0 19.4 0.9 7.8 Energy 13.8 19.5 25.1 22.9 0 0 .. .. .. -/a 0 Other primary 39.7 34.1 28.4 24.1 27.5 26.9 .. .. .. 4.0 5.0 Manufactures 46.5 46.4 46.5 47.8 66.5 68.0 .. .. .. 9.7 9.0 Other 0 0 0 5.2 6.0 5.1 .. .. .. 5.0 5.0 Imports 100.0 1(0.0 100.0 100.0 100.0 100.0 2.3 9.4 9.9 7.6 7.4 Food .. .. .. 26.3 23.7 24.8 .. .. .. 5.0 5.0 Petroleum 0 ( 0 0 2.9 10.7 .. 0 0 -/a 46.0 Machinery and equipment 17.5 25.2 27.5 26.2 24.3 21.3 .. .. .. 6.4 4.0 Other .. .. .. 47.5 49.0 43.2 .. .. .. 9.9 4.1 Share of Trade Withi Share of Trade With Share of Trade With Countries with Centrally Industrial Countries (%) Developing Countries (%) Planned Economies (%) /b Direction of Trade 1978 1981 1978 1981 1978 1981 Exports 37.3 45.9 51.6 50.2 11.1 3.9 Imports 73.3 76.8 17.5 18.7 9.2 4.5 /a Petroleum imports in 1985 are projected to total US$961 million in 1981 constant prices. r /b Includes the Soviet Union, Eastern Europe, Cuba, North Korea and Mongolia.  ANNEX I Page of 6 of 6 Population: 977 mil1{n,x (mid-1980) GNP per capita: US529U (1980) CHINA - BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT (millions US$ at current prices) Actual ProJected .-ndicator 1978 1979 1980 1981 1982 1985 1990 Balance of Payments Exports of goods and services 10,606 15,351 20,901 25,157 24,663 33,700 71,451 of whlch: Merchandise f.o.b. 9,607 13,658 18,492 22,027 21,585 29,037 70,166 Imports of goods and services 11,912 17,582 23,946 23,628 24,928 38,848 75D509 of which: Merchandise c.i.f. 10,745 15,619 21,243 20,292 21,513 34,126 65,799 Net transfers 597 656 640 467 617 767 1,017 Current account balance -705 -1,575 -2,405 1,996 3 52 -4,381 -4,327 Private direct investment - - 57 265 315 465 715 MLT loans (net) -830 822 1,756 769 1,278 Z,773 5,536 U:iicial .. . . ,198 J,231 j,546 Private .. .. . --920 -458 -10 Ut'her capital 822 1,362 1,082 -787 U 1,143 -572 Change in net reserves (-" increase) 708 -609 -490 -2,243 -1,945 0 1,353 International reserves 6,283 6,892 7,382 10,096 12,041 12,041 18,164 of which: gold . . 5,120 5,120 5,120 5,120 Reserves as moaths imports 6.3 4.7 3.7 5.1 5.8 3.7 209 External Capital and Debt Gross disbursements .. Concessional loans .. DAC OPEC IDA Other Nonconcessional loans Official export credits .. .. IBRD /c Other multilateral .. Private External debt Debt outstanding and disbursed .. .. 5,441 5,696 Official Private Undisbursed debt .. .. Debt service Total service payments Interest Payments as % exports GNFS .. .. 5.0 7,8 Average interest rate on new loans (%) Average maturity of new loans (years)  ANNEX II STATUS OF BANK GROUP OPERATIONS LN THE PEOPLEJS REPUBLIC OF CHINA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1982) Loan or $ million Credit Amount ----- Number Year Borrower Purpose IBRD IDA Undisbursed 2021 1981 People's Republic Univ. 100.0 100.0 199.7 1167 of China Develop- ment 1261/a 1982 People's Republic Agricul. 60.0 60.0 of China Develop- ment Total 100 160 259.7 Total now held by Bank and IDA 100.0 160.0 Total Undisbursed 100.0 159.7 259.7 /a Became effective October 7, 1982. B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1982) None C. PROJECTS IN EXECUTION Loan No. 2021 University Development Project Z$100 million loan Credit No.1167 and $100 million credit of November 4, 1981; Date of Effectiveness: February 4, 1982; Closing Date: June 30, 1986. Good progress has been made in project implementation; bid evaluation and recommended awards for about $45 million in equipment have been approved by the Bank. Initial disbursements for technical assistance (about $300,000) have been made and a major contract for about $5 million in expert services is awaiting final signature. Credit No. 1261 North China Plain Agriculture Project $60 million credit of June 23, 1982; Date of Effectiveness: October 7, 1982; Closing Date: December 31, 1987. Project civil works began immediately after credit signature and are well underway; the first supervision mission is in the field.  ANNEX [LI CHINA INDUSTRIAL CREDIT PROJECT (CHINA INVESTMENT BANK) Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare the project: 9 months (b) Agency which prepared the project: PCBC and CIB, with Bank assistance. (c) First presentation to the Bank/Association: July 1981 (d) First Bank mission to identify the project: July 1981 (e) Date of departure of appraisal mission: March 25, 1982 (f) Date of completion of negotiations: November 1, 1982 (g) Planned date of effectiveness: March 1983 Section II: Special Bank Implementation Actions The project will need intensive supervision to achieve its full objec- tives. The first supervision mission is scheduled for February 1983, just before the expected time of effectiveness. Section III: Special Conditions (a) Conditions of Effectiveness (i) Issuance of project appraisal manual (para. 71). (ii) Appointment of a CIB Vice President (para. 73). (iii) Hiring of a senior economic advisor (para, 74). (iv) Conclusion of contract for engineering services to CIB (para. 74). (v) Issuance of Lending Regulations (para. 78). (b) Other (i) Issuance of CIB project supervision instructions (para. 78). (ii) CIB onlending rate to be at least 8% p.a. (para. 79). (iii) Review of CIB lending rates (para. 79). (iv) CIB subborrowers to be allowed to obtain foreign exchange for subloan repayment (para. 80).